Two observations about the unfolding insurance scandal:
The first has to do with the willful blindness on the part of so many people to business practices that don't even come close to passing the ethical smell test. One day, the practice of insurance companies paying "contingent commissions" to brokers is so commonplace that Wall Street analysts can calculate what percentage of revenue and profit they represent for the big brokerage firms. Then, Eliot Spitzer comes along and points out the obvious conflict of interest for brokers whose only job is supposed to be looking out for the best deal for their customers. The next day, they're history.
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Transcript Steven Pearlstein was online to discuss this column.
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It wasn't only the brokers and the insurers, by the way, who failed to see the problem hidden in plain sight. So did any number of state insurance regulators and business reporters, as well as customers, who in this case were sophisticated corporate types.
This ethical blindness, of course, is hardly unique to the insurance industry.
Remember "earnings management," which used to be the subject of how-to seminars offered by accounting firms? It is now the subject of how-not-to seminars run by law firms.
Or how about those "hard" and "soft" dollars paid by mutual funds to Wall Street firms that steered investors to their products or provided "free" research -- until Spitzer came along.
My sense is that these practices developed gradually, in small steps, none of which was enough of a change to ring any warning bells. In time, they became so widespread everyone just assumed they were okay.
But -- to my second point -- I suspect it is not coincidental that these practices developed mostly in industries where middlemen have played a key role, with the cost of their services bundled into the price of the final product (the stock, the insurance policy, the mutual fund). This lack of price transparency brought with it a lack of price competition, allowing brokers to earn incomes that bore too little relation to the skill, time and risk involved.
Now, however, deregulation and technology and hyper-competition have conspired to threaten this arrangement.
In a world of discount airlines and online booking, travel agents can no longer rely on the hidden 10 percent commissions folded into airline ticket prices. As a result, a much smaller industry is moving to a new model in which agents compete on the basis of price as well as service with each other, and with lower-cost automated systems.
