The Mother of All Conflicts of Interest

Griping about regulations is pretty much as natural as breathing if you’re in finance, particularly as they relate to banks. While consensus on the “right” balance of regulation is next to impossible to reach, there are few who will disagree with the fact that Dodd-Frank is an unmitigated disaster. A cumbersome behemoth of ill-fitting restriction and inexplicable exceptions for the very institutions it was intended to govern, we find ourselves facing the same unwieldy banking titans as we did four years ago- except now they’re even bigger.

It would be all too easy to write this off as incompetence, particularly when we listen to elected officials routinely showcasing their ignorance on the issues. Sure, we’d all love it if those in office actually understood the worlds they regulate, but, then again, we don’t really want a bunch of financiers calling the shots anyway, right? One would hope that, in the absence of expertise, those serving in Congress would heavily research and evaluate proposed changes before acting or not. That is, after all, the purpose of having a staff.

Truth be told, we’re sort of hoping this abysmal failure to institute so many necessary reforms comes back to them not reading the reports generated by their staff. Because, otherwise, this gets ugly fast.

Let us explain. If you’re an investment advisor, you’re required to reveal any conflict of interest you might have in an investment you recommend. The idea is that if you have skin in the game, it may tilt your judgment in a manner that doesn’t put the client’s needs first. All that rabble about full disclosure on what stocks are held and by whom at a firm when you read a financial blog or listen to a commentator on television is derived from this requirement.

In some ways, it may be a fair characterization to consider Congress the nation’s ultimate financial advisor. We pay them, via taxes, to manage the nation’s budget and invest our money wisely. Our returns are not measured in dollars and cents, but in things like national security, public services, and protection of our rights. However, one the most important tasks they tackle is providing efficient regulation of the financial sphere in the best interest of the public. But unlike the hardworking investment advisors around the country, and despite being answerable to a standard far higher than a fiduciary one, these national advisors have no obligation to reveal any potential conflict of interest.

And if there was ever a need for such disclosure, it’s here.

Consider the argument that took center stage at the height of Occupy Wall Street. There’s no denying the influx of donations that streams from Wall Street to campaign coffers. Whether from corporations newly freed by Citizens United to donate as they see fit, political groups bankrolled by the same figures, or individuals of influence themselves, the donations are spelled out in black and white, and history continues to demonstrate that those who outspend their opponents are far more likely to win. If your employment depends on the happiness of major financial institutions and their willingness to contribute to your campaign- or, at least, you, as an elected official, believe that to be true- what are the odds that you do anything that might anger them?

That’s a conflict of interest.

Consider the insider trading uproar from earlier this year. At the time, the outrage related to Congress people timing their trades based on important pending votes, turning a handsome profit in the process. But also consider that among the top ten stocks held in Congressional investment portfolios are Bank of America and Wells Fargo. JP Morgan, according to recent reports, has lost favorability among the Congressional elite, but three members of the Senate Banking Committee continue to hold their stock, as well. Remember the mockery that was the Senate “questioning” Jamie Dimon? The stomach churning pandering and fawning? Think about it this way- had the Committee pursued a hard line of questioning, and drove home some of the reckless behavior at Dimon’s bank, there would have been the potential for his stock to take a hit. That’s their stock, too. Had their intensity been interpreted as an indicator of tougher regulation or legal consequences, it wouldn’t just be about JP Morgan’s stock anymore; it would have been about the banking world, in general. That’s their stock, as well.

That’s a conflict of interest.

Consider TARP. Essentially, this was an investment made by the U.S. government into U.S. megabanks. They are seeking to generate returns from said investments in order to prop up the highly unpopular initiative as a success for the American people. A recent Wall Street Journal article addressed moves to speed up the unwinding of assets acquired in the wake of 2008, couched heavily in terms you’d expect to hear from one of the banks they’d bought the assets from to begin with. Any regulation that would curtail the profitability of these banks, and thus the value of these holdings, no matter how necessary we might deem such changes, would reflect poorly on those in office, endangering their electability.

That’s a conflict of interest.

We demand that our financial advisors reveal any potential conflict of interest, no matter how minor. Yet, when it comes to the people we trust to manage the well-being of a nation, such conflicts of interest are often overlooked or dismissed… if touched on at all.  The duty of elected officials is to protect the interests of the nation, but they have skin in the game from every angle. We’re in an election year saturated with patriotic statements of self-sacrifice and dedication to public service, and while such sweeping declarations make excellent sound bites, actions speak a lot louder than words.

Maybe we should listen.