“Hell is empty, and all the devils are here”*

George M. Dennison served on the Board of Plum Creek Timber while also serving as the president of the University of Montana. When asked how he could justify this apparent conflict of interest, he claimed not to have any such conflict, as he did his work for Plum Creek in his off hours.

He knew better, surely, as he is no fool. “Conflict of interest” has less to do with how a person spends his time than service to two masters. If the objectives of one do not line up with those of the other, then Dennison was obligated to resign one position or the other. If UofM and Plum Creek share common objectives, then UofM is obligated to watch out for Plum Creek’s bottom line. That’s the only reason the company exists.

Dennison did not resign either during his tenure. It’s emblematic of our new Gilded Age.

Avoidance of conflict of interest is why elected politicians set up blind trusts, why judges recuse themselves from certain cases, and why law firms diligently search their records for potential conflicts before taking on a new client.

This came to mind this morning as I read the following passage from the book All the Devils are Here, by Bethany McLean and Joe Nocera. They are financial reporters who wrote about the recent financial meltdown, and the passage I cite (p 289) is about attempts by some people to stave off future losses by helping people who were under water with their mortgages:

In fact, around this time [March, 2007] there had been efforts by some of the big Wall Street firms to salvage their triple-A tranches by buying actual mortgages and preventing enough foreclosures to keep those trances from eroding. Bear [Stearns]…announced “Mod Squad”…, which was supposed to help delinquent borrowers avoid foreclosure. Other firms, including Merrill Lynch and Morgan Stanley, were meeting to see if they could do something collectively to keep homeowners from defaulting.

Wall Street firms had not suddenly become philanthropists.

The simple act of buying up mortgages and then forgiving the loans would not only save homeowners, but save Wall Street billions of dollars in potential losses.

The reason behind that was a product called “synthetic CDO.” Mortgages had been leveraged many times over, and the S-CDO’s were not even backed by the actual mortgage. They merely referenced it, and one mortgage might have many bets going on behind it. Rescuing that one mortgage would not only help the home owner, but also save many investors many times over. There were concerns about antitrust, and regulators might be suspicious of such activities, according to the authors. But it was doable.

…a number of the big investors who were short in triple-A tranches were furious when they discovered what was going on. They were going to make money if enough homeowners were foreclosed on!

Being “short in triple-A tranches” meant that investors had bet that mortgages behind securities would fail, and did not want Wall Street doing anything to stall that process. They needed defaults to make money. But those few words could be mined to to uncover the many conflicts of interest that existed at that time:** Wall Street with its own investors, with home owners, and with good public policy.

The plans to prevent mortgage defaults went nowhere.

I know a person who went to great efforts to get his under-water mortgage repackaged using the Obama Administration’s Mortgage Refinance and Loan Modification Plan. This is anecdotal, of course, but it was nearly impossible to qualify. Suddenly, due diligence was the buzzword. I wonder if (I suspect that) Obama’s deep ties with Wall Street made them do a dual purpose rescue – a plan that, like a dead cat, had shiny and soft fur, but smelled bad.
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* from Shakespeare, The Tempest
**I doubt that much has changed on Wall Street today except that sub-prime mortgages are no longer the soup du jour.