Ethics Jurisdiction Over Those Doing Government-Approved Work
Individuals and companies doing the work of government or work approved by government, even when
they do not have a direct financial relationship with government, should be within the jurisdiction of a
government's ethics code. This controversial position is strengthened
by what happened to many Tennessee local governments, according to <a href="http://www.nytimes.com/2009/04/08/us/08bond.html" target="”_blank”">a front-page
article</a> in today's New York <span>Times.</span>
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These local governments, in Tennessee, lowered the interest rates on their bonds by
entering into interest-rate swaps. They did not understand that, should
economic conditions worsen, these interest rates could rise a great
deal. That is, the swaps were riskier than they thought.<br>
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Why did they not sufficiently understand the risks? The reason appears
to be that the state allowed a serious conflict of interest to occur.
The conflict of interest did not involve government officials or even
contractors. It involved individuals the state comptroller appointed to
a board to establish guidelines for derivatives and to devise a
curriculum for a class to teach local officials about interest-rate
swaps. That board included two lawyers from the firm that did most of
the state's interest-rate swap work, as well as a banker from the firm
that advised and underwrote most of the state's interest-rate swaps.<br>
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Then the state approved the law firm and the bank to teach the course.
And, unlike many states, Tennessee allowed the same firm to both advise
and underwrite bonds. In other words, the state permitted the lawyers and bank officers to wear four
hats: they wrote the rules, taught the course, advised the towns,
and underwrote the bonds.<br>
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The new state comptroller said that, in hindsight, it "may not have
been the best idea." A Nashville city council member, and former bond
trader, called the firms' course materials "nothing more than an
infomercial."<br>
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One lesson to be learned is not only that local governments shouldn't
take risks they don't understand (things are risky enough without
manufacturing new ones), but that when you meet someone wearing
multiple hats, even if the state or federal government has approved
everything, you should just say No!<br>
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The government ethics lesson to be learned is that it is important to give a local government's ethics program jurisdiction not only over
officials, but also over contractors, consultants, and people doing
government work or approved to do work effectively for the government, even when they have no direct financial relationship
with the government. The fact that they are volunteering their time or
getting their money some other way (the law firm and bank were making
far more from interest-rate swaps than from regular bond deals) does
not mean that they should not declare their conflicts and deal with
them responsibly. It's important for public trust, and it may end up
being important to the bottom line, as well.<br>
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For other blog entries on local government bonds, see <a href="http://www.cityethics.org/node/644" target="”_blank”">here</a> and <a href="http://www.cityethics.org/node/203" target="”_blank”">here</a> and <a href="http://www.cityethics.org/node/575" target="”_blank”">here</a> and <a href="http://www.cityethics.org/node/504" target="”_blank”">here</a>.<br>
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For another blog entry on ethics jurisdiction over people who have no
financial relationship with government, see <a href="http://www.cityethics.org/node/678" target="”_blank”">here</a>.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
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