This grizzled old hippie once whispered to me in the parking lot of a Dead Show at the Spectrum in Philadelphia, that the Craft Service on “Where’s Marlowe” was outstanding…
Bill Maher | Opening Monologue
June 21 —2002
Millions saw the horrific images of the World Trade Center attacks, and those who saw them won’t forget them. But a New Jersey homemaker saw something that morning that prompted an investigation into five young Israelis and their possible connection to Israeli intelligence.
Maria, who asked us not to use her last name, had a view of the World Trade Center from her New Jersey apartment building. She remembers a neighbor calling her shortly after the first plane hit the towers.
She grabbed her binoculars and watched the destruction unfolding in lower Manhattan. But as she watched the disaster, something else caught her eye.
Maria says she saw three young men kneeling on the roof of a white van in the parking lot of her apartment building. “They seemed to be taking a movie,” Maria said.
The men were taking video or photos of themselves with the World Trade Center burning in the background, she said. What struck Maria were the expressions on the men’s faces. “They were like happy, you know … They didn’t look shocked to me. I thought it was very strange,” she said.
She found the behavior so suspicious that she wrote down the license plate number of the van and called the police. Before long, the FBI was also on the scene, and a statewide bulletin was issued on the van.
The plate number was traced to a van owned by a company called Urban Moving. Around 4 p.m. on Sept. 11, the van was spotted on a service road off Route 3, near New Jersey’s Giants Stadium. A police officer pulled the van over, finding five men, between 22 and 27 years old, in the vehicle. The men were taken out of the van at gunpoint and handcuffed by police.
The arresting officers said they saw a lot that aroused their suspicion about the men. One of the passengers had $4,700 in cash hidden in his sock. Another was carrying two foreign passports. A box cutter was found in the van. But perhaps the biggest surprise for the officers came when the five men identified themselves as Israeli citizens.
‘We Are Not Your Problem’
According to the police report, one of the passengers told the officers they had been on the West Side Highway in Manhattan “during the incident” — referring to the World Trade Center attack. The driver of the van, Sivan Kurzberg, told the officers, “We are Israeli. We are not your problem. Your problems are our problems. The Palestinians are the problem.” The other passengers were his brother Paul Kurzberg, Yaron Shmuel, Oded Ellner and Omer Marmari.
When the men were transferred to jail, the case was transferred out of the FBI’s Criminal Division, and into the bureau’s Foreign Counterintelligence Section, which is responsible for espionage cases, ABCNEWS has learned.
One reason for the shift, sources told ABCNEWS, was that the FBI believed Urban Moving may have been providing cover for an Israeli intelligence operation.
After the five men were arrested, the FBI got a warrant and searched Urban Moving’s Weehawken, N.J., offices.
The FBI searched Urban Moving’s offices for several hours, removing boxes of documents and a dozen computer hard drives. The FBI also questioned Urban Moving’s owner. His attorney insists that his client answered all of the FBI’s questions. But when FBI agents tried to interview him again a few days later, he was gone.
Three months later 2020’s cameras photographed the inside of Urban Moving, and it looked as if the business had been shut down in a big hurry. Cell phones were lying around; office phones were still connected; and the property of dozens of clients remained in the warehouse.
The owner had also cleared out of his New Jersey home, put it up for sale and returned with his family to Israel.
‘A Scary Situation’
Steven Gordon, the attorney for the five Israeli detainees, acknowledged that his clients’ actions on Sept. 11 would easily have aroused suspicions. “You got a group of guys that are taking pictures, on top of a roof, of the World Trade Center. They’re speaking in a foreign language. They got two passports on ’em. One’s got a wad of cash on him, and they got box cutters. Now that’s a scary situation.”
But Gordon insisted that his clients were just five young men who had come to America for a vacation, ended up working for a moving company, and were taking pictures of the event.
The five Israelis were held at the Metropolitan Detention Center in Brooklyn, ostensibly for overstaying their tourist visas and working in the United States illegally. Two weeks after their arrest, an immigration judge ordered them to be deported. But sources told ABCNEWS that FBI and CIA officials in Washington put a hold on the case.
The five men were held in detention for more than two months. Some of them were placed in solitary confinement for 40 days, and some of them were given as many as seven lie-detector tests.
Plenty of Speculation
Since their arrest, plenty of speculation has swirled about the case, and what the five men were doing that morning. Eventually, The Forward, a respected Jewish newspaper in New York, reported the FBI concluded that two of the men were Israeli intelligence operatives.
Vince Cannistraro, a former chief of operations for counterterrorism with the CIA who is now a consultant for ABCNEWS, said federal authorities’ interest in the case was heightened when some of the men’s names were found in a search of a national intelligence database.
Israeli Intelligence Connection?
According to Cannistraro, many people in the U.S. intelligence community believed that some of the men arrested were working for Israeli intelligence. Cannistraro said there was speculation as to whether Urban Moving had been “set up or exploited for the purpose of launching an intelligence operation against radical Islamists in the area, particularly in the New Jersey-New York area.”
Under this scenario, the alleged spying operation was not aimed against the United States, but at penetrating or monitoring radical fund-raising and support networks in Muslim communities like Paterson, N.J., which was one of the places where several of the hijackers lived in the months prior to Sept. 11.
For the FBI, deciphering the truth from the five Israelis proved to be difficult. One of them, Paul Kurzberg, refused to take a lie-detector test for 10 weeks — then failed it, according to his lawyer. Another of his lawyers told us Kurzberg had been reluctant to take the test because he had once worked for Israeli intelligence in another country.
Sources say the Israelis were targeting these fund-raising networks because they were thought to be channeling money to Hamas and Islamic Jihad, groups that are responsible for most of the suicide bombings in Israel. “[The] Israeli government has been very concerned about the activity of radical Islamic groups in the United States that could be a support apparatus to Hamas and Islamic Jihad,” Cannistraro said.
The men denied that they had been working for Israeli intelligence out of the New Jersey moving company, and Ram Horvitz, their Israeli attorney, dismissed the allegations as “stupid and ridiculous.”
Mark Regev, the spokesman for the Israeli Embassy in Washington, goes even further, asserting the issue was never even discussed with U.S. officials.
“These five men were not involved in any intelligence operation in the United States, and the American intelligence authorities have never raised this issue with us,” Regev said. “The story is simply false.”
Despite the denials, sources tell ABCNEWS there is still debate within the FBI over whether or not the young men were spies. Many U.S. government officials still believe that some of them were on a mission for Israeli intelligence. But the FBI told ABCNEWS, “To date, this investigation has not identified anybody who in this country had pre-knowledge of the events of 9/11.”
Sources also said that even if the men were spies, there is no evidence to conclude they had advance knowledge of the terrorist attacks on Sept. 11. The investigation, at the end of the day, after all the polygraphs, all of the field work, all the cross-checking, the intelligence work, concluded that they probably did not have advance knowledge of 9/11,” Cannistraro noted.
As to what they were doing on the van, they say they read about the attack on the Internet, couldn’t see it from their offices and went to the parking lot for a better view. But no one has been able to find a good explanation for why they may have been smiling with the towers of the World Trade Center burning in the background. Both the lawyers for the young men and the Israeli Embassy chalk it up to immature conduct.
According to ABCNEWS sources, Israeli and U.S. government officials worked out a deal — and after 71 days, the five Israelis were taken out of jail, put on a plane, and deported back home.
While the former detainees refused to answer ABCNEWS’ questions about their detention and what they were doing on Sept. 11, several of the detainees discussed their experience in America on an Israeli talk show after their return home.
Said one of the men, denying that they were laughing or happy on the morning of Sept. 11, “The fact of the matter is we are coming from a country that experiences terror daily. Our purpose was to document the event.”
ABCNEWS’ Chris Isham, John Miller, Glenn Silber and Chris Vlasto contributed to this report.
Bank of American Corp. (BAC), which is getting $15 billion from the U.S. government as part of the Treasury Department’s $250 billion “recapitalization” effort, is doubling its stake in state-owned China Construction Bank Corp., and will hold a 20% stake worth $24 billion in China’s second-largest lender when that deal is finalized.
PNC Financial Services Group Inc. (PNC), which will get $7.7 billion from Treasury’s Troubled Assets Relief Program (TARP), is using that cash infusion to help finance its $5.2 billion buyout of embattled National City Corp. (NCC).
And U.S. Bancorp (USB), which received a $6.6 billion capital infusion from that same rescue package, has acquired two California lenders – Downey Savings & Loan Association, F.A., a subsidiary of Downey Financial Corp. (DSL), and PFF Bank & Trust, a subsidiary of PFF Bancorp Inc. (OTC: PFFB). U.S. Bank agreed to assume the first $1.6 billion in losses from the two, but says anything beyond that amount is subject to a loss-sharing deal it struck with the Federal Deposit Insurance Corp. (FDIC).
While the Treasury Department’s investment of more than $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, buyout deals such as these three show that the recapitalization plan has actually had a much different result – one that’s left whipsawed U.S. investors and lawmakers alike feeling burned, an ongoing Money Morning investigation continues to show.
Those billions have touched off a banking-sector version of “Let’s Make a Deal,” in which the biggest U.S. banks are using government money to get even bigger. While that’s admittedly removing the smaller, weaker banks from the market – a possible benefit to consumers and taxpayers alike – this trend is also having a detrimental effect: It’s reducing the competition that’s benefited consumers and kept the explosion in banking fees from being far worse than it already is.
This all happens without any of the economic benefits that an actual increase in lending would have had. And it does nothing to address the billions worth of illiquid securities that remain on (or off) banks’ balance sheets – as the recent Citigroup Inc. (C) imbroglio demonstrates.
In fact, Treasury’s TARP program has even managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers are furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.
One could even argue that since this first bailout (the $700 billion TARP initiative) has fueled takeovers – and not lending – the government had no choice but to roll out the more-recent $800 billion stimulus plan that was aimed at helping consumers and small businesses – a move that may spur lending and spending, but that still adds more debt to the already-sagging federal government balance sheet.
At the end of the day, these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager and expert on the U.S. credit crisis who is the editor of the Trigger Event Strategist, which identifies trading opportunities emanating from such financial-crisis “aftershocks” as this buyout binge.
“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”
Lining Up for Deal Money
In launching TARP, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the government’s goal was to restore public confidence in the U.S. financial services sector – especially banks – so private investors would be willing to advance money to banks and banks, in turn, would be willing to lend.
“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said.
Whatever Treasury’s actual intent, the reality is that banks are already sniffing out buyout targets, while snuffing out lending – and the TARP money is the reason for both.
Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, says Louis Basenese, a mergers-and-acquisitions expert who is also the editor of The Takeover Trader newsletter. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”
Indeed, banking executives have been quite open about their expansionist plans during media interviews, or during conference calls related to quarterly earnings.
Take BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the government program. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans, The Wall Street Journal said.
“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.
And BB&T is hardly alone. Zions Bancorporation (ZION), a Salt Lake City-based bank that’s been squeezed by some bad real-estate loans, recently said it would be getting $1.4 billion in federal money. CEO Harris H. Simmons said the infusion would enable Zions to boost “prudent” lending and keep paying its dividend – albeit at a reduced rate.
Sounds good, right? Not so fast. During a conference call about earnings, Zions Chief Financial Officer Doyle L. Arnold said any lending increase wouldn’t be dramatic. Besides, Arnold said, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”
Buyouts Already Accelerating
With all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.
At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.
According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals that Paulson & Co. are helping engineer – JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ), for instance.
If You Can’t Beat ‘em… Buy ‘em?
When it comes to identifying possible buyout targets, M&A experts such as Basenese say there are some very clear frontrunners.
“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climates – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.
There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors.
The afore-mentioned stealthy shift in the U.S. Tax Code actually gives big U.S. banks a potential windfall of as much as $140 billion, says Gilani, the credit crisis expert and Trigger Event Strategist editor. What does this tax-change do? By acquiring a failed bank whose only real value is the losses on its books, the successful suitor would basically then be able to use the acquired bank’s losses to offset its own gains and thus avoid paying taxes.
“While everyone was panicking, the Treasury Department slipped through a ruling that allows banks who acquire other banks to fully write-off all the acquired bank’s bad debts,” Gilani says. “For 22 years, the law was such that if you were to buy a company that had losses, say, of $1 billion, you couldn’t just take that loss against your own $1 billion profit and tell Uncle Sam, ‘Gee, now my loss offsets my profit, so I don’t have any profit, and I don’t owe you any tax.’ It was a recipe for tax evasion that demanded an appropriate law that only allows limited write-offs over an extended period of years.”
Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.
Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company. The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.
“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”
Not everyone agrees with that assessment. Investors who play the merger game correctly will do well. But the game itself won’t necessarily whip the industry into championship form, Gilani says.
“While consolidation, instead of outright collapses, in the banking industry may serve to relieve the FDIC of its burden to make good on failed banks, it in no way guarantees fewer failures,” he said. “In fact, it may only serve to guarantee, in some cases, even larger failures.”
The epicenter of what may be the largest Ponzi scheme in history was the 17th floor of the Lipstick Building, an oval red-granite building rising 34 floors above Third Avenue in Midtown Manhattan.
A busy stock-trading operation occupied the 19th floor, and the computers and paperwork filled the 18th floor of Bernard L. Madoff Investment Securities.
But the 17th floor was Bernie Madoff’s sanctum, occupied by fewer than two dozen staff members and rarely visited by other employees. They called it the “hedge fund” floor, but U.S. prosecutors now say the work Madoff did there was actually a fraud scheme whose losses Madoff himself estimates at $50 billion.
The tally of reported losses climbed through the weekend to nearly $20 billion, with a giant Spanish bank, Banco Santander, reporting on Sunday that clients of one of its Swiss subsidiaries have lost $3 billion. Some of the biggest losers were members of the Palm Beach Country Club, where many of Madoff’s wealthy clients were recruited.
The list of prominent fraud victims grew as well. According to a person familiar with the business of the real estate and publishing magnate Mort Zuckerman, he is also on a list of victims that already included the owners of the New York Mets, a former owner of the Philadelphia Eagles and the chairman of GMAC.
And the 17th floor is now an occupied zone, as investigators and forensic auditors try to piece together what Madoff did with the billions entrusted to him by individuals, banks and hedge funds around the world.
So far, only Madoff, the firm’s 70-year-old founder, has been arrested in the scandal. He is free on a $10 million bond and cannot travel far outside the New York area.
But a question still dominates the investigation: How one person could have pulled off such a far-reaching, long-running fraud, carrying out all the simple practical chores the scheme required, like producing monthly statements, annual tax statements, trade confirmations and bank transfers.
Firms managing money on Madoff’s scale would typically have hundreds of people involved in these administrative tasks. Prosecutors say he claims to have acted entirely alone.
“Our task is to find the records and follow the money,” said Alexander Vasilescu, a lawyer in the New York office of the Securities and Exchange Commission. As of Sunday night, he said, investigators could not shed much light on the fraud or its scale. “We do not dispute his number we just have not calculated how he made it,” he said.
Scrutiny is also falling on the many banks and money managers who helped steer clients to Madoff and now say they are among his victims.
While many investors were friends or met Madoff at country clubs or on charitable boards, even more had entrusted their money to professional advisory firms that, in turn, handed it on to Madoff for a fee.
Investors are now questioning whether these paid advisers were diligent enough in investigating Madoff to ensure that their money was safe. Where those advisers work for big institutions like Banco Santander, investors will most likely look to them, rather than to the remnants of Madoff’s firm, for restitution.
Santander may face $3.1 billion in losses through its Optimal Investment Services, a Geneva-based fund of hedge funds that is owned by the bank. At the end of 2007, Optimal had 6 billion euros, or $8 billion, under management, according to the bank’s annual report which would mean that its Madoff investments were a substantial part of Optimal’s portfolio.
A spokesman for Santander declined to comment on the case.
Other Swiss institutions, including Banque Bénédict Hentsch and Neue Privat Bank, acknowledged being at risk, with Hentsch confirming about $48 million in exposure.
BNP Paribas said it had not invested directly in the Madoff funds but had 350 million euros, or about $500 million, at risk through trades and loans to hedge funds. And the private Swiss bank Reichmuth said it had 385 million Swiss francs, or $327 million, in potential losses. HSBC, one of the world’s largest banks, also said it had made loans to institutions that invested in Madoff but did not disclose the size of its potential losses.
Losses of this scale simply do not seem to fit into the intimate business that Madoff operated in New York.
With just over 200 employees, it was tight-knit and friendly, according to current and former employees. Madoff was gregarious and empathetic, known for visiting sick employees in their hospitals and hosting warmly generous staff parties.
By the elevated standards of Wall Street, the Madoff firm did not pay exceptionally well, but it was loyal to employees even in bad times. Madoff’s family filled the senior positions, but his was not the only family at the firm generations of employees had worked for Madoff.
Even before Madoff collapsed, some employees were mystified by the 17th floor. In recent regulatory filings, Madoff claimed to manage $17 billion for clients a number that would normally occupy a staff of at least 200 employees, far more than the 20 or so who worked on 17.
One Madoff employee said he and other workers assumed that Madoff must have a separate office elsewhere to oversee his client accounts.
Nevertheless, Madoff attracted and held the trust of companies that prided themselves on their diligent investigation of investment managers.
One of them was Walter Noel Jr., who struck up a business relationship with Madoff 20 years ago that helped earn his investment firm, the Fairfield Greenwich Group, millions of dollars in fees.
Indeed, over time, one Fairfield’s strongest selling points for its largest fund was its access to Madoff.
But now, Noel and Fairfield are the biggest known losers in the scandal, facing potential losses of $7.5 billion, more than half its assets.
Jeffrey Tucker, a Fairfield co-founder and former U.S. regulator, said in a statement posted on the firm’s Web site: “We have worked with Madoff for nearly 20 years, investing alongside our clients. We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme.”
The huge loss comes at a time when the hedge fund industry has already been wounded by the volatile markets. Several weeks ago, Fairfield had halted investor redemptions at two of its other funds, citing the tough market conditions as dozens of hedge funds have done. The firm reported a drop of $2 billion in assets between September and November.
Fairfield was founded in 1983 by Noel, the former head of international private banking at Chemical Bank, and Tucker, a former Securities and Exchange Commission official. It grew dramatically over the years, attracting investors in Europe, Latin America and Asia.
Noel first met Madoff in the 1980s, and Fairfield’s fortunes grew along with the returns Madoff reported. The two men were very different: Madoff hailed from eastern Queens and was tied closely to the Jewish community, while Noel, a native of Tennessee, moved in the Greenwich social scene with his wife, Monica.
“Walter was always really confident in Bernie and the strategy he employed,” said one hedge fund manager who declined to be named because for fear of jeopardizing his relationship with Noel.
“He was a person of superb ethics, and this has to cut him to the quick,” said George Ball, a former executive at E. F. Hutton and Prudential-Bache Securities who knows Noel.
Fairfield touted its investigative skills. On its Web site, the firm claimed to investigate hedge fund managers for six to 12 months before investing. As part of the process, a team of examiners conducted personal background checks, audited brokerage records and trading reports and interviewed hedge fund executives and compliance officials.
In 2001, Madoff called Fairfield and invited the firm to inspect his books after two news reports questioned the validity of his returns, according to a person close to Fairfield. Outside auditors hired to inspect Madoff’s operations concluded that “everything checked out,” this person said.
“FGG performed comprehensive and conscientious due diligence and risk monitoring,” Marc Kasowitz, a lawyer for Fairfield, said in a statement. “FGG like so many other Madoff clients was a victim of a highly-sophisticated massive fraud that escaped the detection of top institutional and private investors, industry organizations, auditors, examiners, and regulatory authorities.”
Now, Fairfield is seeking to recover what it can from Madoff.
“It is our intention to aggressively pursue the recovery of all assets related to Bernard L. Madoff Investment Securities,” Tucker said in a statement.
Working alongside the U.S. investigators on Madoff’s 17th floor, staffers for Lee Richards 3d, the court-appointed receiver for the firm, are trying to determine what parts of the firm can keep operating to preserve assets for investors.
A hotline number had been posted on the company Web site, madoff.com, but on Sunday night, Richards said that there was little reason to call.
“We don’t have anything to report to investors at this time,” he said. “We are doing everything we can to protect the assets of the Madoff entities that are subject to the receivership, and to learn what we can about the operations of those entities.”