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Close to a Laughingstock

David Everett Strickler

Outgoing director of the US Office of Government Ethics, Walter Shaub, discusses the blatant disregard of long-accepted ethics norms given by President Donald Trump and his appointees, and the need for more "teeth" in the ethics program, in today's New York Times editorial page:

Since the enactment of the Ethics in Government Act, our past presidents entered government with an appreciation for the importance of tone from the top. Though exempt from the conflict of interest statute, which bars other officials from working on matters affecting their financial interests, they all voluntarily divested conflicting holdings and put the proceeds in blind trusts or nonconflicting assets. They knew their exemption from the statute was not a reward for attaining high office but a pragmatic recognition that America needs its president engaged in urgent matters of state. By holding themselves to the same exacting standards as the rest of the executive branch, they sent a clear message to those serving under them.

This tradition came to an abrupt stop with President Trump. By continuing to hold onto his businesses and effectively advertising them through frequent visits to his properties, our leader creates the appearance of profiting from the presidency. As things stand, we can’t know whether policy aims or personal financial interests motivate his decisions as president. Whatever his intentions may be, the resulting uncertainty casts a pall of doubt over governmental decision-making. [...]

The cascading effects of the president’s departure from existing ethical norms have touched others in government. The tone from the top led one White House appointee to use her position to hawk the merchandise of the president’s daughter and another to endorse the president’s book. It led a cabinet official, whose recent wedding reportedly featured a chartered bus ride from the president’s hotel, to urge the public to see a movie he produced. The press secretary touts one of the president’s commercial enterprises as the “winter White House,” and the State Department has publicized it around the globe. A White House lawyer made the extraordinary assertion that “many regulations promulgated by the Office of Government Ethics (‘OGE’) do not apply to employees of the Executive Office of the President.” Appearing to echo this view, the Office of Management and Budget challenged O.G.E.’s authority to collect routine ethics records. Even some presidential nominees have pushed back against ethics processes with uncommon intensity.

Affected, too, is the very official charged with responsibility for White House ethics, the counsel to the president. His office recently ginned up ten unsigned, undated waivers, many of which seem intended to have retroactive effect, raising the specter of a possible effort to paper over ethics violations. Worse, the counsel appears to be both issuer and recipient of two waivers. His deputy also beat back a press inquiry regarding the applicability of ethics rules to one of the deputy’s former clients. In addition, his office has dragged its feet on responding to O.G.E.’s questions about appointees, despite the office’s statutory duty to review their disclosures and certify their ethical compliance. [...]

Recent experiences have convinced me that the existing mechanism is insufficient. The Office of Government Ethics needs greater authority to obtain information from the executive branch, including the White House. The White House and agencies lacking inspectors general need investigative oversight, which should be coordinated with O.G.E. The ethics office needs more independence, including authority to communicate directly with Congress on budgetary and legislative matters. Because we can no longer rely on presidents to comply voluntarily with ethical norms, we need new laws to address their conflicts of interest, their receipt of compensation for the use of their names while in office, nepotism and the release of tax forms. Transparency should be increased through laws mandating creation and release of documents related to divestitures, recusals, waivers and training. Disclosure requirements can be refined and the revolving door tightened. These changes would give O.G.E. the tools it needs to address the current challenges and, perhaps more importantly, reinforce for presidents the importance of setting a strong ethical tone from the top.

It goes without saying that corruption is not a good trait in a country's government, but it has serious negative effects on the value the market assigns to the country's companies. There is a reason that emerging markets, which on average tend to be more inflicted by corruption at the top, usually trade at a discount to developed markets. In their 2002 Corruption and International Valuation: Does Virtue Pay? paper, Lee and Ng measured the shareholder value destruction of corruption — firms from more (less) corrupt countries trade at significantly lower (higher) market multiples. They found that, on average, an increase in the corruption level from that of Singapore (#6 in list of least corruption countries at the time) to that of Mexico (#38) corresponds to a decrease of 18.1 in the price-to-earnings ratio (P/E), and a decrease of 1.17 in the price-to-book ratio (P/B).

Mr. Shaub told the New York Times over the weekend that he thinks "we are pretty close to a laughingstock at this point." Investors in US assets need to be concerned about the lack, or perceived lack, of ethical behavior by President Trump and his administration. The US equity market's lofty 22.4x trailing 12-months P/E has a long way to fall if the US government ethics begins to be perceived to be more like that of Mexico than Singapore. Oh, "ethical" Singapore can be bought for only 12.9x trailing 12-months.1


1This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.