Wednesday, April 15, 2015

The Great Understanding: Political Influence in Public Pensions Decisions Doesn't Require Steering

The Great Understanding:  Political Influence in Public Pensions Decisions Doesn't Require Steering 

Yesterday, David Sirota, Andrew Perez, and Matthew Cunningham teamed up on a story in the International Business Times called, “Jeb Bush's Administration Steered Florida Pension Money to George W. Bush’s Fundraisers.”[1]   While the article sheds light on the inside track enjoyed by wealthy money managers, it doesn’t cast light on how the process really works because it tries to make it look as if Governor Bush steered mandates to certain firms. 

The process by which the Carlyle, Goldman Sachs, Blackstone and the other firms mentioned in the article win mandates is far subtler than a Governor steering business to his brother’s contributors.  In addition, the process is much broader because it extends to all sorts of contracts let by state government.  In my view, the process is much more corrupt and much more difficult to reform than one in which politicians explicitly direct certain investments in exchange for campaign contributions.  This is why I don’t think the SEC’s restrictions on campaign donations to trustees or the politicians who appoint trustees has much of an affect on who wins money management mandates.

In the article, we’re shown a list of significant fundraisers for President Bush’s election effort, and list of major money managers who have mandates with the Florida State Board of Administration to invest part of the public pension.  Mr. Sirota has also unearthed some emails that show that Governor Bush urged staff at the Florida SBA to meet with certain individuals and firms.  The article also mentions that George Herbert Walker IV, a Bush cousin, raised money for the President and that Goldman Sachs, his employer, won an alternative investment mandate from Florida SBA.

The process by which investment executives make campaign contributions and are awarded with government contracts, including pension mandates, should be called “the great understanding.”  Everyone with an interest in government contracts knows how the business works.  The movers and shakers in the political process have an inside lane when it comes to winning government work.  It’s like the VIP line at a popular nightclub.  Why should pensions be any different?  It doesn’t take a phone call or email from a Governor for the investment staff at a pension to know that David Rubenstein or Schwarzman are politically connected.  Moreover, Mr. Rubenstein and Mr. Schwarzman have created recognizable brands, making it easy for pension staff to recommend and trustees to hire Carlyle and Blackstone. 

While money managers tend to support and vote for Republicans, the great understanding operates just as well within the Democratic Party.  There are plenty of Democratic money managers and investment bankers at all the major firms to make sure they are well represented wherever there’s money to be made in the public sector.  And if by some chance the firm doesn’t have bi-partisan representation, a partisan will write checks for the other party’s candidates in order to protect his position in the great understanding.

There’s only one thing I don’t understand in IBT’s article.  Why did Governor Bush send emails?  The great understanding doesn’t require phone calls or emails, especially from principals.  If the Governor wanted to make sure an influential manager received a proper hearing before the Florida SBA, he has all sorts of subtle means of making it happen.  My guess is that the Governor wanted to make sure that the money manager knew that the Governor had personally intervened.  Before he runs for President, Governor Bush might want to brush up on how the great understanding operates.


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