Hiring Experts and Giving Ethics Waivers: The Henry Paulson, Jr. Story
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 href="http://www.nytimes.com/2009/08/09/business/09paulson.html" target="”_blank”">a
front-page story</a> in Sunday's New York <span>Times.</span> <br>
<br>
<span>Experts in Government</span><br>
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.<br>
<br>
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.<br>
<br>
<u>Technical Ethics Violations</u><br>
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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
<span>Ethics Waivers and </span><span>Who Should Give Them</span><br>
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:<br>
<br>
<div>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.<br>
</div>
<br>
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.<br>
<br>
<span>The Timing of a Waiver</span><br>
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).<br>
<br>
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.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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