Conflicts of Interest & Chinese Walls
Good article about the inherent conflicts of interest the various bailout manager firms — BlackRock, PIMCO, and AllianceBernstein are some examples — have due to their ordinary businesses.
“As the Wall Street bailout nears its first anniversary, the controversy over giving public money to private banks has become public knowledge. But an equally risky aspect of the financial rescue has flown largely under the radar: the government’s reliance on private contractors – many with potentially significant conflicts of interest – to help revive the stalled economy.
The Treasury Department knows that the law firms and investment managers hired to aid its salvage effort could be influenced by their ties to bailed-out banks; in fact, the department released a rule in January aiming to mitigate the problem.
That rule, however, has raised questions from watchdogs by asking contractors to identify and police their own conflicts of interest. And a careful review of bailout hiring agreements reveals an inconsistent set of rules applied to the types of private deals that contractors can make while serving as agents of the U.S. government.”
I have a few words in the piece. Funny thing, though, they don’t usually quote my language in its “purest” form:
“The financial world often uses the anachronistic phrase “Chinese wall” – a phrase that came into wide use after the 1929 stock market crash – to describe an investment firm’s internal efforts to isolate compromising information.
To a certain extent, then, the debate over conflicts of interest at BlackRock and other firms depends on whether you believe Chinese walls can survive in the age of BlackBerries and blogs.
“Let’s be honest, it’s bullshit. They don’t exist,” Barry Ritholtz, the CEO of the independent research firm Fusion IQ and the creator of the Big Picture financial blog, said in an interview. “They’re a theoretical, abstract legal construct that looks and sounds good when you’re developing legal constructs.”
Sometimes you just have to call a spade a spade . . .
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Source:
Government Taps Bailout Contractors With Conflicts of Interest
Elana Schor
Washington Independent, 5/29/09 6:00 AM
http://washingtonindependent.com/44659/fed-taps-bailout-contractors-with-conflicts-of-interests
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May 30th, 2009 at 11:46 am
Many government functions have been privatized and are now being run by contractors, Barry. It wasn’t until I worked for the National Archives that I realized this and saw for myself how many government functions are being fulfilled by private firm with little accountability to the public. This is part and parcel of the Reaganite philosophy of the last 30 years, which denigrated the idea of government for the common good. Clinton embraced it as well (remember “reinventing government?”), and of course G. W. Bush took it to a whole new level with KBR et al.
While I agree that there’s no such thing as an impenetrable Chinese Wall, I do believe that we can eventually reach a viable equilibrium by restoring FDR’s philosophy that government should serve the national interest. Furthermore, we have to start seeing government work as national service, and a duty for the best and the brightest. We can’t expect good government when we treat government workers, from regulators to educators, as morons for choosing a life of national service and sacrifice.
May 30th, 2009 at 11:49 am
Shorter version:
If we tell the truth, everyone would know we we’re criminals, so we’re not going to tell the truth. It’s not us who are criminals — it’s the truth. Hang the truth.
May 30th, 2009 at 11:59 am
Franklin:
There are good government workers and bad. The problem lies not with the workers, but with the programs and their political justification for being.
Parkinson’s Law, by Cyril Northcote Parkinson (the most famous element of which is the statement, “Work expands so as to fill the time available for its completion.”) demonstrates the true nature of the problem with both big government and/or big business/industry economics of scale (from Wikipedia, and a very terse synopsis):
(1) “An official wants to multiply subordinates, not rivals” and (2) “Officials make work for each other.” He notes in particular that the total of those employed inside a bureaucracy rose by 5-7% per year “irrespective of any variation in the amount of work (if any) to be done.”
That we now have merged business and governmental interests and functions does not bode well for the future of our ostensible Republic.
May 30th, 2009 at 12:10 pm
“Let’s be honest, it’s bullshit. They don’t exist,” says Barry Ritholtz
Ahhh can you be a bit more direct and explicit ;)
Well done !
May 30th, 2009 at 12:14 pm
Manipulation – How Markets Really Work
By Stephen Lendman
http://bit.ly/2VQZV
(The Intelligence Daily) — Wall Street’s mantra is that markets move randomly and reflect the collective wisdom of investors. The truth is quite opposite. The government’s visible hand and insiders control markets and manipulate them up or down for profit – all of them, including stocks, bonds, commodities and currencies.
It’s financial fraud or what former high-level Wall Street insider and former Assistant HUD Secretary Catherine Austin Fitts calls “pump and dump,” defined as “artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price,” then profit more on the downside by short-selling. “This practice is illegal under securities law, yet it is particularly common,” and in today’s volatile markets likely ongoing daily.
May 30th, 2009 at 12:21 pm
The plunge protection team?
They did a great job – last year was only the worst in 8 decades.
May 30th, 2009 at 12:30 pm
@Marcus
I’d agree with that assessment, to a certain point. There’s plenty of water cooler folk in any business/gov’t who just want to do the minimal amount of work required to fill out an 8 hour day.
I’m not so sure that the problem is with the programs, though. There’s a powerful social stigma against the idea of government service. If you choose to be a soldier, people will respect you because you’re putting your @ss on the line for the national good. But if you choose to be an SEC enforcement attorney, people will assume you were too dim-witted to be able to get a job on Wall Street. After all, who would take a job at the SEC making $75k when you can make many times that on the Street?
I do believe that there are plenty of people who would and do take the SEC job over Wall Street for the same reason that a person joins the Army–because they want to serve their country. I just wonder how many more high-quality people could be attracted to national service if we didn’t ridicule those who choose to serve their country by carrying a calculator instead of a rifle, though.
May 30th, 2009 at 12:31 pm
Barry Ritholtz Says:
May 30th, 2009 at 12:21 pm
The plunge protection team?
They did a great job – last year was only the worst in 8 decades.
comment:
—————-
I won’t disagree about that. My current interest is with the mysterious market spikes that seem to follow patterns and must cost a lot of money to make happen. Any opinions that don’t involve tin foil hats?
May 30th, 2009 at 12:50 pm
Barry Ritholtz Says:
“The plunge protection team?
They did a great job – last year was only the worst in 8 decades.”
_____________________
BR: what scares me is that they very well might have done a great job, and what we’re seeing is the best results of their efforts vs. a truly horrendous alternative.
May 30th, 2009 at 12:55 pm
Franklin:
“But if you choose to be an SEC enforcement attorney, people will assume you were too dim-witted to be able to get a job on Wall Street. After all, who would take a job at the SEC making $75k when you can make many times that on the Street?”
________________
My point, exactly. where is the SEC in all of this? Where is the FBI? Why do we need Security Contractors in Iraq when we already fully fund the most powerful standing military in the history of the world?
It is the programs, and Parkinson nailed it.
May 30th, 2009 at 1:13 pm
BR: Re PPT 2008 results. Well the article points out studies indicating some aspects only work on the down side. Some companies can be acquired pretty cheaply. And as MA points out it might have been a lot worse otherwise. The SLP is real.
@KM4: thanks for the article link. I’ve seen Yamada’s name mentioned here several times with people wondering what her current position is. According to the article, she says the bear market will last 12-16 years before it totally unwinds, which means the worst is yet to come thru 2012-2016.
May 30th, 2009 at 2:05 pm
He notes in particular that the total of those employed inside a bureaucracy rose by 5-7% per year “irrespective of any variation in the amount of work (if any) to be done.”
——————-
Probably a better measure of inflation than CPI!
May 30th, 2009 at 2:28 pm
Barry Ritholtz Says:
May 30th, 2009 at 12:21 pm
The plunge protection team?
They did a great job – last year was only the worst in 8 decades.
reply #2:
—————
Considering it was a handpicked GWB team, they performed as expected.
May 30th, 2009 at 2:40 pm
The plunge protection team?
They did a great job – last year was only the worst in 8 decades
———
You don’t know. The team leaderwas maybe shorting the market in one of his non-conflict of interest businesses.
May 30th, 2009 at 3:55 pm
“by asking contractors to identify and police their own conflicts of interest.”
Hasn’t this laissez-faire approach to self regulation already gotten this country into enough trouble? Doesn’t anyone learn anything in Washington??
“The plunge protection team?”
I think you need to re-evaluate your opinion. It’s like I said the other day; the government has quite a few agencies who are doing their best to prop up (or protect from plunging) certain companies, credit and/or asset classes. I do not have to list them because you write about them almost everyday. And if that’s the case how can you possibly not regard them as a plunge protection team? Unless, you feel that they’re doing the right thing? Which would then be in contradiction to Bailout Nation. Please clarify…
May 30th, 2009 at 4:03 pm
P.S.
“They did a great job – last year was only the worst in 8 decades.”
There were too many battles to fight at one time. Interconnectivity and globalization complicated their efforts. Still does.
May 30th, 2009 at 10:51 pm
BR says, “The plunge protection team?
They did a great job – last year was only the worst in 8 decades.”
BTW, I’m not reading your comment to say that you don’t believe the U.S. government is either directly or indirectly proping up equities.
It is a fact that the President’s Working Group on Financial Markets (or PPT) exists, via Executive Order 12631. Furthermore, it is a fact that the main existence of the Federal Reserve Bank is to attempt to fix interest rates. Through the Open Market Operations, the FR is constantly intervening in bond markets. The FR even had the audacity to deny that it is targeting long-term interest rates, when that is one of their primary aims. If the FR will intervene, in broad daylight, to prop of bond markets and deny that it is doing so, doesn’t that destroy any credibility that they have in regards to denying the proping of of equities? Now, I think they are about as successful at proping up equities as they are at proping up bond prices. It works in the short run, killing some shorties, but they can’t stop the freight train. I don’t trust these fools and no one should. At least the Nipponese are open about their intentions.