Makhlouf again

This evening, so we are told, the official government farewell is to be held at the Beehive for outgoing Secretary to the Treasury Gabs Makhlouf whose eight year term expires in two weeks’ time.  It should really be a rather awkward occasion, even allowing for the likelihood that the people who turn up to the farewell will mostly be those either not bothered by serious misjudgements in public office (and a multi-year record of underperformance) or who feel that they have little choice but to attend (the host –  the Minister of Finance –  and, for example, ambitious careerists in the upper levels of the public sector).   The Leader of the Opposition and National’s Finance spokesperson are reported to be boycotting the event.

I’ve long been something of a sceptic of Makhlouf, having first observed him when I was working at Treasury a decade ago.  I was surprised –  and not exactly positive about –  him being appointed Secretary, and more surprised and seriously disappointed by Bill English’s decision to approve his reappointment.   The gradual decline in the quality and standing of The Treasury continued on his watch –  Eric Crampton argues it accelerated –  with a growing sense that The Treasury had become less interested in, and capable of, rigorous economic analysis, and more about bending with the wind to (indeed championing) all manner of trendy causes.   Makhlouf gave many published speeches, and they too were remarkable mainly for platitudes, politically-driven pandering (eg on the PRC), and conventional centre-left tropes, rather than for any distinctive insight.  He was particularly fond of talking up the idea of New Zealand being close to Asia, to which I’ve several times pointed out that when he was home in London he was closer to Shanghai or Mumbai than when he was in the office in Wellington.

Which is not to suggest that he was without his merits.  There were policy and organisational issues where I thought his instincts were sound, under his leadership Treasury continued to be better around the OIA than most agencies, he was/is a pleasant person, and he must have something of a thick skin.  Having been quite critical of him and The Treasury, I was a bit surprised a few months ago when he followed through on one of those polite “we must get together for a coffee” comments people sometimes make, and we had a long, pleasant, and productive discussion on all manner of things.

And so until a couple of weeks ago I’d assumed his term would end quietly and conventionally, with the hope (against hope, given the SSC –  and, frankly, the pool of credible contenders) that someone better might replace him.

But his conduct in the Budget “leak” affair –  much of it directly visible to, and aimed at, the public –  descended to a whole new level.   And simply should not have been allowed to stand.   I wrote about this in a post last week.    Quite a lot of additional information has emerged since then, including from the GCSB. the Prime Minister, and the head of the Department of Prime Minister and Cabinet.  None of it puts Gabs Makhlouf’s conduct in a better light, or offers any mitigating circumstances to explain his words, his actions, and his demeanour.    In such a serious matter he fell far short of acceptable standards.  An honourable and self-aware person in his position would have resigned by now (which might have been made a little easier knowing that he was leaving in a few weeks anyway). But then such a person would not have found themselves in such a position, because having realised that they had made a succession of mistakes –  perhaps unused to the glare of the public spotlight in an intensely political controversy – they’d have apologised and adopted an attitude of contrition.

Where did he go wrong?

Well, first, there was the not-insignificant matter that he was chief executive of an agency charged with maintaining Budget secrecy, and yet systems were such that some material found its way into the public domain anyway without too much difficulty.   Not a hanging offence in its own right, but not a good start.  And there hasn’t even been an expression of regret or apology for that –  not in the public statements anyway, but perhaps he has apologised to the Minister of Finance.

Then there was the rather melodramatic statement Makhlouf issued on the Tuesday evening  (this was the “deliberately and systematically hacked” statement).    It was made when, as is now clear, the GCSB had already told Treasury that nothing of the sort that most people think of when the word “hack” is used had occurred.  At best, it was loose and flamboyant language.  Makhlouf will have had the benefit of advice from his comms, legal, and IT people, and (we presume) his senior deputies.  His staff had had the advice from GCSB, and yet he still put out this statement.  He could, quite easily, have put out an alternative version along the lines of “GCSB has advised us that there has not been a hack, but as we continue to investigate ourselves, we have referred the matter to Police.”

In all the timelines that have emerged to date, none has documented the (likely frequent) contacts between Treasury staff and staff in the office of the Minister of Finance (or of the Prime Minister).  But even if you subscribe to the idea that the Minister was putting pressure on the Secretary, the fact remains that the statement was Makhlouf’s responsibility, and his alone.  As I’ve noted previously, when you are leaving in a few weeks, and then leaving the country, the Minister of Finance has little no leverage over you – but even if he had some leverage, your legal responsibility is still to act responsibly, calmly and independently.

We now have confirmation that the head of the GSCB had alerted his minister to concerns about Makhouf’s statement that evening (after the statement had gone out).  We know too that Andrew Little passed those concerns on to the Prime Minister and the Minister of Finance.  So even if Makhlouf did not know the full extent of GCSB’s concern prior to his statement going out, he must have been made aware of those concerns by late that same evening. (If Andrew Hampton was concerned enough to call his minister, are we to suppose he would not have first rung his fellow public service CE, Makhlouf, to put his concerns on record?)

And yet in his round of media interviews the next morning,  not only did Makhlouf not ease back the rhetoric, he amplified it –  both directly (his use of the “iron bolt” image) and in lines from interviewers to which he did not object.   We also don’t know precisely when Treasury IT staff formally advised Makhlouf what had actually happened, but even by this stage he must have had ample material and perspectives that should have led him to reconsider.  His rhetoric was out of step with whole-of-government action (no ODESC meeting, no early release of market-sensitive bits of the Budget etc,).   Whether or not his intent was partisan (I presume not), his rhetoric in turn provided cover for, for example, pretty inflammatory statements from the Deputy Prime Minister.  He must have realised  –  and if he didn’t it reflects more poorly still –  that he was misleading the New Zealand public.

By later on the Wednesday afternoon, even the Police were washing their hands of the affair (presumably after talking to Treasury IT staff earlier in the day) and yet there was still no clarification or withdrawal from Makhlouf.  Instead, we finally got a statement from Makhlouf at 5am the next morning, in parallel with one he had managed to get out of SSC.    I don’t suppose anyone thinks Treasury staff were at work at 4:30am finalising the press release –  there was no obvious reason why the statement could not have been released hours earlier –  but even then it was the content of the statement that was even more problematic than the timing.

There was no apology (either for the systems allowing the breach, or for his actions words over the previous 36 hours) and renewed attempts to muddy the waters with unsupportable claims that the release of the data had been a breach of some (non-existent) convention around Budget secrecy.  And then nothing more: no media appearances, no nothing.  And there has been nothing since, whether before or after the (belated) announcement of an SSC inquiry into Makhlouf’s words and actions, complete with (irrelevant) report from the State Services Commissioner that Makhlouf believed he had been acting in good faith throughout.  Quite probably, but good faith doesn’t excuse shockingly poor judgement (especially not in one of the most senior officeholders in the land).

My own view remains that had Makhlouf issued a genuinely contrite statement that Thursday morning, the issue would have died off pretty quickly.  New Zealanders seem mostly pretty forgiving, when someone owns up.  But Makhlouf appears to have dug in.  He could have apologised.  He could have taken leave while the investigation is going on (especially as it will involve a lot of questioning of his own staff). He could have resigned.  He could have arranged for tonight’s farewell to have been quietly postponed (I’m sure Treasury will have its own farewell).   But he did none of these things.  And now it appears to be in the joint interests of Makhlouf, the SSC, and the government for the inquiry – undertaken by people with specific conflicts (the SSC statement on the Thursday) and who are in any case too close to those they are investigating – to take just long enough to run out the clock.   That is a sad commentary on the people involved and on the system, and tonight’s farewell does look quite a bit like cocking a snook at New Zealanders, and robust standards of governance (which includes sweating the small –  and not so small – stuff), as the elite –  perhaps barely conscious of what they are doing –  look after their own.

What of the Irish?  I was among plenty of people surprised by Makhlouf’s appointment as Governor of the Irish central bank (I recall a flippant remark the day the appointment was announced about needing to check that it wasn’t April Fool’s Day).  He has no strong background in monetary policy, banking supervision, financial markets, or financial stability.  And he was male, (there was a strong female local contender) and he was – not to put too fine a point on it –  British, and Irish independence hadn’t exactly come about in the peaceful and evolutionary way New Zealand and Australian independence had.   “Hated imperialist overlords” and all that, even allowing for the fact that some time has now passed since then.  To the outsider, it seemed that what Makhlouf had going for him was mostly the conventional centre-left platitudes (appealing to the current Irish government) and a strong emphasis – beyond the facts and evidence –  on “diversity and inclusion”.  He hardly seemed likely to add brilliance or gravitas to the deliberations of the European Central Bank’s governing bodies: as a policy person and economist he was not a patch on the outgoing Governor, Ireland’s own Philip Lane.

The Irish central bank’s reputation took a hit in the wake of the 2008/09  financial crisis.  Much of that appeared to be very well-deserved (with the caveat that the political classes were so invested in the success narrative pre-2008 that a central banker who had tried to be much better might not have lasted long).    They’ve done a lot of rebuilding in the last decade, including having had some foreign appointees in senior roles.  The economist Stefan Gerlach served as Deputy Governor for several years.  He was sceptical when the Makhlouf appointment was first announced.  Here was his take on the news of the SSC inquiry

and on Eric Crampton’s piece on The Treasury under Makhlouf late last week

Radio New Zealand yesterday reported the Irish Minister of Finance saying that Makhlouf’s appointment was secure unless there was “very very grave misconduct” uncovered.

If the appointment has already been lawfully made, a quick check of the Irish central banking act suggests that government may have few options.  The initial appointment will have been solely at the discretion of the Irish cabinet.

19.—(1) The Governor shall be appointed by the President on the advice of the Government and shall receive such remuneration and allowances and be subject to such conditions of service as the Board shall from time to time determine.

A person serving as Governor is automatically ousted in exceptionally extreme circumstances

d) if and whenever he is adjudged bankrupt (whether in the State or in any other country) or makes a composition or arrangement with his creditors or is sentenced by a court of competent jurisdiction to suffer imprisonment or penal servitude, he shall forth-with become and be disqualified from holding the office of Governor.

There is a separate section on removing a Governor.  There is a health ground

21.—(1) If the Governor becomes by ill-health permanently incapacitated for performing his duties as Governor he may be removed from office by the President on the advice of the Government.

and a residual catch-all, which has to be initiated by the Bank’s Board and has to be unanimous.

(2) If the Board, by unanimous vote of all the Directors, requests the President to remove the Governor from office for cause stated, it shall be lawful for the President on the advice of the Government to remove the Governor from office.

It should be very hard to remove a serving Governor from office.  But Makhlouf doesn’t take office for another three months, where the standards really should be lower.  Embarrassing as it might be for the Minister of Finance to do so –  having initiated the appointment and lauded Makhlouf to the skies – it is a bit hard to see how anyone would have so thick a skin as to resist an approach from the Minister of Finance making it clear that he would no longer be welcome as Governor, and could not credibly serve as Ireland’s person in the governing halls of the European Central Bank, at a time when the ECB and European institutions will need all the credibility, and expertise, they can muster.   In the private sector, a payout might be involved.  Those don’t go down well in the public sector, but it isn’t as if Makhlouf resigned another job to accept the Irish appointment –  his term here was expiring and he wasn’t eligible for reappointment.

Time will tell, and that is Ireland’s problem.

On the occasion of farewells, people often go round looking for stories about the person departing.   I’d have met Gabs before this, but the first encounter that really sticks in my mind was a policy forum at The Treasury on aspects of overall economic performance, productivity etc.  If I recall rightly it was held in The Treasury’s wharenui, so we were all there in our socks/stockings.  At some point in the meeting Gabs piped up, opining that New Zealand’s real problem had been that we hadn’t invested heavily enough in rail, and went on to note that one of the best aspects of the British Empire had been its emphasis on rail.  The economists among us didn’t know where to look –  the floor mostly –  or what to say, but I still recall the conversation afterwards along the lines of “thank goodness he is only the Deputy Secretary for the operational side of The Treasury, and doesn’t have a policy role”.

Sadly, little did we know.

It is the sort of experience that leaves me cautious, at best, about what sort of appointment SSC will make this time, when they finally get round to filling the vacancy that has been known for three years and which was advertised six months ago….and which will be vacant in, at most, two weeks from now.