Outsourcing Oversight

The Case for Leaks

In an article on how financial derivatives have helped banks deceive the public, Floyd Norris in The New York Times indirectly made a good case for why we need leaks – and, of course, leakers.

“The Financial Times said it appeared that Italy had used derivatives in the 1990s to allow it to make its budget deficit seem smaller, thus enabling it to qualify for admission to the euro zone.” The evidence for this high level chicanery came from “government documents leaked this week to two European newspapers, La Repubblica and The Financial Times.”

Derivatives based on unsound mortgages played a major role in the credit bubble that produced the Great Recession from which our world is still struggling to recover. Earlier, derivatives played a major role in the rise and collapse of Enron. The ingenious repackaging of assets and liabilities was and still is largely designed to help companies raise money but that is often by disguising their debt — if not just whisking it away as something else, a fact that led Warren Buffett to call them “weapons of mass deception.”

But such exploitation of derivatives is just the tip of the iceberg. The larger implication is that so long as corporations and governments deceive and lie, we need people who are willing to hack into their files and expose their true contents. Imagine if hackers had gotten into Enron’s secret files 15 years ago, of if someone had blown the whistle on the ratings agencies who were giving out AAA approvals to the mortgage bonds without really bothering to investigate them.

This is not to defend illegal acts so much as to acknowledge the bigger picture. If we had adequate regulation in the financial industry, for example, we might not need whistle blowers. If there were strictly enforced rules governing investment banks, investigative journalists might not need secret sources. If we had reliable internal policing of our government’s espionage programs, we might not have needed Edward Snowden. But we if fail to establish legitimate oversight or we allow it to lapse, we invite in others in to do the dirty work.

Floyd continues: “The banks have done an excellent job of persuading the Financial Accounting Standards Board, which sets the rules, not to mess with them. Rather than force the banks to put the assets and liabilities on their balance sheets, as is required in most other countries, the board has proposed additional disclosures,” disclosures, he points out, that allow odd and deceptive practices to continue. (See “Wielding Derivatives as a Tool for Deceit.)”

If government agencies collude in allowing banks of hide their liabilities, this means, in effect, that we are outsourcing the work of oversight to outraged leakers, spies, hackers, malcontents and good citizens who are willing for their own motives to take up the slack – and to risk being persecuted for their services.

To put it another way, under political pressure from influential banks and the national security establishment, we have privatized regulation. The results are uneven, and we often don’t seem to like what we get. But as if often the case in a free market economy we get some of what we need – and sometimes what we deserve.