16 April 2010

Bureaucrats Who Act In Bad Faith

Federal banking examiners found serious problems at Washington Mutual Bank at least five years before its 2008 collapse, but their supervisors showed little concern ... During those five years, examiners constantly warned of "less than satisfactory" loan underwriting, the "horrible performance" of its subprime-backed mortgage securities and the failure of WaMu executives and federal regulatory supervisors to do much about it.

One examiner said he was derided by colleagues as "the housing 'bubble' boy" for his "gloom and doom" predictions for some risky loans, and another complained that critics of subprime loans were called "chicken little."...

Former OTS Director John Reich, who served from 2005 to 2009, referred to WaMu Chief Executive Kerry Killinger as "my largest constituent" in a 2007 e-mail.

That attitude pervaded the upper levels of the agency ...

From here.

Porter Goss, the former director of the Central Intelligence Agency, in 2005 approved of the decision by one of his top aides to destroy dozens of videotapes documenting the brutal interrogation of two detainees. . . Shortly after the tapes were destroyed at the order of Jose Rodriguez Jr., then the head of the CIA's clandestine service, Goss told Rodriguez he "agreed" with the decision, according to the document. He even joked after Rodriguez offered to "take the heat" for destroying the tapes.

"PG laughed and said that actually, it would be he, PG, who would take the heat," according to the document, an internal CIA e-mail message.

Current and former intelligence officials said Goss did not give prior approval before it happened . . . The e-mail messages also reveal that top White House officials were angry the CIA had not notified them before the tapes were destroyed.

From here

In both of these cases, neither Office of Thrift Supervision Director John Reich nor CIA Director Porter Goss, both of whom were senior Bush Administration officials, are likely to face criminal or civil liability. It is the job of the OTS director to decide which regulatory concerns to prioritize and which to make a lower priority, and to judge the credibility of his field officers. The documented actions of Porter Goss took place after the CIA misconduct was a fait accompli and has wide discretion to determine how he will discipline his subordinates.

Indeed, if there was criminal or compensatory civil liability for these kinds of actions, it would be much harder to get qualified people to fill these jobs. No federal bureaucrat has personal resources that would be even a drop in the bucket compared to the harm caused by failing to properly regulate Washington Mutual, one of the biggest bank failures in history. When the pressure is on the Central Intelligence Agency to push hard to stop terrorists, it is almost certain that someone, somewhere will cross legal lines and Jose Rodriguez Jr. who actually ordered that tapes be destroyed without approval from his boss and despite a court order probably could face punitive contempt of court sanctions. This breach of the law did untold damage to American civil liberties, and the CIA's credibility as an agency to adheres to the rule of law at home and with our allies.

But, both men also failed to carry out their duties in good faith. The nation's top thift regulator is supposed to enforce federal law regulating thrifts like someone who believes in those laws and to take sincere input from his field agents that is backed up by real evidence seriously. The director of the CIA is supposed to immediately fire people who violate court orders and symbolically show a commitment to the rule of law at the very top of the organization instead of reassuring a subordinate who has blatantly violated the law. And, of course, their boss, in this case, President Bush, is supposed to appoint people who take their duties serious and try to carry them out in good faith. All of them swore an oath to uphold the law and the constitution when they were appointed.

Impunity or Execution?

In China, when a senior bureacrat did something like this connected to a major scandal which is discovered after the fact in an inquiry, he is routinely sanctioned criminally with a long criminal sentence or executed. Maybe the Chinese have higher standards than we do. But, China is also not a nation known for its law abiding and faithful public servants. Countries like Denmark and France, known for their competent and non-corrupt civil services give their bureacrats job security and fat benefits packages, while rarely seeking after the fact retribution and certainly never putting ex-civil servants in jail for long terms or executing them.

The problem of bureacrats acting in bad faith exists in the private sector too. The Securities and Exchange Commission, standing in the shoes of the customers of Goldman Sachs, is suing the investment banking firm and one of its vice presidents for breaching its duty of loyalty to its customers in conduct that was discovered after the fact. But, the owners of Goldman Sachs have no meaningful remedy for the misconduct of the executives who in theory reported ultimately to them, and in general, investors under the management friendly corporate law regime of Delaware that has become the de facto national standard for publicly held copmanies, have no meaningful remedy either through the board of directors election process or through civil suit against self-dealing and bad faith conduct by the executives who are supposed to be acting in their best interest. When investors protest misconduct by selling their shares, they simply let someone else be exploited by management instead of them.

In general, senior bureaucrats can engage in bad faith conduct with impunity, risking only the loss of their jobs and even more rarely a bad reference or public censure (which in a partisan political environment or big business rarely has major negative consequences for them), and they risk losing their jobs only when their boss is seriously outraged by their conduct.

Job Security At The Top and the Importance of Clarity

Moreover, the person at the top of a big business or large political organization bureacracy, while subject to stern selection criteria to get the job in the first place, is generally very hard to remove. No President has ever been involuntarily removed from office except through death (with the arguable exception of Richard Nixon who resigned under a threat of impeachment when implicated in criminal misconduct by his subordinates). CEOs of public held companies are generally involuntarily removed from office only in the case of the purchase of the company in a hostile takeover, incompetence or major personal involvement in actively malfeasant conduct.

In both the political and business spheres, clarity matters more than severity. Absolutely clear affirmative misconduct is likely to get one booted if it is known, even if the magnitute of the offense discovered is minor.

Watergate itself, probably wouldn't have had any electoral impact, for example if the plot had not been unraveled. But, the Smoking Gun tape that showed Nixon knew about the coverup forced him to resign. Nixon's policy mistakes surely hurt the country far more deeply, but that wasn't the direct cause of his removal from office. But, the apparently clear coverup by Nixon made his position untenable. Clinton was impeached and tried (but ultimately acquitted), based on a misleading statement about a sexual affair of no policy importance in a deposition unrelated to his Presidency.

Dennis Kozlowski, the CEO of publicly held Tyco and his CFO Mark Swartz were sentenced to long prison terms for using corporate funds for personal perks, even though they probably could have secured authorization from the board of directors for increased personal compensation and no one would have faulted them for using compensations as they pleased once the funds were in a personal checking account. The prosecutor, jury and public were more motivated by instances like a $2 million birthday party he threw for his wife on the Italian island of Sardinia and a $6,000 shower curtain allegedly purchased with company funds than they were with the more obscure but far more economically important conduct he engaged in that may have inflated the sale price of their more than $575 million of stock in the company.

The Failure of the Status Quo

The punishment long after the fact through the courts approach to bad faith conduct by bureacrats can be emotionally satisfying, but it doesn't work well. Indeed, in terrorum severe penalties for tempting easy to commit violations of any rule rarely do. It doesn't work for CEOs, it doesn't work for directors of federal government departments, and it doesn't work for people on probation or parole.

The immediate supervisor of the OTS agent investigating Washington Mutual didn't support the agent because he knew that his boss didn't want to enforce the laws that the OTS was charged with enforcing if it could avoid doing so.

The CIA aide who destroyed the detainee tapes did it because he felt it was in the best interest of the CIA and the President and that he probably wouldn't be severely punished by his boss for doing so.

Tyco's CEO and CFO thought that their positions gave them carte blanche to use company assets as their own without repurcussions, because big business boards of directors are usually so timid.

Nixon is famous for saying that if the President does it, that it's legal.

The immediacy of repurcussions for failing to carry out one's job in good faith, and the good faith of one's supervisor matter far more than the severity of a distant and uncertain punishment for misconduct.

To stop senior bureacrats from acting in bad faith, they need to have a boss with a capacity to investigate quickly and act decisively who provides the right expectations. The hard question is how make this happen during periods with good leaders and mediocre leaders.


The solution is probably to provide greater accountability at the top to the extent possible. CEOs and Presidents need to know that there will be immediate negative repurcussions if they fail to live up to their responsibilities.

In the case of publicly held businesses, this may mean redesigning the process by which corporate directors are elected and increasing the independent resources available to directors to carry out their job as the CEO's boss, so that directors are more responsive to shareholders than to management, and so that they have a capacity to be effective in carrying out their responsibilities.

In the case of the federal government, this may mean making it easier for Congress to remove executive branch political appointees from office, easier for the judiciary to remove officials who fail to fully comply with court orders or their legal obligations, and making it easier for regulations contrary to a statute's intent to be swiftly overturned. A status quo that is easier for Congress to alter may discourage manipulations of that status quo by executive branch manipulations.

For example, the Senate might give up the power of a Senate minorities to delay or thwart a Presidential nomination, in exchange for the power to remove their appointees by a simple majority vote not subject to the filibuster. Similarly, an end to the legislative filibuster in the Senate or the creation of a requirement that regulations be approved by Congress before they become effective (both features of Colorado's legislature) might discourage executive branch efforts to promulgate regulations contrary to Congressional intent.

Of course, Senators and Representatives are hardly immunity to the disease of acting unaccountably and failing to act in good faith. Campaign finance is often blamed for this problem, but a lack of political party power over its members, and the incentives of the current system for the opposition to use scandal as a political tool and for the party in power to defend members who appear to have engaged in impropriety may be just as serious.

Giving political parties the power to fill vacancies when their members resign from office, as they do in Colorado, and to refuse to allow unfaithful incumbent elected officials to run for re-election under their banner for political reasons rather than for cause, something that parties usually lack (but which a Colorado political party recent did when an elected legislature voluntarily resigned from her party) might give parties who are in a better position to do so than the opposition, an incentive to discipline their own members when they fail to act in good faith. More people would have an interest in seeing the conduct stopped than in tolerating the conduct.

Then again, there is also much to be said for making it easier for members of the same political party to challenge incumbents, which political parties tend to strongly discourage, and for making it easier to recall elected officials. Measures intended to have the first result have been widely adopted but rarely successful, in part because it is easier to organize an insurgent campaign against an incumbent without a lot of financial backing within a political party than it is to do some via a process more open to the public. See, for example, the current Bennet v. Romanoff and Norton v. Buck races in Colorado for the U.S. Senate nomination in the respective political parties. The latter has worked well at the local level in Colorado in places with small populations, where collective action is less difficult to coordinate, but has not worked nearly so well in larger political entities.

Giving elected legislators more staff resources or better pooling those resources, similarly, might make them less reliant on lobbyists whom they are now dependent for information on the never ending torrent of legislation that comes before them.

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