It's only a matter of time before the Wachter/Schwarzenegger insider-trading ethics scandal blows up.  Soon, actually.  California's media is so competitive that once you have one newspaper invested in a scandal story, there are quickly another 10 to 15 papers racing to catch up, egged on by internet coverage, and eventually 30 or so TV affiliates and the national press are on the scene to cover the daily paper cuts.

If Paul Gigot and the Wall Street Journal editorial board, to their credit, can tear into Tom DeLay's for his lapses in ethical judgment, then it's inevitable they'll tear into the Schwarzenegger insider-trading ethics-scandal-in-the-making.

SALON:   "'We've been friends for 25 years and been in business together for less than 15 years,' Wachter tells Salon about his relationship with Schwarzenegger."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:    

That this story ran and was widely circulated in Sacramento and in California political circles, and nothing's changed indicates a couple of things:

1) either Paul Wachter's arrogance and political tin ear gives him a truly false sense of security, to the degree that he is simply unable to comprehend just how exposed he has made his 'friend', the Governor, through conflicts of interest stemming from his role of managing the vast fortune, estimated to range between $100 to $200 million, of asset holdings in the Schwarzenegger blind trust; or

2) there's no one in Schwarzenegger's orbit who is charged with 'protecting the principal' -- someone who is confident, trusted, and capable enough to both connect dots and see around corners, and who is also able to act accordingly in the Governor's best interests; or (and more likely) 

3) most of the true political pros among the Governor's top advisors truly despise Wachter enough to let Schwarzenegger get dinged on a conflict-of-interest story in which the Governor is the victim, the resolution of which will require Paul Wachter's permanent banishment from the Schwarzenegger inner circle. Our gut says that all three of our assumptions are accurate: Wachter is in way over his head politically, is abrasively arrogant, and fails ultimately for not knowing what he doesn't know.   

SALON: "I am his main person in the whole business, financial, legal area. And, obviously, a close confidant. As the blind trustee, I manage all his money."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS: 

No one person exists on Team Schwarzenegger with the necessary political skills and who, having read the February 2005 Salon piece, would be able to cut Wachter's knees off without shooting his or her own foot off too.  

Pat Clarey, the Governor's Chief of Staff, could fill this role perhaps, but since she knows how much Schwarzenegger relies on -- and is fond of  -- Paul Wachter, she's savvy enough to sit back and watch the political novice do himself in. 

Furthermore, outside political consultants such as MIke Murphy, Don Sipple or George White are paid quite well to solve a crisis, not avoid one, so they're not inclined to help someone like Wachter, who probably wouldn't follow their good counsel.  Heck, in this situation the seasoned Schwarzenegger political pros benefit when the Governor's made more vulnerable, so there's an implicit incentive for the backseat driver to witness a car wreck rather than prevent one.

SALON:  "It doesn't take a doctorate in ethics to see that Wachter is exactly the wrong person to serve as the disinterested trustee."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS: 

So if there's no one to fill the "avoid-a-scandal" role, then it's left to the press to follow the bread crumbs left by various Schwarzenegger insiders with the knowledge about Wachter's short-comings.   That there are nearly 100 capable, seasoned political professionals on Team Schwarzenegger's payroll and that they've all remained silent on this scandal-waiting-to-happen speaks volumes.

The fact that no other California journalist hasn't poked or probed yet about this obvious ethics scandal doesn't make it go away either.   Stories like these develop gradually, eventually heating to a slow boil, often triggered when a tipping point of evidence exists. 

Were Wachter, for example, to sell Schwarzenegger's holdings in Pfizer, once reported to be well in excess of $1 million, someone should be questioning whether the stock sale was a result of Wachter having possible advanced insider knowledge that, in this hypothetical situation, Arnold's views had altered on importing cheaper drugs from Canada.

Proving insider access to Schwarzenegger's thinking and whether it directly affects a stock's value is next-to-impossible to prove, and maybe that's why Wachter and Schwarzenegger accept such a risk.  They're playing a game of 'can't catch me, can ya?' , openly inviting the scrutiny?

SALON:    "'Disinterested party' excludes family and business associates," says Tracy Westen, Stern's colleague at the Center for Governmental Studies. "The word 'blind' means that the trust is not being run by someone with whom you interact on an intimate or a daily basis. If the beneficiary of a blind trust were to get some sense of how the trust is being invested through a casual remark, or a deliberate remark, that might affect a governmental decision. If a longtime business partner is handling the trust, I would certainly question whether it was truly blind."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS: 

Wachter shares a personal office in Santa Monica -- the same physical space -- with Schwarzenegger.  Furthermore, they are conjoined business partners in multiple complex and extended financial arrangements.  He is unquestionably Schwarzenegger's business partner, and should not be deemed eligible to serve as a blind trust manager for the Governor and Maria Shriver. 

No one can legitimately claim otherwise.  Even Wachter's lawyer.The Schwarzenegger-Wachter financial partnership is complex and extensive, as is their personal relationship.  It's said Wachter speaks with Schwarzenegger constantly at all hours in person and by telephone, helps to prepare his political agenda with his Sacramento and outside political team, and often pitches in to coordinate personal life matters and resolve scheduling conflicts.  

Wachter is, for lack of a better term, the trusted personal gatekeeper, and Schwarzenegger relies on him to run interference on a variety of other fronts, especially with Maria Shriver and her cadre of advisors and loyal friends.

Get on the wrong side of Paul Wachter and he'll go out of his way to screw you out of spite, even in matters where it will hurt the Governor or Maria Shriver.  (see Schwarzenegger, pink dress).   He's proud of his vengeful nature, which causes most others to avoid confronting or questioning his motives or judgment.  [Note the emphasis on the word 'most'.]

So when Paul Wachter brags about being that close to the Governor, he's not kidding.  For example, when Governor Schwarzenegger made his first overseas trade mission to Israel, Jordan, and Germany, who sat in the seat next to him for most of the entire trip? 

Of course, Paul Wachter. 

SALON:   "Last March, Schwarzenegger appointed his friend, Wachter, to a state jobs commission. In May 2004, Schwarzenegger took his personal financial advisor, Wachter, on a trip to Israel, Jordan and Iraq to look for business opportunities."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

Paul Wachter likes to say that he knows everything -- repeat everything -- that Schwarzenegger says, meant to say, is doing and hopes or intends to do.  He intuitively knows the Schwarzenegger mind, and if the Governor needs something done for him, he is as likely to turn to Paul Wachter as anyone to act on his behalf.  That's not blind, by any means.  

Wachter may be politically deaf, and his colleagues may consider him over-educated-but-not-very-smart -- 'dumb' smart -- but blind he is not when it comes to managing Schwarzenegger's money.   In fact, he's especially good at managing Arnold's money.How could anyone honestly describe what Wachter is managing as 'blind'? 

Is Wachter so arrogant as to assume that because you receive a legal opinion from your lawyer that it doesn't still create enormous ethical and political problems?  

SALON:    "Wachter says that while he shares these investment 'vehicles' with Schwarzenegger, he qualifies as a disinterested party.  Why?  His lawyers OK'd him as the blind trustee."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS: 

And what does California Common Cause -- the Governor's partner on a proposed statewide redistricting ballot initiative -- think about this close arrangement?

If pressed, it's certain California Common Cause would object to Wachter's handling of Schwarzenegger's blind trust given the troubling lack of an arm's length relationship.  Once any newspaper writes this story, the state's largest good government advocacy group has no other choice but to question Schwarzenegger's ethics, which undermines the redistricting ballot initiative partnership.

So that's why California Common Cause isn't leading the effort to expose this emerging conflict-of-interest scandal.

But hey, Wachter's specialty is turning  allies into adversaries.  He's the kind of guy who wonders out loud, "Why does everyone take an instant disliking to me?"; is there any response other than "Because, Paul, it saves time."

Wachter, a political novice, couldn't possibly see the chess board when all he can play is checkers.   

SALON:    "Furthermore, Wachter is anything but disinterested in the link between the governor's political and financial success. Wachter's company, Main Street Advisors, has long managed much of the Schwarzenegger fortune."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

In advising the Governor on gaming negotiations was the advice Wachter provided meant to help the Governor in his role as a  public official or as a private citizen? 

Which client was Wachter serving -- 'Schwarzenegger as Investor', or 'Schwarzenegger as Governor'?  Of course those questions are impossible to answer, or validate, but you can't answer with 'Both', especially when the negotiations centered on gaming tax rate and collection issues.  

Perhaps it matters more in terms of perception, but as the saying goes in politics perception matters more than reality. 

SALON:    "The economic disclosure statement that Wachter filed when he became a regent shows that he and Schwarzenegger are linked by millions of dollars' worth of partnership investments.

"Wachter's fundamental and most obvious shortcoming is failing to see that he's created his own undoing and seems willing to take down his 'best friend' Arnold too. 

Wachter's openly invited scrutiny into his blind trust manager's role and whether he has used information gleaned from his extraordinary access to Governor Schwarzenegger to benefit Schwarzenegger as well as his own personal investments. 

The fact that legitimate questions can now be raised creates its own momentum and negative political energy source, which can't be a good thing for a Governor overly dependent on a shallow celebrity profile and constantly sinking poll numbers.  

SALON:    "The Schwarzenegger-Shriver economic disclosure statement filed in December 2003 reveals that the couple sold millions of dollars' worth of corporate stocks when the governor assumed office and set up a blind trust. "GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

By his own admission, Wachter sees, observes and knows everything Schwarzenegger -- they share a small, quaint Santa Monica office, home of Schwarzenegger's Oak Production film company and a dozen or so investment partnerships that Schwarzenegger and Wachter jointly own.  Oak Productions is perhaps best known for producing the dismal Schwarzenegger box office flop The Last Action Hero, the Gigli of the early 90's.

Wachter even oversees the Schwarzenegger.com website, serving as its point of contact and manager of Schwarzenegger's charitable auction items.  The Governor and he have offices yards apart, supposedly talk by phone constantly when Arnold's on the road, and see each other socially with their families. 

Wachter is, by his description to reporters, one of Arnold's best friends and it's said he remains close to the Shriver siblings.

In 2004 Schwarzenegger spent as many days in Wachter's Santa Monica office as he did in his Sacramento Capitol office.  To then allow Wachter to manage the Governor's personal $100 to $200 million blind trust with such constant access and open lines of communication is a certain scandal-in-the-making. 

At best it creates a horrible appearance problem, and in politics the worst thing that can happen is to be forced to disprove a negative.  In other words, once a scandal develops the burdens of dealing with proving that something didn't happen quickly becomes debilitating -- just ask House Majority Leader Tom DeLay.  Just ask any seasoned political pro about a client who's faced the draining nature of a daily 'when did you stop kicking you dog?'-type inquiry. 

When any answer you give is the wrong answer, you're in T-R-O-U-B-L-E. 

SALON:    "Wachter, for example, also has more than a million dollars invested in Dimensional Fund Advisors."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

Furthermore, it's not just Wachter's unfettered access that creates a conflict-of-interest for Schwarzenegger  --  Wachter creates one for himself and for Dimensional Fund Advisors equity firm. 

If Wachter uses knowledge that he's gained from his insider status with Schwarzenegger to tip off the Dimensional Fund to buy or sell a particular stock, or to invest in some new technology, or to pursue the purchase of some private company, that violates the law, as Wachter too has significant holdings with DFA, at least $1 million according to his financial disclosure statement. 

Thus, DFA would be wise to avoid all contact with Wachter as long as he remains under the current arrangement.  Otherwise, DFA may be unwittingly placing itself in jeopardy, opening itself to media and legal inquiries.

SALON:    "As his friend, confidant and financial advisor, Wachter is likely to share conversations with the governor that grant him inside knowledge of Schwarzenegger's plans and priorities."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

It doesn't take much to envision a situation where a glaring conflict-of-interest emerges given the breadth of issues before Schwarzenegger. 

For example, with California's prominence in stem cell research, and Schwarzenegger's active promotion of the industry, how does Wachter maintain the necessary arm's length removed required  by state ethics laws if they share the same physical office space and are in constant daily communications? 

DFA, admired in investment circles for its expertise in investing in small- and medium-capitalized high yield companies, will be all over the developing stem cell industry.  They can hardly afford the risk to their reputation that Wachter presents them currently.

                (continued in Wachter Watch II)