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by Rushworth M. Kidder

Before the economy soured last year, a friend of mine got a call from his stockbroker, who was recommending a new kind of “structured investment product.” Trying to explain it, the broker gamely began reading from the information in front of him. But the more he read, the more muddled he got.

Finally, my friend asked him some simple questions: What comprised it, how long it lasted, how it really worked.

“I could just see him scratching his head,” my friend chuckled. And finally the broker said, “Look, I’ll send you the whole thing, and you can read it yourself!”

My friend is himself an accomplished portfolio manager — and this was his chosen broker. Yet here were these two professionals, trying to make sense of a product that, as my friend says, was described “in language that probably even lawyers couldn’t understand.”

The product? It was a derivative made up of bundled subprime mortgage loans — exactly the kind of vehicle that has tanked in recent months and sent the economy into a dive.

That dive may persist, though in congressional testimony last week neither Treasury secretary Henry Paulson nor Federal Reserve chairman Ben Bernanke was predicting a recession. But whatever we call it, the financial downturn raises profound moral questions. Was it caused by blameless human error? A failure of complex computer technologies? An infestation of unforeseeable software bugs? Or is there an ethics component here? Are we seeing not cyclical collapse but cynical collusion? Is this a loss of market value — or of moral integrity?

For answers, I turned to Marshall Acuff, who in 31 years with Smith Barney became its managing director and remains a widely quoted media guru on markets and investments. In his view, the driving force of the current downturn was the increasingly speculative nature of the housing market.

“People just wanted to get involved,” he said, “and they didn’t pay adequate attention to the hows and the whys and the whats.” Nor did the banks, eager to write loans, pay much attention to the credit-worthiness of borrowers or their ability to repay. When borrowers defaulted, the bubble began to burst.

But would the bursting, on its own, have generated the current situation? Not, he feels, without the investment banks. In an effort to extract even more profitability, they began bundling thousands of individual subprime loans together and selling them as securities.

“One could be somewhat cynical,” Acuff notes with his characteristically Southern diplomacy, “and say that the new products were not fashioned in a manner in which someone without a great deal of technical knowledge” could understand them.

To put it more bluntly, as New York attorney general Andrew Cuomo’s office is fond of doing, the question is whether the investment banks deliberately withheld information about the significant risks inherent in these products. He’s investigating that question and may bring charges if laws have been violated.

But what if these products skate just inside the law? Even if these products were legal, were they ethical? Did they honor such core moral values as truthfulness, respect, and responsibility?

Truthfulness, it would seem, requires full disclosure of risk and an honest desire for clarification, which Acuff finds missing here. Instead, he sees some similarities to the collapse of Enron, whose managers put together arcane, complex financial instruments to “create the impression of growth when in fact there isn’t that much growth.”

Respect for the client also has suffered, as sellers of these products took advantage of a certain giddiness in the temperament of the times. This sort of deception, says Acuff, “typically happens when times are good” — again, as in the Enron period. Selling such products is harder, he says, when times are “more challenging” and people are being more careful and “going back to the basics. But when times are good — ‘Hey, I got structured products!’”

But in the end, the issue comes down to responsibility. “The banks themselves, and perhaps even the government, should have some responsibility for educating the public,” he says. Policymakers also should move strongly to restore equilibrium, which he feels is happening, and they should impose “stiffer requirements” to make these products understandable. He also faults the credit rating agencies — Standard & Poor’s, Moody’s, Fitch Ratings — for giving such high marks to these products.

But the real responsibility, he feels, lies with the individual. “If something isn’t simple enough that you can understand it in two minutes,” he says, “I’m not sure you want to get involved with it.”

“At the end of the day, you can have all the regulation out there,” he says, “but if someone doesn’t take responsibility to become educated, then the risk of this sort of thing probably will continue to exist. You should know yourself, you should know and understand what it is that you want to do and how you want to do it.”

Knowing yourself is, essentially, a question of values. In markets, as in life itself, you can’t substitute rules for values. Yes, new products need regulation, but there’s an enormous moral hazard in pretending that public law can relieve us of personal responsibility. In the end, the marketplace is more mental — and moral — than we like to recognize.

©2008 Institute for Global Ethics

Questions or comments? Write to newsline@globalethics.org.

Carl Hausman’s commentary last week, “…But I Play One on TV,” drew many responses from readers, most of whom agreed that that there were ethical problems with the ad, which features Dr. Robert Jarvik, the inventor of the artificial heart, advertising a cholesterol-lowering drug.

A few readers offered a blanket objection to the entire premise of advertising prescription drugs. One reader argued that the advertising industry uses evocative imagery (with risks buried in disclaimers) to send consumers “scurrying to doctors” for drugs they may not need.

Several readers took issue with the fact that Jarvik, though possessing a medical degree, is not licensed to practice medicine and in fact has never practiced. Writes one: “To me, the issue with the Jarvik ad is that because Jarvik invented the Jarvik Heart, I just assumed he was a cardiologist. I was actually shocked when I learned from the Times story that he doesn’t even practice medicine. Turns out he’s just a good pump designer. As someone who is normally immune from being sucked into believing such endorsements, I’m kind of humbled that this one actually worked on me.”

Others were not troubled by the fact that Jarvik is not a practicing physician, pointing out that his academic background would give him the ability to evaluate claims made in the ad.

But what did rankle almost everyone who responded was the use of a double — an experienced rower who physically resembles Jarvik — in a scene that ostensibly showed Jarvik rowing a racing shell as his voice-over extolled the health benefits of the drug. “It is the body double in the boat that kills it and makes it deceptive,” writes a former pharmaceutical company attorney. “Even that wouldn’t be off limits if he did the scull routine regularly, but he doesn’t. Both he and his media critics confirm that.”

A medical professional concurs: “When an actor pretends to be Dr. Jarvik without stating that this is an enactment, that is dishonest. Dr. Jarvik is, in fact, a doctor, but it would have been more ethical to state that he is not a doctor who practices cardiology or even medicine. But the real dishonesty is the first [claim].”

– Compiled by Ethics Newsline® editor Carl Hausman

“The Parliament is today here assembled to deal with this unfinished business of the nation, to remove a great stain from the nation’s soul, and in a true spirit of reconciliation to open a new chapter in the history of this great land, Australia…. We apologize especially for the removal of Aboriginal and Torres Strait Islander children from their families, their communities and their country. For the pain, suffering and hurt of these Stolen Generations, their descendants and for their families left behind, we say sorry. To the mothers and the fathers, the brothers and the sisters, for the breaking up of families and communities, we say sorry. And for the indignity and degradation thus inflicted on a proud people and a proud culture, we say sorry.”

– Australian prime minister Kevin Rudd, speaking before the nation’s Parliament last week and apologizing for past governments’ treatment of tens of thousands of the country’s Aborigine population. Rudd said the apology was a paramount priority of his new labor government, which “was sworn in Tuesday after a convincing electoral win over the 11-year administration of John Howard, who had for years refused to apologize for the misdeeds of past governments,” reports the New York Times.

Source: New York Times, Feb. 13.

For more information, see: Text of Rudd’s speech to Parliament, Feb. 13 — Related Newsline story, Jan. 24, 2005 — Related Newsline story, Oct. 15, 2002 — Related Newsline story, July 10, 2000.

President Bush begins Africa tour to highlight anticorruption efforts; warrantless surveillance is at the vortex of an ethics and political spat; and the Senate ethics committee issues a sharp rebuke to Sen. Larry Craig

WASHINGTON
Much of the news from inside the Beltway and across Africa had an ethics angle last week. Among the stories:

• President Bush highlighted successful anticorruption efforts as he began his tour of Africa. CNN reports that the multicountry tour kicked off in Benin, a nation Bush said is determined to fight corruption and ensure that U.S. aid is properly spent. Speaking to Benin’s president, Thomas Yayi Boni, Bush said: “One of the reasons I’ve come here, sir, is that leaders around the world have got to understand that the United States wants to partner with leaders and their people, but we’re not going to do so with people who steal money, pure and simple.”
• Before leaving Washington for his Africa trip, President Bush leveled angry charges against political opponents over one of the hot-button ethics issues of his term: surveillance for intelligence gathering. Bush accused House Democratic leaders of risking national security by refusing to extend the administration’s authority to eavesdrop on certain electronic communications, Bloomberg reported. Democrats said the underlying law authorizing the surveillance still remains in effect and accused Bush of attempting to frighten the public. Central to the controversy is a provision of the extension, approved by the Senate but not the House, that would grant immunity to telecommunications firms that likely violated the law by providing customers’ data to the White House without search warrants for more than five years following the 9/11 attacks.
• Sen. Larry Craig (R-Idaho) faced a sharp rebuke last week from the U.S. Senate ethics committee over his conviction for disorderly conduct in an airport restroom. The ethics committee concluded that Craig committed the offense, tried to use his position as a U.S. senator to receive favorable treatment after arrest, and wrongly used campaign funds to pay his legal fees after pleading guilty. Craig later tried to withdraw his guilty plea, which stemmed from a police sting operation at the Minneapolis-St. Paul International Airport. In a letter publicly admonishing him, the ethics committee criticized Craig for “attempting to withdraw your plea in significant part because your initial calculation that you could avoid public disclosure of, and adverse public reaction to, this matter by pleading guilty proved wrong…. We consider your attempt to withdraw your guilty plea to be an attempt to evade the legal consequences of an action freely undertaken by you — that is, pleading guilty.” However, the Post notes, the letter effectively ended the ethics committee’s action on the case without any formal punishment or public inquiry into the incident. Despite criticism from fellow Republicans, Craig has vowed to finish out his term, which ends in January.

Sources: CNN, Feb. 16 — Bloomberg, Feb. 16 –Washington Post, Feb. 14.

For more information, see: Related Newsline story, Feb. 11 — Related Newsline story, Sep. 17, 2007 — Related Newsline story, Sep. 10, 2007 — Related Newsline story, May 14, 2007.

High-speed robots will gauge effects of toxic chemicals on human cells and molecules

WASHINGTON
In a move lauded by animal-rights activists, three federal U.S. government agencies announced last week that they will develop robots for use in testing of toxic chemicals, rather than using lab animals.

USA Today reports that the deal was worked out among the National Institutes of Health, the National Toxicology Program, and the Environmental Protection Agency.

According to an analysis from Scientific American, the plan involves using technology developed by each of the agencies to develop the high-speed screening robots and interpret the results on human cells and molecules.

In addition to taking animals out of the equation, UPI reports, officials behind the project say the results will be more relevant to humans.

According to U.S. News & World Report, the new method is being advanced for ethical and practical reasons. “As a society, we need to be able to test thousands of chemicals in thousands of conditions at a much faster rate than we did before,” said Dr. Elias Zerhouni, director of the National Institutes of Health. “The idea here is to move the 20th century paradigm of testing one compound at a time in many animals to a 21st century paradigm to test five to 10,000 compounds against 5,000 to 20,000 conditions in cells that are specific to human toxicology.”

Although no specific timetable was set for implementation of the program, press reports indicate that the work will evolve over the next decade.

It is unclear also whether all animal testing can be eliminated by the protocol.

Sources: U.S. News & World Report, Feb. 16 — Scientific American, Feb. 16 — UPI, Feb. 15 — USA Today, Feb. 14.

For more information, see: Related Newsline story, Feb. 11 — Related Newsline story, Feb. 4 — Related Newsline story, Jan. 22 — Related Newsline story, Jan. 22 — Related Newsline story, Jan. 7.

In other business-ethics news, Valentine’s Day flowers are also under the moral microscope

NEW YORK and BOGOTÁ
Ethics figured in several business stories from the world press last week:

• The U.S. Securities and Exchange Commission wants to make Wall Street financial disclosure data more transparent and is currently probing more than three dozen cases related to the subprime mortgage meltdown, chairman Christopher Cox said last week. Reuters reports that Cox is focusing on the “quality of issuer disclosure,” or the clarity of language describing risk, related to the companies involved in marketing complex securities based on risky mortgages.
• The ethics spotlight also is being focused on another type of lender, reports the Wall Street Journal: companies that make so-called payday loans. Such loans typically are for small amounts but come with very high interest rates and typically target low-income borrowers. The Journal reports that payday lenders increasingly are targeting recipients of Social Security and disability benefits. According to Journal reporters Ellen Schultz and Theo Francis, payday lenders are “forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.” As a result, the report claims, many legal-aid lawyers and senior-citizen service groups say they are seeing many clients on Social Security struggling to keep up with multiple payday loans.
• Last week’s Valentine’s Day highlighted the ethics issues surrounding employment conditions for workers who cultivate flowers, often in large operations headquartered in Colombia. The BBC reports that flower workers have found a voice in Floverde (Green Flower) certification, a program that requires producers to meet 165 criteria, including protecting workers from pesticides and imposing a maximum workweek of 48 hours with no more than 12 hours of overtime. According to the BBC report, the increasing demand for Colombian flowers by U.K. florists and supermarket chains has led to increasing scrutiny, with buyers visiting job sites to ensure that suppliers are in compliance with Britain’s Ethical Trading Initiative, which also includes provisions protecting the right to unionize.

Sources: Reuters, Feb. 16 — Wall Street Journal, Feb. 12 — BBC, Feb. 16.

For more information, see: Related Newsline story, Jan. 28 — Related Newsline story, Jan. 14 — Related Newsline story, Dec. 10, 2007 — Related Newsline story, July 2, 2007 — Related Newsline story, Dec. 11, 2006.

Advocates say Sarkozy’s proposal can fight racism and intolerance; critics say it will traumatize school children and blurs the division between government and religion

PARIS
A wrenching ethics debate is dominating French politics: How should students be educated about the killings of French children curing the Nazi Holocaust?

The Paris-based International Herald Tribune reports that president Nicolas Sarkozy set off a firestorm last week when he announced that during the next school year every French 10-year-old will be required to learn the life story of one of the 11,000 French children deported from France and killed by Nazis.

“This is a way of fighting all kinds of racism, all kinds of discrimination, all kinds of barbarity by reaching children through the story of children of their own age,” Sarkozy said.

The idea did not sit well with psychologists who worry that it will be traumatizing, according to the Associated Press, and the proposal revived debates about how France remembers World War II.

In addition, reports the Times of London, the move is controversial because it is being linked by critics with Sarkozy’s controversial emphasis on religious values in a nation known for imposing a strict barrier between government and religion.

Some teachers’ unions also have objected, accusing Sarkozy of meddling with education and exploiting the issue to divert attention from other political problems.

But the idea has its backers as well, reports the Independent, which notes that “most Jewish organizations have welcomed the idea, as have some of the President’s leading left-wing opponents, including his main rival in last year’s election, Ségolène Royal.”

Sources: International Herald Tribune, Feb. 16 — AP, Feb. 16 — Times of London, Feb. 16 — Independent, Feb. 16.

For more information, see: Related Newsline story, July 30, 2007 — Related Newsline story, Apr. 16, 2007 — Related Newsline story, July 3, 2006 — Related Newsline story, May 1, 2006 — Related Newsline story, Nov. 7, 2005.

Graft allegations roil the Philippines; South Africa is the venue for the corruption trial of a political leader who may run for president; a Canadian probe of the former prime minister’s financial dealings sputters; and a prominent Russian anti-graft crusader is shot dead in an apparent execution

VARIOUS DATELINES
Ethics issues involving graft allegations figured in news reports worldwide last week. Among the stories:

• The Philippine government, racked by a corruption scandal, says it will not tolerate graft and will mount an investigation into allegations of more than $130 million in kickbacks in a state telecommunication deal with a Chinese firm. The Manila Times reports that president Gloria Arroyo, stung by various calls for her resignation, last week warned that “we do not want to tolerate corruption.” While admitting that the Philippines has a “legacy of political corruption,” Arroyo said that her previous efforts to fight graft show a commitment toward a more transparent society.
• South Africa’s upcoming corruption trial of political leader Jacob Zuma is focusing on whether documents seized from Zuma and his lawyer can be used in court. The Voice of America reports that prosecutors allege the documents contain proof that Zuma solicited bribes. Zuma, a popular political leader who may be a candidate for the nation’s presidency in 2009, is facing charges of money laundering, fraud, and racketeering. Zuma denied those charges, insisting that they are politically motivated.
• A Canadian Commons ethics committee probe into the financial affairs of former prime minister Brian Mulroney is sputtering and may be turned over to officials for a public inquiry, reports the Toronto Globe & Mail. At issue is whether Mulroney received cash payments from a German-Canadian arms lobbyist while he was still in office. A string of witnesses with spotty memories has served only to cloud the issue, according to the report. Mulroney has denied any impropriety and said the investigation is a political vendetta.
• One of Russia’s most prominent anticorruption enforcers was shot dead last week in what police characterize as a “hit man”-style slaying. The Moscow Times reports that a witness says Yevgeny Grigoryev was shot in the head and chest by a man wielding a pistol equipped with a silencer. Grigoryev, who had targeted several government officials suspected of bribery and blackmail, also had been the target of a previous assassination plot, according to the Moscow Times.

Sources: Manila Times, Feb. 16 — Voice of America, Feb. 16 — Globe & Mail, Feb. 15 — Reuters, Feb. 16.

For more information, see: Related Newsline story, Feb. 11 — Related Newsline story, Feb. 4 — Related Newsline story, Feb. 4 — Related Newsline story, Jan. 28 — Related Newsline story, Jan. 28.

Session produces no answers but does prompt accusations of politicking

WASHINGTON
One of the biggest stories in sports ethics played out at a U.S. congressional hearing last week, with no conclusive information emerging but with charges of political favoritism dominating the coverage.

Celebrated pitcher Roger Clemens, accused of substance abuse in a report on performance-enhancing drugs in Major League Baseball, testified before a congressional panel and denied a report from his former trainer, Brian McNamee, that Clemens had used human growth hormone, according to ABC News.

Neither Clemens nor McNamee altered his testimony before the congressional panel, leaving their contradictory assertions in place and leading to the widespread conclusion that one of them has perjured himself before Congress.

The questioning of both men took what some critics characterize as a political tack. McNamee’s attorney claimed Republicans on the House Oversight and Government Committee panel were biased in favor of Clemens, who is reported to be a close friend of the Bush family, according to ABC.

The New York Daily News reported that a McNamee attorney went so far as to say he would not be surprised to see Bush intervene in any criminal investigation of Clemens, possibly by issuing a preemptive pardon.

The event took an even more improbable turn when congressional representatives and their staffs asked Clemens for autographs, possibly violating a federal law against accepting gifts of value from people with interests before the committee, reports the New York Times.

In related news, the San Francisco Chronicle is reporting that federal prosecutors are alleging that former Giants slugger Barry Bonds tested positive for steroids in November 2000, the year before he set the single-season home run record for Major League Baseball. The claim is listed in court papers alleging that the current home run king failed multiple tests for banned substances and then lied about those tests when he testified before a federal grand jury.

Sources: ABC News, Feb. 15 — New York Daily News, Feb. 15 — New York Times, Feb. 15 — San Francisco Chronicle, Feb. 14.

For more information, see: Related Newsline story, Jan. 22 — Related Newsline story, Dec. 17, 2007 — Related Newsline story, Nov. 19, 2007 — Related Newsline story, Oct. 1, 2007 — Related Newsline story, Feb. 22, 2005.

Survey examines expected demographic shifts as immigration accelerates

From the Pew Research Center:

“If current trends continue, the population of the United States will rise to 438 million in 2050, from 296 million in 2005, and 82% of the increase will be due to immigrants arriving from 2005 to 2050 and their U.S.-born descendants, according to new projections developed by the Pew Research Center.

“Of the 117 million people added to the population during this period due to the effect of new immigration, 67 million will be the immigrants themselves and 50 million will be their U.S.-born children or grandchildren.

“Among the other key population projections:

• “Nearly one in five Americans (19%) will be an immigrant in 2050, compared with one in eight (12%) in 2005. By 2025, the immigrant, or foreign-born, share of the population will surpass the peak during the last great wave of immigration a century ago….
• “The Latino population, already the nation’s largest minority group, will triple in size and will account for most of the nation’s population growth from 2005 through 2050. Hispanics will make up 29% of the U.S. population in 2050, compared with 14% in 2005.
• “Births in the United States will play a growing role in Hispanic and Asian population growth; as a result, a smaller proportion of both groups will be foreign-born in 2050 than is the case now.
• “The non-Hispanic white population will increase more slowly than other racial and ethnic groups; whites will become a minority (47%) by 2050.
• “The nation’s elderly population will more than double in size from 2005 through 2050, as the baby boom generation enters the traditional retirement years. The number of working-age Americans and children will grow more slowly than the elderly population, and will shrink as a share of the total population.

“The Center’s projections are based on detailed assumptions about births, deaths and immigration levels — the three key components of population change. All these assumptions are built on recent trends. But it is important to note that these trends can change….”

For the full press release from the Pew Research Center, Feb. 11, click here.

“Few minds wear out; more rust out.”

– Christian Bovée (U.S. lawyer, 1820-1904)