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This Week in Scandals

 Every week, we take stock of how the week unfolded for the stories we're tracking in Scandal Watch (see the right sidebar). Here is how we do it.  And, as always, feel free to suggest new scandals.

1. Market Crisis

This week several papers continued to ask themselves a now-familiar question: What happened?

An economics professor writes in the New York Times that the phenomenon of "groupthink" quelled warnings of a dangerous housing bubble at the Federal Reserve and other government agencies, where consensus was a hotter commodity than doubt.

The Times also reports that mathematical risk models failed to predict the crisis because they ignored one key factor: human behavior.

The paper also traced the fallout from a bad investment in CDOs as it ricocheted between an Irish bank and U.S. parties, like New York City’s transit agency and a Wisconsin school board. Despite the crisis’ global scope, the Bush administration indicated this week that it does not support a global crisis regulator.

Meanwhile, ex-employees at Washington Mutual testified in a lawsuit that they felt pressured to approve all loans, no matter what, and Fannie Mae caught some flak after a Dallas TV station reported that it had spent $6,000 on a golf retreat just weeks after being seized by the government. Adding insult to injury, taxpayers may be on the hook to pay the legal fees for execs at Fannie Mae and Freddie Mac, which are under investigation by the Justice Department.

And finally, the Village Voice exposed the seedy underbelly of Lehman Brothers: a subsidiary that actually fueled the demand for subprime loans.

2. AIG

The Wall Street Journal reports that AIG’s risk models failed to catch major risks, mainly because they didn’t address the valuation of the company’s credit-default swaps until late 2007.

Financial experts are starting to question the effectiveness of AIG’s $143 billion bailout and wonder whether the government should have let the company go bankrupt instead. And AIG shareholders are suing the company for not allowing them to vote on a key part of the bailout proposal.

Meanwhile, U.S. transit agencies are pressing the government to bail them out after AIG’s collapse scuttled their tax shelter deals and left them owing millions to various corporations.

3. Detainee Treatment

The second Gitmo trial ended on Monday with a conviction and life sentence for Osama bin Laden’s propagandist, but the Washington Post reports that many of the government’s other cases have hit stumbling blocks.

Meanwhile, Brig. Gen. Thomas Hartmann, who was recently stripped of his role as legal adviser to Gitmo’s military tribunals and is under investigation for improperly influencing the prosecutions, has filed his retirement papers.  

4. Alaska!

The fate of Sen. Ted Stevens (R-AK) remains up in the air. He was convicted of lying on Senate disclosure forms last week but most likely still scored re-election on Tuesday. Senate Minority Leader Mitch McConnell threatened to expel him from the Senate if he won but implied that he would wait for the appeals process to conclude, which could take years.   

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