Pay-to-Play isn’t a household word. But in the money-management business, it’s a business strategy used far too often that corrupts both the givers and receivers.
The poster child of pay-to-play is Alan Hevesi, the former New York State official who controlled the state’s $125 billion pension system. Any firm that wished to manage part of this fund had to contribute to Mr. Hevesi’s reelection fund and perhaps ingratiate itself with other gatekeepers.
Lots of folks got caught up in this scandal. The most prominent has been Steven Rattner, the "Car Czar" who oversaw the restructuring of the U.S. auto industry last year. (Mr. Rattner recently published his account of that effort in his book "Overhaul.") Rattner agreed to a multi-million dollar fine and severe restrictions on his involvement in the securities industry. He allegedly paid millions to a consultant to arrange access, and did professional favors for Mr. Hevesi’s family members.
While pension plans routinely use consultants, these usually help plan sponsors or boards with analytical tasks and other profession specialties. Paying a consultant for access, though, is deeply immoral. It corrupts the investment management process, because access is substituted for expertise, and relationships crowd out results. Over time the sponsor benefits personally while the beneficiaries get sub-par performance. It’s a breach of fiduciary duties.
In the long run, these schemes cannot succeed, because they aren’t based on financial return. And as the parent of any teenager knows, "Everyone is doing it," is no defense at all.
Douglas R. Tengdin, CFA
Chief Investment Officer
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