Inside Rick Lazio's Biggest Wall Street Deal—The Chummy E-Mails

Diverting nearly a billion in retiree benefits into subprime risk? Oh, just watch him work the e-mail.

Millard was still getting acquainted with the agency when he testified at his confirmation Senate hearing that September. Yet he was already talking about fundamentally changing PBGC's investment policy, shifting billions in assets from what he called "extremely conservative" investments to higher-yield ones. Maryland Democrat Barbara Mikulski, who then chaired the aging committee, did not hide her alarm. "I am really requesting as chair that before any board decision is even taken that you share" the new investment policy "with us," asking pointedly: "Do I have your commitment on that?" Millard said he'd be "absolutely be happy to discuss" the policy with the committee.

Millard was only acting director that fall, awaiting confirmation and commuting to his new job in Washington. With eight kids at home and a very pregnant wife, he frequently scheduled Monday or Friday meetings in New York. Lazio was quite willing to make Morgan's expertise available to him, introducing Millard to an array of exciting and risky investment approaches for PBGC. One Monday meeting in October in New York was listed in Millard's calendar as "Credit Derivatives with Rick Lazio." The two continued talking and e-mailing in November, when Lazio sent Millard an eight-page "follow-up," list of "frequently asked questions about pension transfers." The document appeared to propose the transferring of some PBGC benefit plans to subsidiaries created and controlled by JPM. Lazio was providing an insurance analyst to "help" Millard "scope the project properly."

On December 4, the exchange shifted to a two-inch-thick Morgan document listed in the attachment as "Investment Portfolio Details: Subprime, Alt-A Exposure," which Lazio passed on to Millard. The attachment highlighted "information on a couple of insurance companies," including raves about AIG. He flattered Millard: "Challenging the culture in government requires persistence and good arguments," he wrote. "I hope we can help a little on the latter." Millard got the package from him at 10 in the morning, and an 8:49 e-mail that night indicated he wanted to talk to Lazio "re whether JP Morgan will negotiate."

For reasons that aren't clear, the Millard/Lazio e-mails then ceased for a few months. Millard was confirmed on December 17 and, though he had previously said he wouldn't propose a new investment policy until spring, he actually forced it past an unusual session of the three-member board in early February. The policy allowed PBGC—a traditionally cautious protector of retirement funds that is financed by premiums from participating employers, and steps in when companies can no longer make monthly pension payments—to set aside 10 percent of its assets in alternative investments, 5 percent in real estate, and 5 percent in private equities. Mikulski never got her promised hearing, but penned a letter to Millard with Senator Ted Kennedy shortly after the policy was announced, calling it "much more aggressive" and saying it would "move billions from stable bonds" into "riskier investments."

On April 24, 2008, a friend of Millard's e-mailed him a Wall Street Journal story announcing that Lazio was leaving the bank's governmental relations unit and was becoming a managing director in the real estate and infrastructure group within Morgan's asset-management division. "It's not a traditional role for a former public servant," Lazio boasted. By the start of May, he and Millard were back in regular contact, and now he was no longer the bank's lobbyist: He had joined the very unit that would handle Millard's contract, an unlikely coincidence.

In May, Lazio wrote his "very friendly" e-mail about Millard to Joseph Azelby, the head of the real estate group that he had just joined. The author of a confidential Morgan analysis had just granted him permission to pass sensitive Morgan market predictions on to Millard. So, on June 3, he attached "JPM Asset Management long term assumptions prepared for this year" in an e-mail to Millard, calling the numbers "important inputs" in Morgan's internal process and asking him to show it to no one.

The same day, one Morgan executive e-mailed another about a conversation he'd just had with Katherine Rosa, a managing director in the Private Equity Group (PEG). "Kathy asked me to let you know she met with Rick Lazio this morning," wrote Kristopher Nichol. "Turns out that Lazio is very good friends with Charles Millard. Lazio and Millard have worked together on political and investment projects. Kathy is optimistic that this connection will give PEG one more front on which to move the relationship with PBGC forward." Lazio's sweet "in" with Millard obviously had his colleagues salivating.

Millard responded within 10 minutes of receiving Lazio's e-mail about JPM's long-term assumptions—hardly enough time to read the secret study. The relationship was on such a roll that he asked if Lazio would be in D.C. over the next couple of weeks. The two immediately arranged a New York meeting for the next Monday. But Millard discovered that he couldn't keep the appointment: "On the phone with him now," Millard's assistant e-mailed while talking to Lazio just two minutes after Millard decided he had to cancel. Lazio told the assistant that he and others from Morgan "would like to come to Rye Monday morning first thing like 7 am-8am," suggesting an emergency visit to Millard's house.

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