Ratting Out Steven Rattner
Before we decide whether to hang him or chop off his head, I think we can all agree that Steven Rattner -- President Obama's man in charge of saving the American auto industry -- is totally innocent. "Neither Mr. Rattner nor [his former investment firm] Quadrangle has been accused of any wrongdoing," the Wall Street Journal revealed under the headline "Rattner Involved in Inquiry on Fees." The New York Times went with "In State Pension Inquiry, a Scandal Snowballs," but another Times story said, "There is no indication . . . that Mr. Rattner faces criminal or civil charges." The Journal editorial page ["The Public Pension Shakedown"] declared that "there's no public evidence that he broke any laws," before recommending that government employee pension funds be taken away from "political actors" and turned over to the private sector.
The last is an especially boneheaded lesson to draw from this episode since the alleged "pay to play" scandal results from the outsourcing of investment decisions from government employees to private firms. The accusation, if there is an accusation, is that firms such as Rattner's paid bribes to get in on the action.
In a way, the accusation is clearly true. It is an open practice for firms such as Quadrangle to pay fees to people with political connections when they are seeking a piece of a public pension fund to manage. What did anyone think these fees were for, if not to influence the people who make the decisions? The influence may have to be indirect -- become a client of the decision maker's friend, or invest in his brother's stupid movie (both real examples from this case). But the real target is always a public official. There's no point in influencing the people who don't make the decisions.
Somewhere there's a line where legal bribery turns into illegal bribery. No one who knows Rattner (who used to be a New York Times reporter and is widely believed to be ambitious) would be surprised that he skated close to the line. Everyone, including Rattner, would be astonished if it turns out that he crossed it.
And where is that line? They say that the scandal is what's legal, so in that sense the line doesn't matter. The scenery is equally squalid on either side. They also say that (a favorite law school bromide) "ignorance of the law is no excuse." You can't escape a speeding ticket even if you sincerely believe that the limit is 120 mph. But shouldn't the law give some kind of clue -- like those signs on snow-covered mountains warning that you are entering avalanche country? The Post said that payments to get pension fund business are "a common industry practice and not illegal." Then it said, "The authorities are investigating whether Quadrangle . . . participated in a pay-to-play scheme to get investments from the state pension fund, according to people familiar with the case." Oh. And the difference is?
The New York Times explained, "At the heart of the case are the fees paid by investment firms [that] sought business from the pension fund. Such fees are legal, unless they are used, either directly or indirectly to bribe public officials." Got it now? No?
The Wall Street Journal gave it a go. "The main legal issue for the investment firms turns on whether they knew, or should have known, that fees they paid to certain entities for access to the New York fund were legitimate or were improper kickbacks."
Henry Blodget, the disgraced former dot-com operator reinvented as a commentator, says the key distinction is whether the offer of a bribe came before or after the promise of a piece of the action. This is a swell distinction. All it lacks is any obvious sense of which is blameless and which is corrupt.
In short, nobody seems to have any idea where the line is. You could say this ambiguity is a good thing if it keeps people far away from avalanche country. I lose no sleep over the danger that I may have inadvertently bribed a public official, and you probably don't either. It's not a hard danger to avoid, if you have no desire to manage part of a public pension fund. On the other hand, this ambiguity gives enormous power to government agencies and to those present-day Torquemadas, state attorneys general, to pick their targets and define the law as they wish.
Quadrangle ultimately paid $1.1 million in fees to manage $100 million of pension money. That's a lot to pay. Rattner & Co. must have believed they could make at least this much back in fees or in market returns that they would be allowed to keep. Why doesn't New York auction off the right to manage its pension funds, or at least award them strictly on the basis of past performance? The best way to eliminate corruption in the management of state pension funds, as anywhere else, is to make it unprofitable.