You are here
Don't Underestimate the Effects of Conflicts of Interest
Saturday, October 25th, 2008
Robert Wechsler
Back in January, I wrote a
blog entry focusing on the lack of transparency in the credit
rating business so central to the subprime mortgage mess that has
brought the world economy to its knees. Transparency, it has become
clear, is all important.
The same goes for conflicts of interest. The New York Times' article on credit rating executives' testimony this week before the House Committee on Oversight and Government Reform begins:
One of these executives said, "the business model prevented analysts from putting investor interests first." The other said, "Profits were running the show." What they meant was that most credit rating agencies are paid by the investment firms that issue the instruments being rated. The rating firms are paid to give good ratings, and not to be too careful in their examination of the instruments. People and institutions buy risky bonds and instruments based on ratings that say the risk is low. And then boom!
According to an article in the Washington Post, Henry Waxman, chair of the House committee, said, "Millions of investors rely on [the credit rating agencies] for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public. The result is that our entire financial system is now at risk."
In other words, don't underestimate the effects of conflicts of interest, or the breaking of trust they represent. And don't ignore the warning signs in local government situations, such as arrogance, a lack of transparency, the failure to fully bid out contracts, and constant denials that go against the facts (current credit rating executives still deny that conflicts impaired their firms' judgment).
At the municipal level, conflicts won't destroy the world financial system, but they can bring a city to its knees and undermine trust in government for a generation. They can cost a city millions of dollars, and even when they are brought out in the open, they can be very difficult to fix. Just look at Chicago and Memphis, for example.
Sometimes it takes bigger examples to make the point that conflicts of interest are not minor ethical matters with little meaning in the real world. We now know that our economy is effectively a confidence game. Government isn't much different.
Robert Wechsler
Director of Research-Retired, City Ethics
---
The same goes for conflicts of interest. The New York Times' article on credit rating executives' testimony this week before the House Committee on Oversight and Government Reform begins:
Conflicts of interest were largely
responsible for the disastrous performance of credit rating agencies in
assessing the risks of mortgage-backed securities, two former
high-ranking officials at [rating agencies] said Wednesday in
Congressional testimony.
One of these executives said, "the business model prevented analysts from putting investor interests first." The other said, "Profits were running the show." What they meant was that most credit rating agencies are paid by the investment firms that issue the instruments being rated. The rating firms are paid to give good ratings, and not to be too careful in their examination of the instruments. People and institutions buy risky bonds and instruments based on ratings that say the risk is low. And then boom!
According to an article in the Washington Post, Henry Waxman, chair of the House committee, said, "Millions of investors rely on [the credit rating agencies] for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public. The result is that our entire financial system is now at risk."
In other words, don't underestimate the effects of conflicts of interest, or the breaking of trust they represent. And don't ignore the warning signs in local government situations, such as arrogance, a lack of transparency, the failure to fully bid out contracts, and constant denials that go against the facts (current credit rating executives still deny that conflicts impaired their firms' judgment).
At the municipal level, conflicts won't destroy the world financial system, but they can bring a city to its knees and undermine trust in government for a generation. They can cost a city millions of dollars, and even when they are brought out in the open, they can be very difficult to fix. Just look at Chicago and Memphis, for example.
Sometimes it takes bigger examples to make the point that conflicts of interest are not minor ethical matters with little meaning in the real world. We now know that our economy is effectively a confidence game. Government isn't much different.
Robert Wechsler
Director of Research-Retired, City Ethics
---
Story Topics:
- Robert Wechsler's blog
- Log in or register to post comments
