Krebs Daily Briefing 30 May 2014


Mexican Authorities Arrest Head of Company Tied to Bank Fraud

Amado Yáñez Osuna, who headed Oceanografía, the oil services company at the center of a $400 million fraud involving Citigroup’s Mexico subsidiary, has been arrested, according to Mexico’s attorney general’s office. The announcement, made late Wednesday, suggests that prosecutors are close to building a case against Mr. Yáñez in the scheme, which forced Citi to reduce its 2013 earnings by $235 million. The arrest warrant was issued against Mr. Yáñez “for his involvement in committing crimes that are under investigation in the case of Oceanografía,” particularly those covered by banking laws, the attorney general’s office said, without elaborating on the charges. Mr. Yáñez had been under house arrest at his Acapulco beach house under a provision of Mexican law that allows authorities to hold a suspect for up to 80 days without formal charges. He underwent emergency intestinal surgery on May 20 and remains under guard in a Mexico City hospital.

Special Report: The rifts behind Nigeria’s mass kidnap

(Reuters) – When local people warned that hundreds of Islamist militants were heading towards his remote town of Chibok in northeastern Nigeria, Danuma Mphur hurried to summon help. As chairman of the Parent Teachers Association at the town’s school, Mphur feared for the safety of children who were staying there to take exams. The 15 Nigerian soldiers in Chibok were no match for the forces of Boko Haram, a militant group waging a campaign to create an Islamic state in the region. Reinforcements were needed, fast. Mphur says he called the police and the local government chairman. In turn the local government chairman also called the police and contacted the military commander in Chibok between 9:30 p.m. and 10 p.m. on that evening, according to Kashim Shettima, the governor of Borno state, which includes Chibok. “Can we go further than that?” said Shettima, suggesting there was little more local people could have done than ask for help. Backup never arrived. The military said in a statement that it received no warning about the attack. It added that when reinforcements were sent, they were ambushed on the “120 km rugged and tortuous road” from Maiduguri, the state capital, and delayed. Chibok’s local government chairman could not be contacted for comment.

Britain, Italy include drugs and sex in GDP

The U.K.’s Office of National Statistics announced Thursday that paying for drugs and sex adds about £10 billion ($16.7 billion) a year to the economy. The British government is now including prostitution and narcotics sales in its official Gross Domestic Product (GDP) statistic. That’s the oft-cited measure of how much a country’s economy grows or contracts. Overall, illegal activities are still a small part of the U.K. economy — a mere 0.7%, according to government estimates. The reason for the change is to harmonize economic reporting across the European Union. Prostitution and some drugs are legal in the Netherlands, and the Dutch count those activities in official government statistics. Since prostitution and many narcotics are still illegal in the United Kingdom, the government is using a combination of police seizures and other data to estimate how much money these activities are adding to the economy. Governments often use surveys to gather this information, but drug dealers are unlikely to answer those. Italy made a similar announcement last week that it would begin measuring narcotics and sex work in its GDP, generating “mafia economy” jokes as the news reached social media. But the Brits and Italians aren’t the only ones who measure illegal business activity in their countries. Estonia, Austria, Slovenia, Finland, Sweden and Norway do as well. Even the U.S. Bureau of Economic Analysis measures prostitution as a part of Nevada’s state GDP.  “Where prostitution is legal, we will count it,” says spokesman Thomas Dail.


U.S. probing 15 banks, payment processors for fraud

(Reuters) – U.S. prosecutors have opened criminal and civil probes into at least 15 banks and payment processors as part of a wide-ranging consumer fraud investigation, according to documents released on Thursday by a congressional committee. The Justice Department’s investigation, known as “Operation Choke Point,” is more than a year old and aims to crack down on fraud by going after firms that handle and move money for various suspect businesses. According to documents released on Thursday by the House of Representatives’ Oversight Committee, the DOJ had criminal probes open of four payment processors, one bank and several officials as of November 2013. The department had separate investigations into at least 10 banks and payment processors under a civil fraud law, according to a memo from a DOJ official that was included in the documents. Maame Ewusi-Mensah Frimpong, an official in the DOJ’s civil division, wrote in the memo that the probe had already caused some banks to stop processing payments for entities the firms believed could be involved in fraud against consumers. “We believe we already have denied fraudulent merchants access to tens, if not hundreds, of millions of dollars from consumers’ bank accounts, and that amount will increase daily and indefinitely,” Frimpong said in the November memo.

Wells Fargo to pay $62.5 million to settle securities lending lawsuit

NEW YORK (Reuters) – Wells Fargo & Co has agreed to pay $62.5 million to settle claims from a group of institutional investors that the bank improperly advertised a risky securities lending program as safe. Approximately 100 investors, led by the City of Farmington Hills Employees Retirement System pension plan, have asked U.S. District Judge Donovan Frank in St. Paul, Minnesota, for preliminary approval of the deal, which would resolve a 2010 class action. The plaintiffs argued that the bank marketed its lending program as safe but instead invested their funds in risky products such as mortgage-backed securities, causing significant losses. In settling the case, Wells Fargo continued to deny any wrongdoing, according to court papers. A lawyer for the plaintiffs did not immediately respond to a request for comment on Thursday. Wells Fargo also did not immediately respond to requests for comment. A hearing before Frank is scheduled for June 5. Last year, a federal jury ruled in Wells Fargo’s favor after a trial over similar claims that it misled a separate group of investors about its securities lending program. Lawyers for the plaintiffs in the current case cited the outcome of that trial as one factor in their decision to settle rather than risk continuing the litigation. Other lawsuits concerning the lending program remain pending in Minnesota.–sector.html

Investment Chief Named for New York City Pensions

Scott Evans, a former head of asset management for TIAA-CREF, will be the next chief investment officer of New York City’s $150 billion pension system, according to the city comptroller, Scott M. Stringer. The comptroller, as legal custodian of New York City’s pension money and investment adviser to its 58 pension trustees, has the power to pick the investment chief. The decision is increasingly sensitive, affecting not just how comfortable New York’s public workers will be in old age but also whether the city can deliver on its promises to them without straining its tax base or compromising its overall quality of life. None of the five pension funds in the city system has nearly as much money as it should, with thousands of workers now retiring every year and claiming their benefits. It will be up to Mr. Evans to advise the trustees on how best to close the gap. He will start in July, in the Bureau of Asset Management, which is now part of the comptroller’s office. “We are moving this office forward by being smarter in our operations and implementing reforms to the existing structure supporting the five funds,” Mr. Stringer said in a statement on Thursday morning.

Details under wraps in Regions Bank settlements of 4 cases alleging fraud in interest rate swaps

BIRMINGHAM, Alabama – Regions Bank, which last week was ordered to pay a private sewer company $10 million for defrauding it via a series of interest rate swaps, has settled four other similar cases in the past four years, court records indicate. A spokesperson for Regions said the terms of the settlements, reached in 2011, 2012 and 2013, are subject to confidentiality agreements and will not be disclosed. Efforts to reach attorneys representing the plaintiffs in the cases were not successful. Regions executives declined to be interviewed, but in a prepared statement the bank said problems related to variable rate demand notes, the bonds on which the interest rate swaps were executed, were not unique to Regions. According to court documents Regions or its sister company Morgan Keegan & Co. backed VRDN issues for its clients between 2000 and 2008 and later sold them interest rate swaps with the assurance that the swaps would result in a fixed rate. The rates, however, were not strictly fixed. They were tied to a letter of credit from the bank and could rise under certain circumstances. In 2008 and 2009 investors fled the market, causing a collapse that Federal Reserve Chairman Ben S. Bernanke said at the time “exposed the vulnerabilities” of the financing arrangement nationwide and triggered rising rates.

Ex-Microsoft CEO Ballmer buys NBA’s LA Clippers for $2 billion

(Reuters) – Former Microsoft Corp (MSFT.O) CEO Steve Ballmer has purchased the NBA’s Los Angeles Clippers franchise for $2 billion, a record for a professional basketball team, sole trustee Shelly Sterling announced on Friday. In a news release from Greenberg Glusker, Sterling’s counsel, she said she had signed a binding contract to sell the team to Ballmer on behalf of the The Sterling Family Trust, which owns the club. “I am delighted that we are selling the team to Steve, who will be a terrific owner. We have worked for 33 years to build the Clippers into a premiere NBA franchise. I am confident that Steve will take the team to new levels of success.” The agreement will need to be approved by the National Basketball Association’s Board of Governors before it is finalized. The NBA did not immediately respond to requests for comment. “I will be honored to have my name submitted to the NBA Board of Governors for approval as the next owner of the Los Angeles Clippers.  I love basketball,” Ballmer said in a statement. “And I intend to do everything in my power to ensure that the Clippers continue to win – and win big – in Los Angeles.”

Pennsylvania pension explains its unexpected disclosure

FORTUNE — Financial blog Naked Capitalism recently published a dozen limited partnership agreements for private equity funds that had received investments from the Pennsylvania Public School Employees’ Retirement System. Each of the agreements was found within a publicly-available database on the Pennsylvania State Treasury website, even though many of them contained language explicitly prohibiting such disclosures. After several days, PSERS has finally provided an explanation as to what happened:

The House just voted to protect medical marijuana patients from federal interference

The US House of Representatives late Thursday passed a measure that would prohibit the federal government from interfering with states’ medical marijuana laws. The bill is the first time in history that any chamber of Congress has acted to protect medical marijuana businesses and users. It also got bipartisan support: 170 Democrats and 49 Republicans voted in favor of the bill. The measure was attached to a funding bill for several federal agencies, and it blocks the Department of Justice and Drug Enforcement Administration from using funds to prevent states from implementing their own medical marijuana laws. The measure, however, will require approval from the Senate and President Barack Obama. The Senate is expected to pass its own funding bill, so the medical marijuana amendment will need to survive through both chambers’ reconciliation process — and then obtain Obama’s signature — to become law. Still, marijuana legalization advocates praised the House’s decision.

President Barack Obama to meet Friday with Eric Shinseki

President Barack Obama plans to meet with Veterans Affairs Secretary Eric Shinseki on Friday morning and says he will have a “serious conversation” with him about his “capacity” to adequately handle the problems in the department. The meeting is set for 10:15 am at the White House. “I’ll have a serious conversation with him about whether he thinks he’s prepared and has the capacity to take on the job of fixing it, because I don’t want any veteran to not be getting the kind of services they deserve,” the president said during the excerpt of an interview with Kelly Ripa and Michael Strahan that was taped on Thursday and aired on Friday. Shinseki on Friday is expected to deliver to the president an internal audit on the situation at the VA. Obama has come under increasing pressure to fire Shinseki over the VA scandal. An interim inspector general report released this week detailed “systemic” problems in the department, prompting a flurry of lawmakers on the left and right to call for the secretary’s resignation. The IG review came after reports that said at least 40 veterans died while waiting for health care in the Phoenix VA system.


Judge Gene Reese: The monkey wrench he tossed at the school choice law was not his first

MONTGOMERY, Alabama – I see from Mike Cason’s story Wednesday that Montgomery County Circuit Judge Gene Reese has thrown a monkey wrench at the signature accomplishment of the first Alabama Legislature under Republic control in 136 years. According to Mike’s story, Reese, a Democrat, ruled the much ballyhooed (by the GOP) Alabama Accountability Act (AAA) – you know it as the school choice law – is unconstitutional. Reese essentially ruled that the way the Legislature approved the law by substituting one bill for another in a last minute conference committee did not follow legislative or constitutional rules. Wednesday’s ruling is not the first time that Reese has challenged how Alabama’s public schools operate. Some 21 years ago Reese, in a historic ruling, found that the state’s system for funding public schools was unconstitutional and inequitable. The decision followed a month-long trial I covered that exposed gross inadequacies in how schools were funded that left hundreds of schools falling apart and students receiving less than a fair shot at a quality education. Years ago I profiled Reese after the school equity decision had been reached, a decision critics attacked as judicial overreach. Gov. James use to say of Reese that he was “just one little old circuit judge” charging that he lacked the power to tell the state how to run its schools. I remember to this day how Reese answered the charge: “The state has given circuit judges the power to order men and women to be put to death. I’ll take my chances that we have the authority to rule if the state has violated the Constitution.”

Ponzi schemers sentenced to 5 years each over fake stock-market computer program that lost investors millions

MOBILE, Alabama – “This is not a case about the lack of insight, or a case about making mistakes, this is a case about doing the right thing.” So said Chief U.S. District Judge William Steele on Thursday before sentencing three men to prison for securities and wire fraud for their part in a massive Ponzi scheme that cost investors almost $3 million. Stephen Merry, David Petersen and Yaman Sencan were convicted on 20 different counts each during a jury trial in December and faced a max of 20 years in prison. But, as was anticipated, Steele gave them a lesser sentence while still ordering them to pay $2,891,898 back. That amount was calculated as part of a pre-sentencing investigation, although prosecutors were initially seeking $4.7 million, which they alleged was the total amount invested. The scheme involved promises of high profits in exchange for low risks thanks to a computer program designed to take advantage of temporary price differences among different stock markets, according to prosecutors. Trial testimony indicated a fourth defendant – Timothy Durkin – told investors he developed the trading system with billionaire New York real estate mogul Arthur Cohen and a Russian named Alex Karpov. Durkin left the country before he was indicted and was not tried along with Merry, Petersen and Sencan.

AG seeks stay of order striking down Accountability Act

The Alabama Attorney General’s Office and attorneys representing local parents Thursday filed a motion asking Montgomery Circuit Court Judge Eugene Reese to stay his Wednesday decision striking down the Alabama Accountability Act. The five-page brief calls Reese’s decision “wrong” and said it will impact families of students taking advantage of the tax credits offered under the law. “Absent a stay, the injunction will upend the ability of these families to plan for the 2014-15 school year,” the brief said. “And it may well leave them with no choice but to return them to their earlier, failing schools.” The Alabama Accountability Act, passed amid fierce controversy in February, 2013, allows parents of students with children in schools designated as failing to apply for tax credits that can be used toward private school tuition. The legislation initially would have allowed school districts to apply for waivers from certain laws governing education, but emerged from a conference committee nearly three times as long, and with the tax credits attached.

Caught in a TRAP

Abortion is on trial this week in Alabama. Technically speaking, the witnesses are appearing before federal District Judge Myron Thompson to discuss a new state law that requires doctors who perform abortions to have admitting privileges at local hospitals. That sounds reasonable, I know, but it isn’t, and it’s also not what’s at stake. This trial is about whether poor women in red (and even purple) states will continue to have access to abortion, or whether some states will succeed in shutting down every clinic within driving distance, all in the name of protecting women (from themselves). Alabama’s law is cheerily called the Women’s Health and Safety Act. It’s based on a model bill, written by Washington, D.C., anti-abortion groups and their lawyers, which has passed in whole or part in a slew of states. Over the last 40 years, the states have tried many ways to limit abortion. They’ve imposed waiting periods. Required parental consent for minors. Required ultrasounds. Stopped Medicaid from paying for the procedure. Limited private insurance coverage. Banned particular late-term procedures. But these tactics mostly seek to discourage women rather than block them entirely. And so, the new abortion restrictions have a different target—clinics. What are known as TRAP laws (for “targeted regulation of abortion providers”) make it prohibitively expensive, or simply impossible, for a clinic to operate. In Alabama, three of five clinics say they will have to close if their doctors are required to get admitting privileges from a local hospital, because no hospital will agree to give this to them. “They did not want a relationship with Planned Parenthood at all,” said one doctor who testified Thursday of the state hospitals, speaking behind a black curtain and under a pseudonym, because of past harassment. “They did not want the political controversies that come with having a relationship with Planned Parenthood.”

Morning Money

SHOULD DEMS WORRY ABOUT Q1 GDP? NOT REALLY – Dems hoping to run on an improving economy this year got an ugly headline Thursday with the revision in Q1 GDP to -1 percent, even worse than expectations. And some Republicans jumped on it, as excepted. But most economists view the number as a one-off attributed a brutal winter and much slower inventory building than expected, something that will probably reverse in the second quarter. And jobless claims retreated back to 300K, a bullish signal for faster job growth heads.

HFE’s Jim O’Sullivan: “Of the 1.1-point revision, a full point came from inventories, so the details are more positive for future growth … [M]ore recent data signal a rebound in Q2. The Q1 weakness was clearly exaggerated, particularly by weather effects. There is certainly no sign of new weakening in the latest jobless claims data.”

STILL, NO REASON TO CELEBRATE EITHER – The GDP figure overstates the weakness of the economy. But it also suggests that the robust year many Democrats hoped would overcome the party’s many disadvantages may also not materialize. Pantheon’s Ian Shepherdson: “It is not certain, though, that Q2 growth will make up all the lost ground, not least because the severe weather has already left its mark on the April data. … We assume second quarter growth will rebound to about 3 percent, but that will leave the average for the first half of the year at just 1 percent. As a result, the Fed’s forecasts for growth this year will have to be revised down substantially.

CHEAT SHEET – All you need to know about GDP in one handy chart from Hamilton Place Strategies:

MARKETS UNCONCERNED – Reuters: “The S&P 500 index climbed to its third record closing high in four sessions … as traders shrugged off data that showed the economy shrank in the first quarter and bet on improvement in the second quarter. New claims for unemployment benefits fell more than expected last week, pointing to a strengthening labor market and giving investors a reason to buy U.S. stocks.”

GEITHNER THINKS BIG – Former Treasury Secretary Tim Geithner explains financial panics to Big Think:

BALLMER BUYING THE CLIPPERS – LATimes’ James Rainey scoops: “Former Microsoft chief executive Steve Ballmer won a frenetic bidding war for ownership of the Los Angeles Clippers, with his $2-billion offer setting a record price for an NBA team, … Ballmer, who was chief executive of Microsoft for 14 years, was chosen over competitors that included Los Angeles-based investors Tony Ressler and Steve Karsh and a group that included David Geffen and executives from the Guggenheim Group, the Chicago-based owner of the Los Angeles Dodgers. A person with knowledge of the negotiations said the Geffen group bid $1.6 billion and Ressler at $1.2 billion.

“The sale price is almost four times the highest previous NBA franchise sale price – the $550 million paid earlier this month for the Milwaukee Bucks. It is second only to the Dodgers’ 2012 sale for $2.1 billion as the highest price for any sports team in North America. The prospective sale by Clippers co-owner Shelly Sterling comes five days ahead of an NBA hearing to oust her family from ownership following a controversy in which Donald Sterling insulted African-Americans in a secret audio recording … The tentative deal still must receive the blessing of her husband, Donald Sterling.”

THE PIKETTY WARS CONTINUE – NYT’s Neil Irwin: “Six days after the [FT] launched an attack on the data behind Thomas Piketty’s much-debated tome … Mr. Piketty has offered his first detailed response to the newspaper’s criticism. The short version: He doesn’t give an inch. In response to a request from The New York Times to further address the criticisms … Mr. Piketty, a professor at the Paris School of Economics, wrote that his data were correct, and his conclusions stood: Wealth inequality in Europe and the United States was high in the years before World War I, fell for much of the 20th century, and has been rising sharply again in the past three decades.

“He argued that many of the things that The Financial Times identified as sloppy or arbitrary were in fact considered choices, which he explained in footnotes. Reasonable people might disagree with some of his choices of how to handle the data, he says. But even where there’s room for debate, any reasonable changes to his methodology would be small and not alter the broad conclusions, he suggested.’

THE HOUSE AS ATM MAKES A COMEBACK – WSJ’s Joe Light and Annamaria Andriotis: “A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis. Home-equity lines of credit, or Helocs, and home-equity loans jumped 8 percent in the first quarter from a year earlier … The $13 billion extended was the most for the start of a year since 2009. Inside Mortgage Finance noted the bulk of the home-equity originations were Helocs.

“While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share. In 2013, lenders extended $59 billion of Helocs and home-equity loans. The last pre-boom year near that level was 2000, when lenders extended $53 billion, according to Inside Mortgage Finance.”

THIS MORNING ON POLITICO PRO FINANCIAL SERVICES – Jon Prior and Zachary Warmbrodt on what is holding up the risk retention rule [] … Pro’s subscriber-only coverage – and to get Morning Money every day before 6 a.m. – please contact Pro Services at (703) 341-4600 or

GOOD FRIDAY MORNING – Congrats to Ansun Sujoe and Sriram Hathwar who tied as winners of the Scripps National Spelling Bee, the first joint championship in over half a century.

DRIVING THE DAY – Lots of economic data today including personal income and spending at 8:30 a.m. which is expected to show gains of 0.3 percent and 0.2 percent, respectively … Chicago PMI at 9:45 a.m. expected to dip to 61.0 from 63.0 … University of Michigan Consumer Sentiment at 9:55 a.m. expected to tick up to 82.5 from initial reading of 81.8 but down from April’s 84.1 …

COMING NEXT WEEK: PANIC OVER BANK RUNS JUSTIFIED? – One of the big themes of Tim Geithner’s book is that doing things differently (and more punitively toward banks) would have caused disastrous bank runs. But is that true? A group of scholars will discuss over lunch at the Cato Institute next Wednesday at noon.

GOOGLE BOWS TO E.U. RULING – FT’s Richard Waters: “A landmark ‘right to be forgotten’ ruling against Google in Europe risks damaging the next generation of internet start-ups and strengthening the hand of repressive governments looking to restrict online communications, Larry Page, the search company’s chief executive officer, has warned. Mr Page’s comments, in an interview with the [FT] … came as Google bowed to this month’s European Court of Justice decision, introducing a mechanism that could lead to large amounts of private information being stripped from the widely used search service.

“An online form, available from Friday, will give anyone in Europe an easy way to ask the US company to censor links to other internet sites that they think contain outdated and damaging information about them. The company hopes to strike a balance between blocking damaging private information about ordinary Europeans while preserving links to things in the public interest, such as articles about corrupt public officials.”

BOEHNER PLANS TEA PARTY CRACKDOWN – POLITICO’s Jake Sherman: “They’ve given John Boehner constant headaches during his three years as speaker. Now, Boehner’s friends are trying to make sure that a small pocket of tea-party-aligned Republicans won’t have a chance to derail his speakership next year. And if they try, they could be punished. … . A group of his closest allies – including fellow Ohio Republicans like Pat Tiberi – are discussing tactics such as trying to change GOP Conference rules to punish members who do not support the party’s nominee during a floor vote.

“A lawmaker who bucks the Republicans’ choice for speaker could lose committee assignments – or worse. … In a sign of force, some of Boehner’s friends are considering releasing a letter with the names of several dozen GOP lawmakers pledging to vote for no one else besides the speaker – making the election of a more conservative rival logistically impossible … The effort is playing out amid ongoing speculation that Boehner may retire soon after the midterms, though the Ohio Republican insists he will stick around.”

JUSTICE SEEKS $10 BILLION BNP FINE – WSJ’s Devlin Barrett, David Enrich and Christopher M. Matthews: “The U.S. Justice Department is pushing BNP Paribas … to pay more than $10 billion to resolve a criminal probe into allegations it evaded U.S. sanctions against Iran and other countries for years, which would represent one of the largest penalties ever imposed on a bank … A final resolution of the yearslong investigation of the French bank is likely weeks away, and it is possible the ultimate settlement amount could total far less than $10 billion. BNP is looking to pay less than $8 billion …

“A settlement for $10 billion or more would approach the largest penalty the U.S. ever levied on a single bank: the $13 billion deal J.P. Morgan Chase & Co. struck last year to resolve a civil probe into its handling of mortgage securities. BNP and the U.S. authorities also are negotiating whether the bank will temporarily lose the ability to transfer money into and out of the U.S. … Prosecutors are continuing to try to extract a guilty plea from the bank. In recent negotiations, they have pointed to the muted market reaction in the wake of Credit Suisse’s admission to conspiring to aid tax evasion as evidence a guilty plea by BNP wouldn’t be disastrous.”

U.S. ECONOMY TAKES A PAUSE – FT’s Robin Harding: “The US economy shrunk at a worse than expected annualised pace of 1 percent in the first quarter of 2014 but the fall says little about its ongoing health. In its second estimate, the [BEA] … revised its estimate down from growth of 0.1 percent to a contraction of 1 percent. But while the initial weakness was due to bad weather, the revision was almost entirely falling inventories. … The bad weather has not continued into the second quarter, and inventories can only fall so far, so most economists expect growth to rally towards a pace closer to 3 percent for the rest of the year. … Paul Ashworth at Capital Economics in Toronto said the decline was ‘nothing to worry about.’

“The figures reflect a gloomy first quarter. It was marked by freezing weather across the Midwestern US, which closed shops, factories and construction sites. In gross domestic product, that showed up as falling exports and investment, which left growth close to zero. … Apart from the inventory adjustment, most other categories were little changed, and a few of the revisions were encouraging. Growth in consumption – a much better indicator of the underlying health of the economy – was revised up slightly from growth of 3.1 percent to 3.2 percent.”


MANUFACTURING REBOUND HAS WINNERS AND LOSERS – WSJ’s Cameron McWhirter, James R. Hagerty and Tom McGinty: “The U.S. has added about 650,000 factory jobs since their numbers rebounded after the recession, putting manufacturing workers at 12.1 million and reversing a long decline in such jobs. But uneven growth has created regional disparities … Mobile County is among the winners. Shipbuilder Austal … . facility here is busy seven days a week … But private-sector manufacturing jobs declined in 38 percent of the counties in the Journal analysis of data from September 2009 and September 2013.

“Among the worst slides has been in Onondaga County, N.Y., where factory jobs fell 17 percent. A smokeless brick chimney juts from rusting ruins in the county, where a dinnerware plant near Syracuse closed in 2009 after 138 years. A Lockheed Martin Corp. electronics plant has cut jobs to about 1,600 from roughly 2,300 in 2009. Unlike Mobile, Syracuse hasn’t attracted major new industrial employers.”

MACK TO STEP DOWN AT ROSNEFT – FT’s Jack Farchy and Tracy Alloway: “John Mack, the former chief executive of Morgan Stanley, is to step down from the board of Russia’s state-controlled oil group Rosneft. His move comes after the US Treasury department last month sanctioned Igor Sechin, Rosneft’s president, in connection with Russia’s actions in Ukraine …

Mr Mack dismissed the notion that his departure had anything to do with sanctions and said he had struck an agreement with Mr Sechin to sit on Rosneft’s board for just one year. Rosneft said Mr Mack was stepping down from the board ‘for personal reasons’. Mr Mack joined Rosneft’s board last June after the Russian oil group bought TNK-BP for $55bn from BP and the AAR consortium. Six months later Rosneft announced it would buy Morgan Stanley’s global oil trading business.”

KOCH SCRUTINTY BENEFITS MORE SECRETIVE GROUPS – WP’s Matea Gold: “Senate Majority Leader Harry M. Reid’s relentless attacks on the billionaire Koch brothers are having an unforeseen impact: spurring other wealthy Republican donors to give more money to groups that keep their supporters’ names secret. Several prominent pro-Republican advocacy groups say they are benefiting from a burst of cash as some donors … turn away from political committees that are required by federal law to reveal their contributors. The trend can be seen at the prominent GOP super PAC co-founded by strategist Karl Rove, American Crossroads, which discloses its donors to the Federal Election Commission.

“The group, which hauled in $117 million during the 2012 election, has raised $9 million so far this cycle, including just $266,000 in April. At the same time, group officials said, donors are more interested than ever in supporting Crossroads GPS, a sister organization with a tax-exempt status that allows it to keep its donor list private. The two groups recently kicked off a $10 million television advertising campaign against vulnerable Senate Democrats – $8 million of which was paid for by Crossroads GPS. Paul Lindsay, a Crossroads spokesman, said the spotlight that Reid (D-Nev.) and others have put on major political funders on the right has driven more contributors to the nonprofit arm. Democrats are ‘dragging private citizens through the mud, and that’s led to a shift of sorts for donors,’ Lindsay said.”

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POTUS Events

11:00 am || Meets with the My Brother’s Keeper Task Force; Roosevelt Room
1:00 pm || Lunch with Biden
2:15 pm || Attends a hurricane preparedness meeting; FEMA Headquarters, Washington

All times Eastern
Live stream of White House briefing at 1:00 pm


The House wraps up work for the week on Friday with votes on the intelligence authorization after two late nights debating 2015 appropriations.

Debate and votes on the 2015 Commerce-Justice-Science appropriations bill lasted until 1:15 a.m. Friday. Members will return less than eight hours later for legislative business.

The intelligence authorization would allow funding for the CIA, Defense Intelligence Agency, Office of the Director of National Intelligence and National Security Agency.

The House passed a measure last Thursday to limit the NSA’s bulk data collection. But debate of the intelligence authorization and 11 amendments will likely still draw debate over the NSA.

The Senate is not in session this week.


TOMORROW STARTS TONIGHT: There were no surprises this morning at the House Ways and Means markup, where the committee approved six of the 50 tax breaks that expired in 2013 — known as “extenders” in wonk world. The House GOP pushed through a $287 billion tax break for business write-offs on a 23-11 party line vote.

Two points:

1.) Democrats on the Committee are opposing the tax breaks because of deficit concerns.

2.) All eyes now move to the Senate. Republicans have blocked an extenders bill in the Senate because they don’t like Democrats’ handling of amendments and floor procedure. But in a mid-term election year, will Senate Republicans really risk blocking tax breaks? The Hill’s Bernie Becker has the gamer from this morning’s hearing:

THIS IS OVERNIGHT FINANCE, where we’ve almost made it to the weekend. Tweet: @kevcirilli. Email: Back to work…

ECONOMISTS GOT IT WRONG: GDP SHRANK WORSE THAN EXPECTED. The U.S. economy shrank 1 percent last quarter, the Commerce Department said today. That’s double the amount of shrinkage all you wonks and economists predicted.

What gives? Most are blaming the wacky winter weather, while others pointed to the lackluster housing recovery.

WHAT’S BAD IS GOOD? Some economists, including Jason Furman at the White House, are pushing that the shrinkage is actually a good thing. They’re pointing to data showing a decline in inventories and an increase in consumer spending.

—Put simply: Businesses couldn’t meet consumer demand, and now will have to boost spending in Q2.

We shall wait and see…

FIRST LOOK – BOUSTANY TO CONGRESS: ACT ON TRADE. Rep. Charles Boustany (R-Louis.) will deliver a speech Friday at the American Enterprise Institute, renewing a push for Congress to grant Obama trade promotion authority (TPA).

“There are Democrats who support trade and believe the TPA is a good bill but will not sign on or encourage their colleagues to support it without having the political cover to go against the party line,” Boustany will say, according to prepared remarks. “Until the White House becomes serious about trade, the TPA bill will not move forward.”

The speech will also spark speculation that Boustany is positioning himself to be chairman of the House Ways and Means Trade subcommittee.

—Back story: Senate Majority Leader Harry Reid (D-Nev.) didn’t grant floor time for a trade bill that former Senate Finance Committee Chairman Max Baucus (D-Mont.) saw through with bipartisan support. New Finance Committee Chairman Ron Wyden (D-Ore.) has also signaled that he will not fast track the Baucus’ bill.

What the bill does: It gives the president more powers to conduct trade deals without Congressional approval, something Reid has opposed in the past. The issue has put the Senate majority leader at odds with President Obama.

SPORTS BLINK – GOLDMAN BETS ON BRAZIL FOR WORLD CUP. The economists over at Goldman picked host-country Brazil to win the upcoming World Cup. Read the 60-page, detailed analysis here:

—CHEAP SHOT, via Fox News Latino’s online story: “After betting – and profiting on the subprime mortgage crisis – Goldman Sachs decided it was time to start betting on sports, particularly the World Cup.”

QUOTABLE: Former Reagan economic adviser Arthur B. Laffer at Heritage earlier today, on Jon Corzine, whom he taught at the University of Chicago: “He was a C-student. And with some of the recent disclosures of MF Global – I’m not even sure he earned a C.”

Corzine, the former Democratic governor of New Jersey, was forced to resign from MF Global in 2011 after the brokerage firm collapsed.

ISSA BLASTS DOJ ON ‘OPERATION CHOKE POINT.’ “House Republicans are accusing the Justice Department of pushing banks to cut ties with legitimate businesses operating in unsavory areas.

“In a new report, the House Oversight Committee blasted the Justice Department for its ‘Operation Choke Point.’ The secretive initiative, begun in 2013, is aimed at pushing banks to shut off services to legally questionable fields as a way of stifling fraud.

“But Chairman Darrell Issa (R-Calif.) and other panel Republicans say the plan forces banks to ‘act as the moral arbiters and policemen of the commercial world.’ They called on the Justice Department to scrap the program, saying it is locking entirely legal businesses out of banking services due to government pressure.” Story:  Report:

—WHY THIS MATTERS: If Issa can inject “Operation Choke Point” into the national political debate, it could be a headache for Democrats in a mid-term year. OCP fits nicely into GOPers’ claims that agencies like the IRS and the Consumer Financial Protection Bureau grossly overstep their powers and hinder economic growth.

But is Issa’s strategy working?

DOJ DEFENDS ‘OPERATION CHOKE POINT.’ Justice Department officials are hitting back. They’re claiming that the financial firms they’ve put out of business were breaking the law and perpetuating consumer fraud.

“When financial institutions choose to process transactions, even though they know the transactions are fraudulent or are willfully ignorant of that fact, they are breaking federal law and we will not hesitate to hold them accountable,” DOJ spokeswoman told Emily Stephenson forReuters.

DEFEATED: HOUSE BILL THAT NIXED COMMERCE AGENCY. Cristina Marcos reports for The Hill: “The House on Wednesday defeated a proposal backed by the Club for Growth that would defund the Economic Development Administration.”

PAGING BILL ACKMAN: HOSTILE TAKEOVERS SOAR. Olivia Oran for Reuters: “Hostile and unsolicited mergers and acquisitions so far this year has accounted for about 7 percent of announced worldwide dealmaking, the most since 2007, according to Thomson Reuters data.”

THE HONEYMOON IS OVER FOR DFA’s C.D. Democracy For America’s comms director Neil Sroka was on his honeymoon on the island of Ko Samui in Thailand during the military coup.

He’s back in the U.S. safe and sound, telling OVERNIGHT FINANCE: “While it was sad to see a country filled with such amazingly kind people taken over by the military, as a tourist honeymooning in Thailand for the last two weeks, the coup had almost no impact on our day-to-day experience of the country… honestly, the coup really didn’t impact my wife and I at all.

“Other than the night markets closing early for the mandatory 10 p.m. curfew and most cable news channels being blocked, my wife and I might not have even known something had happened if we weren’t reading the newspapers.”

Neil is married to Christine Jacobs, communications director for the governance studies program at Brookings.

Welcome back, Neil.

THE BOTTOM LINE — DOES FED BALANCE SHEET MATTER? Harvard economic historian Niall Ferguson is out with a new study this week arguing that the Fed’s soaring balance sheet doesn’t really matter.

Ferguson argues that central banks around the world had seen their balance sheets shrink as a percentage of GDP during the lead-up to the 2008 financial crisis.

“Relative to the size of the financial sector, moreover, central bank balance sheets had shrunk dramatically in the three decades preceding the global financial crisis. By that yardstick, their recent expansion partly marks a return to earlier levels.

Conservatives have been pouncing on the central bank for months, particularly as it begins easing off its economic stimulus policies. The Fed’s balance sheet exceeds $4 trillion. In 2007, the Fed’s balance was $870 billion. Full study:

FIRST LOOK: PETRI TO PUSH FOR STUDENT LOAN DEFAULT REFORM. Rep. Tom Petri (R-Wis.) will keynote at The American Bankruptcy Institute (ABI) tomorrow at The Georgetown University Law Center.

The veteran GOP lawmaker will tout his student loan proposal that would link student loan payments to income. Read the bill: HR1716. It’s failed to gain much traction in the past. Register for the Student Debt Symposium here.

NOTABLE: Reps. Jared Polis (D-Colo.) and Brad Schneider (D-Ill.) joined Thomas A. Stewart, executive director of the National Center for the Middle Market (a partnership of GE Capital and OSUs Fisher College Business), on the Hill earlier today.

Polis and Schneider are teaming up with Reps. Steve Stivers (R-Ohio) and Tom Rice (R-S.C.) as part of The Congressional Caucus for Middle Market Growth, emphasizing the 3 percent of businesses that make the U.S. middle market but are responsible for a third of U.S. private sector jobs.

They haven’t pushed for legislation — yet.

ON-TAP FOR TOMORROW: House Appropriations FY2015 Defense markup at 8:30 a.m…. Rep. Ami Bera (D-Calif.) talks India’s economy at 8:30 a.m. in the Capitol… Incoming Cleveland Fed chief Loretta Mester speaks at 12:30 p.m…. Richmond Fed President Jeffrey Lacker speaks at 2 p.m…. Philly Fed President Charles Plosser speaks are 5 p.m.


Reading between the lines of the Democratic Congressional Campaign Committee’s $44-million fall ad reservation reveals some surprises.

The buy, which spans 36 districts with both offensive and defensive opportunities for the party, leaves out some top Democratic targets, like Rep. Joe Heck in Nevada’s 3rd District, Rep. Chris Gibson in New York’s 19th District, Rep. Steve Pearce in New Mexico’s 2nd District, and Arkansas’s 4th District and West Virginia’s 2nd District, both Republican seats left open with their current representatives running for Senate.

Arkansas is the only one of those states with a competitive statewide race, meaning ad buys will remain relatively cheap through the fall and Democrats have no immediate need to lock in lower rates with early buys. And Gibson is facing Democrat Sean Eldridge, who is expected to self-fund.

It also passes over Rep. Patrick Murphy in Florida’s 18th District, once considered a top GOP target but who has emerged as a prolific fundraiser and has avoided any strong opponents. The same goes for Rep. Cheri Bustos in Illinois’s 17th District, who looks safer than she did at the beginning of the cycle.

But some of the inclusions speak as loudly as the DCCC’s omissions. The committee is spending on Pennsylvania’s 6th District, where Rep. Jim Gerlach (R) is retiring, and the state’s 8th District, where Rep. Mike Fitzpatrick (R) is running for reelection, both tough gets for the party. It’s also reserving airtime in the districts of Michigan GOP Reps. Dan Benishek, Tim Walberg, Kerry Bentivolio and Mike Rogers, who’s retiring. And they’ve reserved time in Arkansas’ open 2nd District, and in Rep. Steve King’s (R-Iowa) district, both of which are long shots.

All four of those states have competitive statewide races, and locking in lower advertising rates early gives Democrats the option of taking advantage of a favorable climate, depending on how the top of the ticket performs, for cheap.

The committee also hinted the party’s not entirely confident in California’s 26th District, where Democratic Rep. Julia Brownley is up for reelection, Connecticut’s 5th District, where Republicans haven’t found a strong challenger for Rep. Elizabeth Esty (D), and, perhaps most surprisingly, New York’s 11th District, where it plans to spend nearly $1 million this fall despite GOP Rep. Michael Grimm’s indictment.

Some of those holes will be filled by outside Democratic groups, which are barred from coordinating from the parties but can now see where they’re needed. And the reservations can — and will — shift as the map develops.

Indeed, the early buys are a reminder of how much things can change in a few short months.


VETS GROUP TARGETS DEMS: Concerned Veterans For America is launching a six-figure ad campaign targeting Sens. Kay Hagan (N.C.), Mary Landrieu (La.), Jeanne Shaheen (N.H.), Mark Pryor (Ark.), Mark Warner (Va.) — all facing competitive reelection fights — and Senate Majority Leader Harry Reid (Nev.), meant to pressure the lawmakers into backing the 2014 Department of Veterans Affairs Management Accountability Act.

MS-SEN (COCHRAN): Jeppie Barbour, the brother of former Gov. Haley Barbour, has endorsed state Sen. Chris McDaniel in his primary challenge to Sen. Thad Cochran (R-Miss.) — breaking with both of his sons, who are actively supporting Cochran, and his brother, who has endorsed the senator. Meanwhile, Citizens United launched a new ad for McDaniel that features former Pennsylvania Sen. Rick Santorum, who won the state’s GOP primary when he ran for president last year, endorsing the challenger. Former Alaska Gov. Sarah Palin will appear at a rally for McDaniel on Friday, just four days out from the primary.

OK-SEN (OPEN): Former Oklahoma Speaker T.W. Shannon (R) picked up the backing of former Rep. J.C. Watts (R-Okla.) in his bid for the Senate.

OR-SEN (MERKLEY): A new Public Policy Polling survey gives Sen. Jeff Merkley (D) 50 percent support among Oregon registered voters to GOP challenger Monica Wehby’s 36 percent support, with another 15 percent of respondents undecided. The survey also shows Wehby deeply underwater with voters, while Merkley is seen favorably by a plurality of respondents.

MI-SEN (OPEN): Former Michigan Secretary of State Terri Lynn Land (R) dodged questions about her opposition to the auto bailout and struggled to coherently answer a question about net neutrality.


DCCC CHAIRMAN CALLS FOR SHINSEKI’S RESIGNATION: Democratic Congressional Campaign Committee Chairman Steve Israel (D-N.Y.) became the first member of House Democratic leadership to call for Veterans Affairs Secretary Eric Shinseki to resign.

CA-52 (PETERS): Republican Carl DeMaio’s campaign office was broken into and vandalized.

CA-31 (OPEN): The League of Conservation Voters officially endorsed Redlands Mayor Pete Aguilar (D), days after it sent out mailers attacking former Rep. Joe Baca (D-Calif.).

KS-04 (POMPEO): Former Rep. Todd Tiahrt (R-Kan.) on Thursday announced his plans to primary Rep. Mike Pompeo, looking to take back his old seat. The Club for Growth immediately came out backing Pompeo in the race.

AL-06 (OPEN): Surgeon Chad Mathis, one of a handful candidates vying for the GOP nomination in Alabama’s heavily Republican 6th District, launched a new ad just five days out from the primary featuring his kids panning his cooking skills but touting his potential as a member of Congress.

2016 WATCH

O’MALLEY: Maryland Gov. Martin O’Malley (D) is heading to Iowa, the latest signal he’s keeping his options open on a 2016 run.

CLINTON: Hillary Clinton will face questions about Benghazi, the 2016 presidential election and her new book in a joint interview Fox News has secured for next month. Meanwhile, she stopped in for a surprise lunch with President Obama on Thursday.

“I’ve been confused for Anthony Weiner twice now. I don’t know how this keeps happening.”


IRS Announces Issuance of Two Affordable Care Act Electronic Publications

The IRS today announced the issuance of two electronic publications containing information for individuals and families about the Affordable Care Act (ACA). These one-page publications are available on the IRS website and can be used by individuals, tax professionals, health care professionals and other stakeholders for educational and outreach purposes.

Publication 5152, Report changes to the Marketplace as they happen…, discusses the importance of reporting changes in circumstances, such as family size and income changes that can affect the Premium Tax Credit, to the health insurance Marketplace.  Reporting changes can help individuals and families avoid getting too much or too little in advance credit payments.

Publication 5156, Facts about the Individual Shared Responsibility Provision, discusses what individuals need to know regarding health insurance coverage and taxes.

These two publications will supplement several earlier IRS ACA flyers:

Publication 5120 (English) and Publication 5120SP (Spanish) – Facts about the Premium Tax Credit (Flyer)

Publication 5121 (English) and Publication 5121SP  (Spanish) – Facts about the Premium Tax Credit (Tri-fold Brochure)

Publication 5093 –Health Care Law Online Resources

More Information

Find out more about these and other  tax-related provisions of the health care law at

About Thomas Krebs

Securities litigation, regulation and compliance attorney.