By Steven Pearlstein
Wednesday, May 9, 2007
Hardly a day goes by that you don't read another account of sleazy business practices among subprime mortgage bankers or student loan companies or the private health plans under Medicare.
You know, the stories about mortgage companies that pressured appraisers to approve loans for amounts in excess of house values, and Wall Street investment banks that demanded more and more mortgages to package even if it meant lowering underwriting standards.
Or the ones about student loan companies that pay what look like thinly disguised kickbacks to win a spot on the "preferred lender" lists at college financial aid offices, or use loopholes in the federal student loan program to qualify for millions of dollars in subsidies they don't deserve.
And then there are the more recent accounts of supposedly respectable health insurers that hire brokers to lure low-income seniors away from traditional Medicare into private "Medicare Advantage" plans. Some turn out to require higher co-payments for services or don't permit people to go to any doctor they choose -- and certainly don't do much of anything to lower the cost or improve the quality of care.
As with the scandals of an earlier era, the industry responses to these embarrassing revelations have a certain predictable rhythm to them.
First comes the denial that these practices are going on, followed shortly by the explanation that they are the work of a handful of rotten apples.
Then, when it turns out the practices are widespread, lawyers are trotted out to declare that it's all legal and proper. This is usually followed by a quickie study that purports to show how these practices benefit consumers, or the poor or the economy at large.
When all that fails, the desperate industry is forced to go negative, questioning the motives of critics and regulators who are accused of overreacting or cynically pursuing some political or ideological agenda.
It rarely works. In the end, the industry winds up taking it on the chin. Companies fail. Executives lose their jobs. Fines are paid. New regulations are imposed or government funding is curtailed.
If all this is so predictable, and the consequences so costly, you have to ask why industries haven't learned that they'd be better off stopping questionable practices before they become widespread.
Surely when established mortgage lenders first felt the competitive pressure from upstart brokers and began offering high-risk borrowers interest-only loans with no money down, some grown-up in the room realized this was going to end badly.
And as far back as 2003, the financial arrangements between colleges and lenders raised enough ethical red flags that the National Association of Student Financial Aid Administrators considered asking the government to require lenders to publicly report gifts of more than $50. Under industry pressure, the board of directors rejected the idea by one vote.
Then there are the health insurers, who spent years convincing Congress they could save money and improve quality by aggressively managing the medical care of seniors with serious or chronic illnesses. So how could they not see the threat to the entire Medicare Advantage program when competitors began showing up with un-managed care plans peddled by fly-by-night independent brokers?
As it happens, a vehicle exists for restraining bad actors and preventing unethical practices from taking hold in an industry. It's called the industry association. Most of them are right here in Washington. Most make a pretense of maintaining industry standards and promulgating codes of conduct. And most are led by experienced executives who are paid big money to keep their industries out of trouble.
Unfortunately, too many associations have come to believe it's not their place to police the behavior of their dues-paying members. After all, what looks to some members like unethical behavior looks to others like product innovation or aggressive marketing. And for the heads of these associations, stirring up division within the ranks hardly seems like a strategy for hanging on to a cushy job.
Except, of course, when it is. Perhaps nobody understood that better than Jack Valenti, who died last month after decades of representing the big Hollywood studios in Washington. Jack took a back seat to nobody when it came to aggressively defending the interests of his clients. And nobody was better at keeping himself in the good graces of his members.
But when the studios found themselves in a competitive race to the bottom in the smuttiness and violence of their movies, Jack was clever enough to foresee the likely political and regulatory backlash, and convincing enough to persuade his members to accept a movie rating system that has, in effect, become a form of industry self-regulation.
Mortgage brokers, student lenders and health insurers are only now realizing what Jack Valenti learned long ago: The purpose of a trade association is not simply to protect its members from government, but to protect its members from themselves.