Janine Wedel - Unaccountable - How Elite Power Brokers Corrupt Our Finances, Freedom, and Security

The scrutiny from the paper did prompt change. In April 2010, Defense Secretary Robert Gates ordered that mentors convert to so-called Highly Qualified Experts—government employees who initially were allowed to disclose their financial interests only to ethics officers, but within months, due to the paper’s focus on the issue, were required to publicly disclose. Apparently not even the former had gone over well with them. According to a Defense Department Inspector General report, the vast majority of retired generals and other senior officials wouldn’t convert (that is, disclose their ties, even internally) and quit. 66In November 2011, USA Today reported that “The Pentagon’s use of retired generals and admirals as paid advisers has virtually ceased.” 67As reporter Tom Vanden Brook told me, “These guys were unwilling to have their corporate ties open to public scrutiny.” 68

It’s hard to imagine that those who devised the mentors program weren’t aware of the obvious ethical, security, and financial concerns. Everyone in the military knows what many ex-military officials are doing nowadays. So it’s worth noting that the name chosen sounds so wholesome, even evoking a spirit of volunteerism. Of course, unlike volunteers, the mentors were paid hundreds of dollars an hour.

As we have seen throughout this book, innocuous- or generic-sounding names connected to powerful people and groups often deserve our attention. That is because, as is the case here, such names can cover for accountability holes.

Ethically Challenged?

Are all these retired senior officers gunning for personal profit at the expense of the public good?

It’s likely not that simple.

We should not reduce their choices solely to self-interest. They are responding to what their peers do and to the ethics of their community. The vast majority likely have not considered these ethical questions or the unaccountability inherent in the overlapping roles that they craft for themselves. Any suggestion of ethical taint is likely to evince a reaction along the lines of “I’ve been in the military for forty years. Don’t you think I know right from wrong?” In fact, one will find several iterations of these defenses offered by the generals and admirals interviewed by Bender. “You spend 35 years in an ethical place,” said one. “You don’t leave that at the door.” 69

The pattern has changed drastically in just a few decades. I asked several retired senior officers why so many of their peers continue military/intelligence work after retiring. Air Force Colonel Randall Gressang, who performed such work (via professional-services contracts to defense agencies) for eighteen-plus years after retiring, told me this: “They see more [of their peers] do it and the monetary rewards are potentially much greater.” 70

Some of these retired officers seem to think that we should just take it as a given that they will behave with the utmost integrity. Bender reports: 71

The generals who navigate these ethical minefields said they are capable of managing potential conflicts without oversight. . . . “You have to have a firewall in your head,” said industry consultant and former Vice Admiral Justin D. McCarthy.

But it’s entirely reasonable for the public—and, in fact, should be our duty—to see this differently. With all due respect to the vice admiral and his cohorts, public accountability would demand that the “firewall” be on paper for all of us to see. And while it seems anachronistic, one would hope and expect that whatever roles and relationships these generals accept do not undermine the integrity of the institution and the public interest. I suspect that a certain five-star general named Eisenhower might agree.

And yet someone like Mike McConnell apparently sees nothing wrong with “having never left government” while at Booz Allen. In fact, he would probably think we are naïve fools for even perceiving a problem.

As you’ll see next, powerful players who don’t have any stars or medals also try to make the claim that they can regulate themselves. Again, former government officials are paid top dollar to carry out activities that one would expect to be the domain of the government, and that are accountability-challenged.

SHADOW REGULATORS

Professional services outsourced by government have typically encompassed such activities as information-gathering, analysis, administration of programs, and core functions mentioned earlier, such as managing intelligence operations. Now government is also, remarkably, contracting out regulatory power and, in the process, diluting it.

What, exactly, is Promontory Financial Group? A single American Banker profile used these varying phrases to describe it: “. . . sort of ex-regulator omnibus,” “shadow network between banks and regulators,” “an auxiliary . . . private-sector regulator.” Or, if you really want a head-scratcher: “a kind of arbitrage and interlocution between regulators and banks.” 72No matter which description one chooses, there is no doubt that Promontory illustrates some of the perils that come with outsourcing government duties and even informal authority to private entities.

A private consultant to Bank of America, Morgan Stanley, Wells Fargo, PNC, Allied Irish, and the Vatican, among others (and with fifteen offices that span the globe from Toronto to Tokyo, Denver to Dubai, Singapore, San Francisco, and Sydney, and, of course, Washington, D.C.), Promontory is hired by these and other top financial firms to manage a crisis, or to navigate the thicket of new regulations meant to rein in some of the banks’ now infamous investment “innovations.” 73

Who can provide the best advice on the thinking and doings of regulators? Former regulators, of course. Almost two thirds of Promontory’s approximately 170 senior executives have been employed by agencies charged with monitoring the financial industry, according to the New York Times . 74No surprise, as the firm was founded by Eugene Ludwig, who, under President Bill Clinton (a friend from both Oxford and Yale Law School), headed the U.S. Treasury’s Office of the Comptroller of the Currency (OCC), charged with supervising national banks. Its advisory board is another heavy-hitting list that includes two former SEC chairmen, Mary Schapiro and Arthur Levitt, Jr., and former Federal Reserve Vice Chair Alan Blinder. 75With these ex-regulators on board, Promontory can advance the interests of its banker clients: using very recent government experience with regulations under consideration, helping defang the implementation of the Dodd-Frank legislation passed after the 2008 financial crisis, and (shadow)-lobbying former regulatory colleagues to do so. 76

Since opening its doors in 2001, Promontory has evolved alongside the big changes in financial regulation around that time. The Sarbanes-Oxley Act, aimed at preventing corporate malfeasance following the spectacular accounting frauds of Enron, Worldcom, and other companies, was passed in 2002. Wall Street firms played their own role in abetting these crimes.

But the real trouble that was to percolate over the next decade emanated from Wall Street and was perfectly legal and largely unregulated: exotic derivatives. (Ironically, back in 1994, as comptroller, Ludwig himself had warned about the dangers of such derivatives.) 77

After derivatives detonated in 2008, Wall Street poured huge amounts of money into blocking financial reform. When the Dodd-Frank legislation eventually did pass in 2010, the new game became implementation—or, as some analysts might call it, obstruction. As we mentioned in the previous chapter, the truly important fight is not so much in the headline-grabbing prosecutions we’ve seen over the past few years, which are sometimes high on performing for the public and low on results that matter: rather, it’s what’s happening inside the dense fine print of Dodd-Frank, with some of the top lawyers in the United States haggling over details, sometimes not even for substantive reasons but simply to thwart implementation.