You are here
Hiring Experts and Giving Ethics Waivers: The Henry Paulson, Jr. Story
Monday, August 10th, 2009
Robert Wechsler
Again, a very public federal conflict of interest matter provides
valuable material relevant to local government ethics. This
time it's former Treasury Secretary Henry M. Paulson, Jr.'s
relationship with the firm he formerly headed, Goldman Sachs, the
subject of a
front-page story in Sunday's New York Times.
Experts in Government
Whenever experts in the business world are hired by government, there are conflict of interest problems. Such experts are frequently faced with situations that involve companies and individuals with whom they had close personal and business relationships, as well as companies and individuals who were their clients, competitors, or rivals. The more frequent the conflicts, the more difficult it is to recuse oneself and have others handle these situations.
This is especially true in a crisis (or, in the case of smaller local governments, when there is no one else qualified to handle the matter). Even before the economy was in a state of crisis last September, Paulson was in frequent contact with the person who replaced him at Goldman Sachs. Paulson had to be in close contact with the investment banks, and it is only to be expected that he would talk most with the person he respected most or felt most comfortable with. This person happened to be with his firm, as opposed to someone, for example, who had left his firm and was working for a competitor.
Technical Ethics Violations
But since no one knows the content of Paulson's conversations, no one knows whether he was already in violation of the ethics agreement he signed in 2006. At first blush, one would think he was, since the ethics agreement said that its intent was to "avoid even the appearance of a conflict of interest." However, there is no appearance of anything when a government official makes a private phone call.
But how could the former head of Goldman Sachs have expected to talk with investment bankers who are his former colleagues and competitors without having ongoing conflicts of interest? Hiring an expert with strong loyalties and relationships, personal and financial, in their field creates the appearance of a conflict, and will create actual conflicts at least occasionally.
An ethics code or, in Paulson's case an ethics agreement, is of far more value with respect to how such conflicts are to be dealt with, than they are with identifying when conflicts occur. It should be assumed that experts have ongoing conflicts, without wasting time on which matters involve technical conflicts and which do not.
Ethics Waivers and Who Should Give Them
When it looked like his former firm might have to be rescued, Paulson says, he asked for an ethics waiver to talk with his former firm about its status. The reason given for the waiver, by the individual who gave it, was a good one:
This is exactly the sort of balancing that should be done when ethics waivers are requested. However, I don't approve of having the waiver come from the Treasury Dept. general counsel's office. The office that gives advice should not be the office that gives waivers, and waivers should not be given by any office that reports to the individual requesting the waiver.
The Timing of a Waiver
The most important issue relating to the waiver given to Paulson is that it was given just after he had been involved in the decision by which the government bailed out A.I.G, which allowed it to pay $13 billion to Goldman Sachs (in addition to the $10 billion bailout paid directly by the government to Goldman Sachs).
Paulson says that he was not involved in the A.I.G. bailout, but there are signs that he was, including the word of others involved in the decision. The issue here is that the reason Paulson gave for requesting the waiver may not have been the real reason, or was only part of the reason. When requesting and giving a waiver, it is important that there is full transparency. It's bad enough that the waiver was given via e-mail from an internal lawyer. It would be even worse if the waiver were given on the basis of partial information. But again, we will never know exactly what Paulson talked about with his replacement at Goldman Sachs.
Robert Wechsler
Director of Research-Retired, City Ethics
---
Experts in Government
Whenever experts in the business world are hired by government, there are conflict of interest problems. Such experts are frequently faced with situations that involve companies and individuals with whom they had close personal and business relationships, as well as companies and individuals who were their clients, competitors, or rivals. The more frequent the conflicts, the more difficult it is to recuse oneself and have others handle these situations.
This is especially true in a crisis (or, in the case of smaller local governments, when there is no one else qualified to handle the matter). Even before the economy was in a state of crisis last September, Paulson was in frequent contact with the person who replaced him at Goldman Sachs. Paulson had to be in close contact with the investment banks, and it is only to be expected that he would talk most with the person he respected most or felt most comfortable with. This person happened to be with his firm, as opposed to someone, for example, who had left his firm and was working for a competitor.
Technical Ethics Violations
But since no one knows the content of Paulson's conversations, no one knows whether he was already in violation of the ethics agreement he signed in 2006. At first blush, one would think he was, since the ethics agreement said that its intent was to "avoid even the appearance of a conflict of interest." However, there is no appearance of anything when a government official makes a private phone call.
But how could the former head of Goldman Sachs have expected to talk with investment bankers who are his former colleagues and competitors without having ongoing conflicts of interest? Hiring an expert with strong loyalties and relationships, personal and financial, in their field creates the appearance of a conflict, and will create actual conflicts at least occasionally.
An ethics code or, in Paulson's case an ethics agreement, is of far more value with respect to how such conflicts are to be dealt with, than they are with identifying when conflicts occur. It should be assumed that experts have ongoing conflicts, without wasting time on which matters involve technical conflicts and which do not.
Ethics Waivers and Who Should Give Them
When it looked like his former firm might have to be rescued, Paulson says, he asked for an ethics waiver to talk with his former firm about its status. The reason given for the waiver, by the individual who gave it, was a good one:
I have determined that the magnitude of
the government’s interest in
your participation in matters that might affect or involve Goldman
Sachs clearly outweighs the concern that your participation may cause a
reasonable person to question the integrity of the government’s
programs and operations.
This is exactly the sort of balancing that should be done when ethics waivers are requested. However, I don't approve of having the waiver come from the Treasury Dept. general counsel's office. The office that gives advice should not be the office that gives waivers, and waivers should not be given by any office that reports to the individual requesting the waiver.
The Timing of a Waiver
The most important issue relating to the waiver given to Paulson is that it was given just after he had been involved in the decision by which the government bailed out A.I.G, which allowed it to pay $13 billion to Goldman Sachs (in addition to the $10 billion bailout paid directly by the government to Goldman Sachs).
Paulson says that he was not involved in the A.I.G. bailout, but there are signs that he was, including the word of others involved in the decision. The issue here is that the reason Paulson gave for requesting the waiver may not have been the real reason, or was only part of the reason. When requesting and giving a waiver, it is important that there is full transparency. It's bad enough that the waiver was given via e-mail from an internal lawyer. It would be even worse if the waiver were given on the basis of partial information. But again, we will never know exactly what Paulson talked about with his replacement at Goldman Sachs.
Robert Wechsler
Director of Research-Retired, City Ethics
---
Story Topics:
- Robert Wechsler's blog
- Log in or register to post comments
