Ex-Brookings Economist Litan Responds to Warren’s Conflict Accusation

By John Ortman • October 08, 2015 • 0 Comments
Economist Robert Litan has responded on Forbes.com to accusations of conflicts of interest leveled the last week of September by Sen. Elizabeth Warren (D-Mass.) that cost him his position at the Brookings Institution.

Background

In a letter to Brookings president Strobe Talbot, Warren had claimed that Litan used his Brookings affiliation to lend credibility to a July cost-benefit study he co-authored that’s critical of the DOL’s proposed fiduciary regulation — a regulation that Warren strongly supports. Citing a $85,000 fee that Litan and his co-author received from The Capital Group investment firm to write the study, Warren called the report a “highly compensated and editorially compromised work on behalf of an industry player seeking a specific conclusion.”

The study estimates that the proposed fiduciary rule “could cost investors as much as $80 billion” during a future market downturn and argues that advisers would raise fees and costs to comply, making it harder for lower-income people to get personalized advice.

Subsequently, Litan resigned from his unpaid position at Brookings — possibly under pressure from Talbot.

Two Major Weaknesses Asserted

In an Oct. 5 column Litan wrote for Forbes.com, Litan responds to Warren’s accusation. “I can only speculate why Sen. Warren has been so interested in our research, but I suspect it is because, even with its disclosed sponsor, the study exposed two major weaknesses in Labor’s proposal – which the Department may correct when it issues its final rule,” Litan says. “But if it does not, these two points, at least in my view, make the rule susceptible to being overturned by a court as being arbitrary and capricious (or failing a benefit-cost test) if it is legally challenged.”

Litan says these two major weaknesses in the proposed rule are:

  • The DOL’s economic analysis was flawed because it did not estimate the benefits of broker advice — especially advice urging clients not to time the market by selling stocks during market meltdowns and then failing to buy back in even as stock prices rise or rebalancing their portfolios as market conditions and their own situations change. “We conservatively estimated the value of this advice to be 44 basis points, an amount exceeding the benefits of the proposed rule,” he writes.

  • Litan’s study proposed a simple alternative to the DOL’s extensive and and complicated rule: require that mutual fund prospectuses “contain a box on the front in big bold letters” providing this information. This, he writes, is contrary to claims that he and his co-author “ignored the conflicts built into the current broker compensation model or straw men implications that we support brokers ‘snookering clients,’” Litan writes.

Litan ends his Forbes.com column with this: “And for the sake of civil discourse in the future, I hope that future policy debates will avoid ad hominem attacks and focus on the substance of the arguments, as long as the source of funding (if any) is disclosed (as it was here).”

John Ortman is ASPPA's director of communications.