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To put a matress under a falling giant pales in comparison to placing a sign on Wall Street, reading “No giants allowed.”

In April of 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” trying to weaken or kill new financial regulations that he claimed are needed to stave off a second Great Depression.  It is telling that the banks that contributed to the financial crisis of 2008 were trying to diminish any new regulation. The President wanted more consumer protections, limits on the size of banks and the risks they can take, reforms on executive compensation and greater transparency for controversial securities known as derivatives.  He maintained that each of these areas must be in any bill that he signs. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After castigating their “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists now staked out on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March 2008 warning of financial manipulation, market bubbles and the concentration of economic power.

Analysis:

At the time of his speech, the President was supporting the bills coming out of the House and Senate, neither of which forestall or minimize market bubbles and reduce the concentration of economic power.  Regarding the latter, it is my understanding that nothing in either bill limits the the size of the big banks.  For the President to say that the bill reaching his desk must include something limiting the size of institutions in the US financial sector yet also say that he supports the bills coming out of Congress does not make sense as it involves a contradiction. On the eve of the President’s speech, Fox News pointed out that the President’s chief of staff had met behind closed doors with reps of Wall Street firms. The message was reportedly: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would contradict himself concerning the size issue.   Given the inevitable lag of regulators amid the fast pace of innovation in product development on Wall Street, simply regulating existing products would not forestall another crisis; the concentration of private capital in the form of large banks must be reduced for “too big to fail” to be effectively mitigated.  Sadly, the President will probably get away with demanding limits on the banks’ size while signing bills that do not contain such language.  That he received just under a million dollars from Goldman Sachs in his Presidential campaign is just part of the story, for once elected the President was undoubtedly focused on 2012.  Recalling Andrew Jackson, who successfully took on the bank of the US by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, I must admit to thinking that Barak Obama does not have their guts to take on the big guys. How many of us in the twenty-first century remember Jackson or Roosevelt?  We are more likely to make our current President the default from which we measure.  I submit that this is a mistake.  If we ignore or are ignorant of the strong points in our history, we cannot benefit from them and we are doomed to repeat the weak points.

Source: http://www.nytimes.com/2010/04/23/business/economy/23prexy.html?hp

Structural, or institutional, conflicts of interest are of great significance in applied ethics, even though they are often disregarded or ignored. Far more salient are personal conflicts of interest, such as when an employee pockets money meant rather than declares it as revenue for his or her company. Structural conflicts of interest are institutional in the sense that organizational arrangements inherently evince a conflict of interest such that people in them are necessarily subject to a conflict in their interests simply by participating in one of the organizations in the arrangement. An organizational or institutional conflict of interest, whether within one organization or involving relations between organizations, is not any less unethical than a personal conflict of interest because in both cases people are subject to a conflict of interest--only one being valid.  I present two cases and an argument that “firewalls” in an organization to prevent it from a conflict of interest are insufficient.

In the EU, the European Commission (the executive branch of the EU Government) sued four elevator companies that were part of a cartel in Belgium and Luxemburg.  Essentially, the Commission was seeking anti-trust damages—a first in EU jurisprudence.  Benoit Allemeersch, attorney for one of the companies, argued that the jurisdiction of the the commercial court of Brussells, the Tribunal of Commerce, violated the jurisdictional clauses in the contracts between the companies and the Commission.  He argued that the Commission acted as “police officer, prosecutor, jury and sentencing judge” in finding the existence of a cartel, and then used its own decision to make a private claim for itself before the commercial court. He argued that “the mere statement by the Commission that they respected their own ‘Chinese walls’ in making their decision and bringing the claim is not a sufficient guarantee to the defendants nor to any other citizen.” He maintained that in the case being argued, there was no “equality of arms” between the two sides, given the commission’s privileged position. According to Allemeersch, “the European Court of Human Rights requires that justice is not only done, but is also seen to be done.”  In other words, even the appearance of a conflict of interest, which can be in an institutional arrangement even if not acted upon, is enough to dismiss claims. The existence of “firewalls” within an organization does not sufficiently mitigate either the dismissal or, more generally, the institutional conflict of interest.

Even though the commission had previously argued that its own “Chinese walls” ensured the independence of the claim, Allemeersch correctly maintained that these safeguards could not be proven, tested or substantiated. I contend that the counsel is correct. Even if the Commission could show policies and procedures that act as its safeguards, such internal guidelines do not have the force of law and thus are insufficient to be relied upon—especially by external parties.  It can not be assumed, moreover, that an organization’s policies and procedures outweigh whatever internal interest happens to be dominant in the organization, given the nature of power to overflow its boundaries.

To say that the most powerful person a room is constrained by parchment alone is to be woefully ignorant of the reality of human nature.  Even if there are two equally-powerful people in the room with antipodal objectives, institutional checks and balances can only work as long as too great of a power imbalance does not exist.  If a US President is intent on invading a country, for example, and the Congress does not have sufficient power over his, the separation of powers institutionally could not be counted upon to keep Congress from rubber-stamping the President’s declaration of war.  For the President to be able to effectively declare war while being the commander in chief of the US military and the armies of the union’s republics is itself a structural conflict of interest.

Essentially, I am making a Nietzschean and Hobbesian argument that the most powerful person in the room is not apt to be constrained by invisible ”firewalls” in the room that are intended to level the powers of that person and a weaker person.  As Nietzsche writes, the strong must be strong and the weak cannot be other than weak.  To ask the strong to be weak or treat the weak as though it were strong goes against the nature of power.  In my analogy of the room, the two persons can represent heads of departments whose respective goals are at odds with each other. A “firewall” of policies and procedures is not sufficient to inhibit the more powerful head from pressuring the other.  Furthermore, the existence of a person whose authority includes both departments relativizes the firewall.  To bring in this element, I turn to the roles of rating agencies and Goldman Sachs in the American financial crisis of 2008. In the case of Goldman, the bank sold what its salespeople referred to as “crap” because the bank’s own proprietary position profited by the sales. In the case of the rating agencies, they were paid by the issuers of the securities that they were rating.  That either of these conflicts of interest were allowed to exist at all points to a proclivity among the general public to ignore institutional conflicts of interest—focusing instead on personal ones involving someone’s compensation and job.

In listening to and reading about the banks and rating agencies culpable in the American financial crisis, I doubted the “firewalls” argument given by the rating agencies.  The CEO of Moody’s for example, stated in Congressional testamony that he placed an equal emphasis on market-share and the quality of the ratings.  However, several of his former employees testified that they had been pressured not to lose a client to a competitor.  They stated that when ratings were changed, it was typically to protect the firm’s market-share (i.e., out of fear of losing the issuer).  The CEO’s faith in his own equipose as well as his firm’s “firewalls” was mistaken, even if he didn’t realize it.  To be sure, he may not have been aware of a more-powerful department putting such pressure on a less-powerful one.  It is possible, however, that the CEO was actively pushing his subordinates behind the scenes for more market-share, essentially profiting from the conflict of interest in the issuer-pays system.

In general, because an organization has an official above its firewalls, it is possible, even legitimate in terms of that position’s authority, for that official to put pressure on one side of the wall to capitulate in the interest of the whole (i.e., the entire organization).   Consider, for example, Lloyd Blankfein, who was CEO of Goldman Sachs at the time of the financial crisis.  He was over both the market-making and proprietary-trading units.  He could therefore have put pressure on the units selling securities to do so in a way that complements the bank’s own proprietary holdings.  For example, he (or his VP’s) could have pushed shorting sub-prime mortgage-backed derivatives in market-making (the clients taking long positions) because the proprietary interests of the bank would benefit from a fall in the housing market.  The bank’s sales people did indeed clients to go long even as the bank itself was going short in the belief that the housing market bubble was headed for a hard landing.  Before a US Senate committee, Blankfein claimed that the market-making and bank’s trading on its own books were unrelated unless the bank took out a position on its books as a counter-party needed by a client.  However, the bank sold clients on taking long rather than short positions on the housing-based securities even as the bank was taking a net short position on its own books above and beyond what was necessary to be a counter-party to its clients’ transactions.  This conflict of interest manifested in the duplicity involved in selling clients on what the sales people knew privately was “crap.”  As one of them wrote, if the clients knew the bank’s reason for going short, that would interfer with the bank’s ability to profit from the shorts.  Structural conflicts of interest are designed such that there is an incentive in favor of duplicity. Given a company’s overall interest and the fact that senior managers have authority over the entire firm, firewalls should not be relied upon by outside parties (or by those inside).
In the end, given the nature of human beings and power, we ought not be blindsided by claims of the efficacy of paper “firewalls.”  We ought not assume that the most powerful person or coalition in an organization will necessarily be voluntarily restrained by a weaker party in the same organization.  Moreover, we ought to take more seriously institutional or structural conflicts of interest in how we design and reform arrangements between institutions.  Where the status quo contains a structural conflict of interest, that condition ought to be put on a limited lifeline, with a deadline set for changing the arrangements.  Even if the alternative is not as efficient (it would doubtlessly not be flawless), it would be better than the status quo.  Charges of an institutional conflict of interest can be treated as red flags that instantly move to the front burner on people’s agendas.  We need not be hoodwinked by the duplicitous and self-interested into believing their asseverations concerning their own paper “firewalls.”

According to The New York Times, Florida, like about a dozen other states, debated a proposed amendment to its state constitution that would try to block, at least symbolically, much of the proposed federal health care overhaul on the grounds that it tramples individual liberty. Before getting to the matter of federalism, whose primary object is the protection of liberty, I raise the issue of an industry with such a vested interest making substantial campaign contributions to the supporters of the amendment nonetheless. I contend that there is an ethical conflict of interest in the practice, even if it is constitutional (assuming wealth as free speech, which is problematic).

What united the proposal’s legislative backers in Florida was more than this ideology. Its 42 co-sponsors, all Republicans, were almost all recipients of outsized campaign contributions from major health care interests, a total of about $765,000 in 2008.  Around the 2008 election, the groups that provide health care contributed about $102 million to state political campaigns across the country, surpassing the $89 million the same donors spent at the federal level. This opened the backers and their state government to attack by those "nationalists" who wanted the federal government to be involved in health-insurance. Indeed, they argued that the magnitude of the health care industry’s contributions demonstrated the dangers of leaving such a question up to individual states, where campaign finance and ethics rules vary from strict to negligible. The industry has enormous power at the state level, they contended, and very few states have state-level consumer groups that are able to lobby effectively against them. Yet the alternative of consolidation of the "extended republic" carries with it other dangers.

Indeed, the matter of the US Government’s enumerated powers was not lost on the state legislators opposed to a federal health-care law.  “We are trying to prepare, and trying to send a message that there is no reason for those decisions to get made at the federal level,” said Representative Linda L. Upmeyer, a Republican who is leading the council’s efforts in Iowa.  Without “opt-in” or “opt-out” provisions in the federal legislation, state constitutional amendments would be preempted, and thus merely symbolic.  It seems like a lot of work just to make a statement. 

In terms of health-care policy, states opting out could compromise the economies of scale being assumed by the federal cost-saving measures.  However, such policy reflects ideological preferences, which can vary from state to state.   The effect on our system of public governance (i.e., federalism) ought to be considered as well, lest we inadvertantly run our ship of state into a wall.  Consolidation at the expense of federalism (i.e., semi-sovereign political units—in this case states that are republics) works against the inherent diversity in an empire-scale Union.  However, if the health-care industry is able to dominate health-care policy at the state level—a consolidated industry against comparatively smaller republics—then federal action might be necessary to protect republican principles…yet at the expense of federalism.   In other words, what if the cost of maintaining federalism is rule by industry?  Governmental consolidation may well be foisted on us by necessity, given the power of consolidated private capital in the US.   Yet by this logic, why stop at the US Government?  To be sure, the health-care and banking industries have demonstrated their influence on Congressional action (and inaction).  Why not then argue that a federation of the US and the EU is necessary to create a governmental entity large and powerful enough to fend off the encroachments of big business?
I suspect that anti-trust legislation is necessary not only to protect the viability of competition and the market, but also to keep industry from capturing government.  The latter is particularly important where federalism exists because the smaller units of a federal system are perhaps more easily dominated by big business.   Sadly, those who are in favor of free-market health-insurance (rather than government involvement) do not also push for enforcement of the anti-trust law.

In terms of US federalism specifically, federal health-care legislation cannot be justified by any of the enumerated powers granted to the US Goverment. So it must be the spending clause that the feds are using.  The US Government may spend for the general welfare.  In my view, this is best interpreted as “for that which the states cannot do” or “for emergencies rather than ordinary spending.”  Otherwise, the spending clause easily trumps any enumeration at all because with spending comes power (i.e., strings).   My interpretation dovetails with the heterogenious nature of an empire-scale Union such as the US or EU, wherein consolidation is not natural.   Broadening out to political economy, the problem then is the ability of big business to bully state governments.  This can be viewed as a threat to the semi-sovereignty of the states, and thus to the federal system itself.  Federalism, in other words, may make it possible for industries to veto any reform they do not favor (and to ensure special treatment for themselves).   Large concentrations of commercial wealth may be able to use federalism for their purposes, and perhaps a consolidated government of the Union less well.  In allowing such private concentrations of power, we may be forcing ourselves to consolidate our public governance.  State governments are reduced to symbolic amendments (i.e., impotence); one size fits all, across a continent.  Yet the alternative is capture by industry.  However, this can be a false dichotomy.  If the business interest can be trumped at the federal level, US anti-trust law could be expanded to include “protection of the state governments.”  The US Government could still serve as a check on those governments (e.g., when they are captured by an industry), and vice versa!   It is perhaps because this is not in the interest of big business that we no longer have the checks and balances of federalism.  In any case, we can’t very well afford to look at federalism in isolation, though it is equally dangerous to ignore it in favor of the issue, or flavor, of the day.

Source: http://www.nytimes.com/2009/12/29/health/policy/29lobby.html?_r=1&ref=politics

Goldman Sachs, which played a role in enabling Greece to hide its public debt, urged investors in March, 2010 to buy shares in two big health insurance companies, UnitedHealth Group and Cigna because their rates were sharply up and competition was down. According to the NYT, the White House claimed, “ the Goldman Sachs analysis shows that while insurers can be aggressive in raising prices, they also walk away from clients because competition in the industry is so weak.”  Rate increases ran as high as 50 percent, with most in “the low- to mid-teens” — far higher than overall inflation.  Kathleen Sebelius, the secretary of health and human services, stated on March 10, 2010, that she was left unconvinced after meeting with health insurance company execs at the White House the previous week because medical cost increases could not justify the rate increases. Furthermore, she pointed to the profit increases, some as high as 50%, in 2009 over 2008, and large executive salaries as evidence that the firms could have absorbed more of their cost increases than they did.  Cutting off customers when it is time for a firm to pay up while recording higher salaries and profits indicates that something is structurally wrong with the industry (and with the firms, ethically speaking).  If the execs lied at the White House, citing costs that “had to be passed on,” we ought not be so gullable at the managers’ claims in the future.  Also, if they were lying, we might recall Senator Rockefeller’s description of the insurance companies as sharks…feeding machines that are often not seen until their fins break the water-surface and their teeth are coming down on you.  Otherwise, the water is calm.

In February, 2010, the US House of Representatives passed a bill that would repeal the anti-trust exemption for the industry.  Armed with fresh retained earnings, the oligarchic industry was in a good place to fight that bill in the Senate.  In other words, the bill abruptly stalled. That the repeal was so difficult, if not impossible, to achieve is itself telling.  Once an industry has such clout and power that it can effectively veto legislation it doesn’t want—even as the firms cut customers off when they get sick (not to mention pre-existing condition abuses)—our republic itself is in danger.  In the regulatory literature, this is called “capture theory.”  The pubic good is captured by concentrated (and vested) business interests. The plight of financial sector regulatory reform in the wake of the financial crisis of 2008 is another case in point.   In short, cleaning up these messes should be easier, even given the encumbering checks and balances in the US Government.  The fact that it is not should give us great pause.

Source: http://www.nytimes.com/2010/03/07/health/policy/07health.html?ref=politics

On January 18, 2011, Comcast received government approval to acquire NBC Universal. This followed a lengthy review, which mandated a list of conditions. The most important of them is aimed at preventing the new media conglomerate from thwarting competition in online video. However,even though regulators described their review as the most intense scrutiny ever for a planned media merger, Comcast managers said they believed their company faced few onerous restrictions from the review. “I don’t think any of the conditions are particularly restrictive,” said David L. Cohen, executive vice president of Comcast. This statement ought to give readers some pause.

According to The New York Times, "The combination of Comcast’s cable and Internet systems and NBC Universal’s channels will create a media powerhouse, and it will be the first time a cable company will control a major broadcast network." In abstract terms, process or transport will control content. It is perhaps as though the flying to grandma's for Thanksgiving were itself the point. Less abstractly, it is worth looking at how the privileging of throughput might have an impact on content. It seems at the very least like a case of mistaken priorities.  Even so, what sticks out to me is the conflict of interest that is inherent in the combination. I believe we put too much stock on the ability of regulations to mitigate such conflicts.
The concentration of market power in a combined media company that includes program content with a strong cable-system influence is inherently at odds financially with other routes being able to use the content. In other words, there is an inherent conflict of interest at the root of the combination. Interestingly, it could be argued that NBC content, being private property, could rightly be limited to one pipeline. For example, NBC could have purchased Comcast in order to have its own route. It would be understandable if NBC wanted to limit its content to its own pipeline. Our resistance to this idea is perhaps because we view the major networks as public goods because they are readily available over the airwaves. The latter give the content the veneer of being public goods. Similarly with the free content available on the internet, it is easy to view it as a public good because it is free and available, even though the content has ownership. This post, for example, is mine because I am writing it; it contains my ideas. So it could be argued that the "over the air" system of television broadcasting had led us to "forget" that the content is private property, which could rightly be limited as to throughput.  Yet it could also be argued that broadcasters must have broadcasting licenses because they are being allowed to use the public airwaves, which are a public good, and there can be obligations associated with this privilege that include open access and safeguarding competition. Essentially, there is is a public good vs. private property tradeoff that should be addressed in analyzing the merger.
The matter of who in the merger is in the driver's seat is also relevant, for it might be in NBC's interest to be broadcast beyond its own cable system, whereas Comcast would benefit most by restricting the availability. Part of the angst over the merger may be due to the restrictiveness inherent in Comcast being in the driver's seat. A policy implication might be that in such mergers the content could be mandated to be in charge. That the people at Comcast view the restrictions as far from onerous may suggest that the company will be able to do what is in its financial interest in spite of the conditions. One might recall the case of subprime mortgage derivatives, which had outstripped the ability of regulators to regulate, much less to understand. To rely on regulations to protect the public interest in the case of very complex securities minimizes the ability of traders to circumvent what must seem to them as quite superficial barriers. The conflict of interest in the present case, which involves throughput restricting access beyond what is in the interest of the public or even the content, can be expected to have a subtle and on-going force that would inevitably out-wiggle the ability of regulators to look out for the public interest. 

Lastly, the case of a media company that includes political and news content means that market concentration also has implications for free speech, and ultimately for the republic itself. Specifially, the views gaining access in the public air waves could narrow, and those that make it through migh be more likely to support the media company's general political interests. It is, for example, in the interest of corporations that we debate secondary issues, rather than the basics that enable large businesses to exist.  For example, it is notable that after the <i>Citizens United </i>case that allows for unlimited campaign donations, the question of whether a corporation should be considered a legal person was not salient in the media.  Also nearly missing was a discussion of whether wealth constitutes speech.  As another example, in the debate on financial reform in 2010, whether banks too big to fair should be allowed even to exist was not much debated. Consequently, the resulting law applies "too big to fail" only to firms that have already failed on their own (e.g., structuring their liquidation). According to Jesse Eisinger of Propublica, "Goldman, like all the other major investment and commercial banks, had become too big and intertwined, making the financial system too fragile. . . . Unfortunately, despite a hulking financial reform law, the American financial system still has largely the same structural issues that it had before the crisis." Eisinger laments that neither the U.S. Government nor Wall Street has been particularly interested in going after the underlying structural flaw: over-leveraged banks whose size alone renders them too big to fail. Coincidentally, discussion of this structural flaw and the related very existence of the big banks as big banks was kept largely off the public radar. I wonder if we realize how narrow our public political discourse really is,  why that is so, and what the impact has been on legislation.  In other words, what the public debates may not be an accident. The consolidation of the media sector could facilitate the subterranean influence of corporate America on the American polity and society.

 In short, conflicts of interest are of such force that they cannot be undone by regulators. Therefore, it is better that such conflicts not be permitted to exist in the first place. Pipeline should not be allowed to control content. It isn't even good business because it isn't in the interest of the content.  Hence even from the standpoint of private property, there is reason to be critical of the merger. Secondly, it ought to be recognized that the concentration of media power in a republic is dangerous to that form of government because a narrowing of public discourse does not serve the electorate in making informed decisions in voting.  Compounding the problem, both the conflict of interest and the negative effects on the republic itself are long-term, whereas the regulators and the public have their attention fixed primarily on the short term.

Sources: http://www.nytimes.com/2011/01/19/business/media/19comcast.html?_r=1&scp=3&sq=comcast&st=Search; Jesse Eisinger, "Goldman Sachs's Navel-Gazing Comes Up Short," The New York Times, January 19, 2011: http://dealbook.nytimes.com/2011/01/19/goldman-sachss-navel-gazing-comes-up-short/?ref=business