Operation Fast and Furious (F&F) – a program run by the US Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) that allowed thousands of lethal weapons to cross the Mexican border – was apparently no secret among high-level political authorities at the Department of Justice (DOJ). Among those in the know? Newly-confirmed Deputy Attorney General James Cole.

Information is now seeping out about the political whiplash that secured a confirmation vote for Cole in exchange for the DOJ’s release of documents to Congress. In a supremely ironic twist, the documents ransomed by Cole’s confirmation strongly suggest that Cole himself was involved in the cover-up of F&F. 

To recap, James Cole is no stranger to serious misconduct occurring during his alleged “watch.” Cole was the “Independent Consultant” stationed at AIG by the Securities and Exchange Commission (SEC) before, during and after the financial meltdown of 2008. Despite his oversight responsibilities, Cole looked the other way as the AIG Financial Products Division in London ran the corporation off the rails, ultimately driving the international economy off a cliff. The cost to US taxpayers of the AIG bailout was more than $150 billion.

James Cole was confirmed by the Senate today to the post of Deputy Attorney General at the Department of Justice (DOJ). With this, the long battle to hold him accountable for his part in what happened at AIG during the financial meltdown of 2008 comes to an ignominious end.

With the help of numerous AIG whistleblowers, GAP fought to prevent Cole from assuming his new role, where he will now help to decide who is prosecuted and who is not.

The Obama administration has picked the wrong guy. Beginning in 2005, Cole served as the Independent Consultant (IC) at AIG for five years, as a result of two deferred prosecution agreements between the corporation, the SEC and the DOJ. The US government decided that AIG needed independent monitoring as a result of an earlier corporate fraud that forced then-CEO, Hank Greenberg, to resign as part of a deal that allowed him to escape prosecution.

As the IC, Cole was supposed to review the adequacy of AIG's internal controls over financial reporting, and recommend best practices for strengthening legal compliance. For his trouble, he and Bryan Cave (the law firm where Cole is a partner) were reportedly paid over $20 million by AIG.

As the 111th Congress draws to a close, the heat is on to confirm James Cole as Deputy Attorney General. Despite the last-minute push, Cole still has serious problems that haunt and disqualify him from taking a senior position at the Justice Department.

From 2005 through December 2009, James Cole served as an independent monitor in the Compliance Office of the American International Group (AIG), placed there by the Securities and Exchange Commission (SEC) as part of a deal that allowed AIG to escape prosecution for fraud.

While Americans and their elected representatives are notorious for their short attention spans, it’s worth remembering, in this case, that AIG was the corporation that nearly drove the US economy off a cliff in September 2008. AIG’s Financial Products Division (AIG-FP), based in London, wrote credit default swaps involving staggering amounts of money that had to be covered with a US government bailout in the range of $180 billion.

The Senate Judiciary Committee is scheduled to vote on James Cole’s nomination for Deputy Attorney General tomorrow – Tuesday, July 20th. Serious doubts remain, however, about Cole’s role at AIG before, during and after the company’s financial collapse in September 2008. I posed him some questions prior to Cole’s hearing last month on GAP’s YouTube channel.

Over the past two weeks, a number of Senators have posed written questions to Cole about his role at AIG. His answers are troubling – particularly those he provided to Senator Charles Grassley.

On July 2nd, Senator Charles Grassley (R-Iowa) posed written questions to James Cole, the Obama administration’s nominee for the post of Deputy Attorney General. Many of these questions focused on Cole’s role as the Independent Consultant placed at AIG from 2005 through 2009 as part of two deferred prosecution agreements (DPAs). The first of these DPAs resulted from charges of aiding and abetting securities fraud in the AIG Financial Products subsidiary based in London, the AIG appendage that crashed the world economy in 2008 and required a $182 billion bailout courtesy of the US taxpayer. Some of Cole’s responses to Grassley’s questions were both puzzling and contradictory, and others we know to be misleading.

Under the terms of the 2006 DPA, Cole was asked to examine “the adequacy of whistleblower procedures designed to allow employees or others to report confidentially matters that may have a bearing on AIG’s financial reporting obligations.” In written questions Grassley asked Cole to provide a “discussion of the scope of your work under the 2006 DPA.” In response, Cole simply quotes from the DPA, which is, of course, available to Senator Grassley and the rest of the world on the DOJ website. A meaningful written discussion of whistleblower procedures at AIG would have to include an account of the layoff of ten compliance attorneys and officials in the aftermath of the corporation’s financial collapse in September 2008. Several of the ten were whistleblowers who had written to senior management at AIG about deficient compliance procedures. None of them was interviewed confidentially by Cole, who acceded to the demand of Suzanne Folsom, then Chief Compliance Officer, that Cole interview her staff only when she or her designee were present. As a result, the whistleblowers were summarily terminated under guise of a staff reduction.

The public finally got a look at the trio who ran AIG aground before the bailout in 2008 when they appeared before the Financial Crisis Inquiry Commission yesterday. Joseph Cassano, Martin Sullivan and Robert Lewis seemed defiant and pained, still stunned and humiliated, respectively. The New York Times articles (here and here) and the questioning yesterday explain the sheepishness and shame on display with the AIG executives who testified. At AIG-FP (Financial Products), Cassano had encumbered the AIG holding company with enormous uncapitalized and unhedged long-term risk based on a single market trend: the upswing in US housing prices. This is like betting your house that one horse will win the Derby because it’s been winning up until now. In this case, we now know that the horse was feeling queasy by 2005, so why Cassano did this remains unclear. Based on yesterday’s testimony, neither Sullivan nor Lewis ever asked him.

What is clear is that AIG-FP under Cassano had inexplicable corporate autonomy, even after senior management knew that he was sinking the ship. By 2006, AIG-FP had stopped insuring CDSs (credit default swaps) based on mortgage-backed securities because even the “experts” working for Cassano knew the deals were rotten. These guys were careful to keep this to themselves, however, and James Cole, the Independent Consultant installed at AIG by the SEC and the Justice Department to review AIG-FP transactions from 2000 – 2005, failed to spot it. Part of the reason for the blind spot that affected Cole is explained by the recommendations for compliance (p87) that he himself set out in 2007. When Cole recommended the establishment of a Committee to oversee the transacting of derivatives, which would have encompassed oversight of the CDSs insured by AIG-FP, he wrote:

The Derivatives Committee should be responsible for providing an independent review of proposed derivative transactions or programs entered into by all AIG entities other than AIG Financial Products Corp. (“AIG-FP”).

These recommendations, made in September 2007, show Cole’s explicit intention to keep his eye off the ball, even though, a 2004 deferred prosecution agreement between AIG, the Department of Justice (DOJ), the SEC and the New York State Insurance Commission– placed him at AIG to review potentially fraudulent AIG-FP transactions.

Cole, of course, has now been nominated to serve as the Deputy Attorney General at DOJ, where he would help to decide who should and should not be prosecuted. Cole does not appear to be the ideal candidate for this slot, based on his performance at AIG.

Bea Edwards is the International Reform Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.

For the past two months, GAP has criticized the nomination of James Cole to be Deputy Attorney General at the Justice Department (DOJ). We have argued that because Cole, who served as Independent Consultant at AIG during the critical time period from 2005 through 2009, missed clear signals of malfeasance, he is unsuited to serve as the second-in-command at the DOJ.

Last week, after four senators requested Cole’s reports to DOJ about AIG, prior to deciding on his nomination, a DOJ spokeswoman defended Cole’s role at AIG, telling Main Justice that

Critics who suggest that Mr. Cole was somehow too close to AIG misunderstand his relationship with the company,” …. “His presence was imposed on the company by a federal court. In fact, as the [Congressional Research Service] report notes, AIG executives tried to have him removed.

“[Cole] was never a general overseer or monitor of AIG’s entire operation nor was he assigned to examine many of the issues involving AIG’s near collapse, such as credit-default swaps or retention bonuses…”

This statement did more to obscure Cole’s role at AIG than to clarify it. First, although it’s true that in late 2008, Chief Compliance Officer Suzanne Folsom mounted an effort to remove Cole, it was not because he was insisting on a tough compliance regime. Folsom wanted him out because he was pocketing too much AIG money. His costs, as Independent Consultant, included not just the $20 million paid to his law firm, but tens of millions more for the consultants, who, we understand, were both expensive and incompetent.

A substantial part of the consulting fees apparently went to DLA Piper, the law firm where Anastasia Kelly, AIG General Counsel, parked herself in 2010, after fleeing AIG in order to avoid pay caps imposed by the TARP regulations.

Second, although it’s also true that Cole was not a general overseer of AIG, he failed to object when Folsom dismissed half the team that was working on compliance and oversight just after AIG had to be rescued by taxpayers in 2008. Many of these people had written to the board and to the CEO to expose AIG’s weak compliance program before the meltdown. When Cole did finally interview them, he acceded to Folsom’s demand that she or her designee be present to observe the conversations. This collaboration is simply inconsistent with the responsibility of an independent monitor.

Third, it’s also true that Cole did not monitor many of the issues which sank the AIG balance sheet, most of which were trades arranged in AIG-FP. But as we pointed out earlier, Cole himself made the decision to exempt the problem division from his oversight (p.87).

Fourth, Cole was assigned under the 2004 deferred prosecution agreement to review five years of transactions effected by the problem division, AIG-FP. This assignment would specifically have included credit default swaps as well as other fraudulent maneuvers designed to conceal liabilities.

Finally, no one has suggested that the retention bonuses paid in 2009 were involved in AIG’s near collapse. The bonuses were paid after the collapse, and critics questioned the propriety of paying bonuses to those responsible for the crisis. More cynical critics have instead suggested that the putative ‘retention bonuses’ were, in fact, hush money, since a number of people who received them have left the firm. Critics are also wondering if the second round of retention bonuses was paid in 2010.