Institutional Impact | July 7, 2022

The politics and power of asset management lead straight to the U.S. Supreme Court

Imogen Rose-Smith
ImpactAlpha Editor

Imogen Rose-Smith

Editor’s note: ImpactAlpha contributing editor Imogen Rose-Smith, a longtime senior writer for Institutional Investor, contributes a bi-weekly column on the policies, practices and strategies of the largest asset allocators, including pensions, foundations, and endowments. As Imogen says, she’s “tracking what investors do, not just what they say.”

ImpactAlpha, July 7 – I had my next “Institutional Impact” column (almost) ready to go, when the U.S. Supreme Court dropped its decision in Dobbs v Jackson Women’s Health Organization

When the highest court in the land overturned Roe v. Wade, eliminating women’s constitutional right to an abortion and control over our own bodies and throwing women’s rights backwards by 50 years or more, my counterintuitive defense of HSBC’s Stuart Kirk felt like yesterday’s news. Too small a fry. 

So I decided to start over. It’s time to talk about who is enabling the extremist assholes who are determined to impose their sexist, racist, reactionary Christian right agenda on the majority of the country. 

I’m talking about the asset management industry. 

OK, not everyone in the asset management industry. I’m talking about those with sufficient money and power to fund the GOP and who supported Donald Trump and the extreme right wing agenda he ushered in. Those who turned a blind eye to his blatant corruption in the service of lower taxes and hands-off regulation (let’s not kid ourselves that this is fiscal conservatism) and their own ambitions. 

That means a hearty congratulations to Blackstone’s Steve Schwarzman and other asset management executives who gave big to the GOP during the last political cycle, and who are doing so again this year. Since I do not want to be hounded by angry PR people, I’m not going to name names. The curious can look them up here, and here

Schwarzman, the billionaire who founded Blackstone in 1985, has been described by the Financial Times as one of President Trump’s “staunchest backers on Wall Street.” As the FT reported in January of 2021, Schwarzman “has lent rhetorical support to the president at key moments” and gave $30 million to Republican causes in 2020, including $3 million to a Trump-aligned super-PAC.

After the January 6 insurrection on Capitol Hill, political activists argued that Schwarzman’s support for the former guy could be a liability “if not for Blackstone itself, then for the public pension funds that contribute a large chunk of Blackstone’s $584 billion asset pile.”

That’s because the fat checks donors like Schwartzman wrote came from fortunes gained through the business of asset management and capital markets. This includes fees paid by investors such as public pension plans, foundations, endowments, and individual citizens – many of whom probably quite like things like civil liberties, equality, and a women’s right to make her own healthcare choices. 

Some pension plans rallied to the cause of Blackstone arguing that they would never mix politics with fiduciary duty. In a statement to the FT, Blackstone stressed that Schwarzman had expressed “horror and disgust at the appalling insurrection that followed President Trump’s remarks on January 6,” and had long ago “made it crystal clear . . . that President-elect Joe Biden won the election.”

The statement also attacked one of the groups urging pension plans to act against Schwarzman by cutting ties with Blackstone, the Action Center on Race and the Economy, or Acre, as a “fringe anti-capitalist group.” Blackstone also told the FT that Acre’s letter to pension funds contained “completely false” claims and “outrageous distortions.”

You know what sounds fringe and anti-capitalist, not to mention anti-democratic? Not allowing a woman to have a safe and legal abortion even in the case of rape, incest, or when a woman’s health is at risk. 

The fig leaf of fiduciary duty

Then there is David McCormick, the former McKinsey & Co. consultant and unsuccessful U.S. Senate candidate. McCormick joined the Westport, Conn.-based Bridgewater Associates in 2009 as president, helping with the $236 billion hedge fund’s leadership transition. McCormick became Bridgewater’s CEO in 2020 but resigned in January 2022 to run in Pennsylvania’s Republican primary (he lost to the Trump-endorsed Dr. Oz). He may run for the state’s other Senate seat in 2024. 

McCormick, who served in the George Bush administration, never gave money to Trump. But he ran a decidedly Trumped-up campaign. His platform included threats to transgender rights. In one debate, McCormick said he was “fully against all scenarios involving abortion,” according to Axios, apart from “the very rare instances” of exceptions for the life of the mother.” McCormick’s 2021 Bridgewater salary, according to his U.S. Senate disclosure filing: $22.5 million.

These titans of asset management making oversized political contributions to the Republican party over the last two or three election cycles, and those who lent their support to Trump, have helped usher in the dystopian nightmare we’re now experiencing. And the fact that they keep giving – or in McCormick’s case running – shows how little they care about things like civil liberties when their tax bill is on the line. 

Because it’s not just a woman’s right to choose that’s on the line here – although that would be bad enough. As we saw from Supreme Court Justice Clarence Thomas’s concurring opinion, the court is threatening civil liberties across the board, including same-sex marriage. The court’s ruling on environmental protection effectively eviscerated the agency and stopped it from doing its job. Its decision on gun rights, which is the exact opposite of its states’ rights logic on abortion, makes us less safe. The same court came out against Miranda rights, and undermined tribal sovereignty. 

There is precious little legal logic here and plenty of extreme right-wing (fringe if you like) political ideology. Not to mention the fact that Justice Thomas’s wife sure was very close to what looks like some pretty treasonous behavior around that January 6th insurrection that Schwarzman is so upset about. 

Today it’s legally easier to get an abortion in Mozambique then it is in Missouri. We can no longer use the fig leaf of fiduciary duty to justify funneling money to people who turn around and bankroll politicians and a party that is dismantling our civil rights – and will eventually take the economy down with them. 

Of course asset managers alone didn’t bankroll Trump. The GOP has plenty of funders who are not in finance. But some titans of finance sure did their part, supporting a party that is so morally bankrupt it elected a fake TV billionaire to the highest position of power so he could push through judges who would dismantle basic fundamental civil rights.

So yes, I’m angry. 

But it’s more than that. We need to take stock of how our industry is contributing to the problem, and what we can do to fix it. 

This isn’t about being a Democrat or a Republican. Indeed, if I was a Republican I’d be extremely pissed about what was happening to my party right now. It’s about our broken system of money and power and what we can do about it.

Politics of investing 

Lately people have been encouraging me (as a Global Impact Leader, after all) to write about the politicization of ESG. I explain that ESG has always been political. It’s just that now that ESG is starting to succeed and is targeting industry sectors such as fossil fuels, the right is pushing back. 

Take Michael Garland, who as New York City’s assistant comptroller has purview over the New York City Pension System. Garland hasn’t been filling proxy proposals for all these years (love ya’ Mike, keep up the good work) just because it’s the right thing to do. It also happens to match up with the agenda of the (mostly Democratic) politicians who sign his paycheck. 

And there’s a reason that the Wyoming Retirement System doesn’t have its own Mike, while the large California pension plans come with an ESG army. While Florida might be getting more Trumpy by the day, the state’s public pension plan does have its own Mike and corporate governance team.

The asset management industry itself is a political animal. In part, this is because public pension plans are run by political officials. But it’s not just public funds. Sovereign wealth plans, union funds, universities, corporate plans and other institutions are run by individuals, and individuals are political entities, be they elected officials or otherwise.

The asset management industry has made many people very wealthy. Rich people like to influence politics. They can do that in this country by making almost unlimited political donations. Which politicians like.  

There is nothing wrong with this (well, there is and campaign finance reform would be nice. But whom are we kidding?). It’s legal, and it happens on both sides. By way of example, Marc Lasry, the founder of the $12 billion New York-based Avenue Capital Group, was a huge donor to Hillary Clinton. Had she won the 2016 election, Lasry would have been packing his bags to become ambassador to France. Instead he launched an impact fund. 

Of course there is former Vice President Al Gore who, after his 2000 Presidential ambitions crashed and burned in Florida and with the Supreme Court, co-launched Generation Investment Management. Gore’s political connections were helpful in getting that business off the ground.  

The problem comes when the system of investing gets corrupted – when politicians or investment officials get kickbacks to direct investments toward certain fund managers. Or when investment managers who are made wealthy through this system fund, with their own money, political agendas that are antithetical to the views and beliefs of the people whose money they are investing. 

Then there is the grift. 

Playboy playmates and public pensions

If you think all of this corruption swirling around the GOP has nothing to do with asset management, let me introduce you to Los Angeles-based businessman Elliott Broidy

Broidy, an overweight dumpling of a man, is a curious figure in Trumpland. The most fun fact about Broidy, a former chair of the Republican National Committee (RNC), is that according to reports that surfaced in 2018, he allegedly paid $1.6 million for the silence of a Playboy Playmate with whom he had sexual relations resulting in a pregancy which the model had (at that time presumably legally) aborted. This came to light because Trump’s former lawyer Michel Cohen (remember him?) handled the $1.6 million payment, using the same pseudonym he used for Trump.  

Paying off a Playmate, however, wasn’t the thing that required Broidy’s subsequent pardon from President Trump. Oh no. Broidy got caught up in the scandal surrounding 1Malaysia Development Berhad, or 1MBD, the dodgy Malaysian sovereign wealth fund that is the topic of the 2018 book, “Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World.” As The Wall Street Journal reported, Broidy had been negotiating a possible payment in the tens of millions of dollars range if he could get the Justice Department to drop its investigation into 1MBD. One email had Broidy and his wife (!) being offered $75 million if the DOJ dropped the investigation. 

Long story short, the Feds charged Broidy with conspiracy to act as a foreign agent because of his lobbying of the Trump department on behalf of the Malaysian and Chinese governments. Broidy pleads guilty, and agrees to pay $6.6 million. The felony he pled guilty to had a prison sentence of up to five years. On the day before Trump left office, he gave Broidy a full pardon. 

This wasn’t the first time Broidy has escaped surviving jail time for his shenanigans. Back in 2002, Broidy was involved in a massive pay-to-play scandal involving his then-private equity firm Markstone Capital Partners and the New York State Common Retirement System. New York Common at the time was headed up by New York Comptroller Alan Hevesi

After an investigation by then-Attorney General Andrew Cuomo (for it was he), Hevesi did time for taking political kickbacks and gifts in return for directing investments to certain money managers. Markstone Capital Partners was one of the firms involved. (Broidy gave or helped raise more thain $500,000 in contributions for Hevesi.) Broidy pleaded guilty to a felony, later reduced to a misdemeanor. He had to step down from leading Markstone. (As part of the plea agreement, Broidy also admitted he “funneled $300,000 to ‘Chooch,’ a movie produced by brothers of David Loglisci.” Loglisci was the Chief Investment Officer at New York Common under Hevesi. The New York Post’s film critic called Chooch “The sort of vanity project that gives amateurs a bad name.”)

What is often overlooked, however, is that Broidy’s dabbling in public pensions went beyond New York. He was also appointed by then-mayor of Los Angeles Antonio Villaraigosa (note, all the politicians involved here are Democrats) to serve on the board of the LA Fire and Police Pensions system, giving him asset allocation authority over pension assets. That retirement system also suffered from problems with pay-to-play and Broidy was forced to resign after receiving a letter from the Securities and Exchange Commission asking questions about his relationship with third-party firms, placement agents, relating to the probe in New York.  

I tell this story to show show off my vast backlog of largely useless pension plan knowledge and also just what a massive pile of steaming hypocrites the current bunch of political leaders and funders on the Republican side right now are. Their stultifying puritanical values stop very far from their own bedroom doors. Broidy’s sexual peccadilloes would be none of my business if a)  he wasn’t corrupt and b) the party he bankrolled wasn’t trying to take away my reproductive rights.

These types of sleazebags still exist and operate in asset management. Pay-to-play regulations in most states have largely clamped down on the placement agent shenanigans that Broidy and others were using and it’s been a while since we had a pay-to-play standal at a major public pension plan. But the separation between political power and asset management is still gossamer thin. 

And we haven’t even gotten to the former co-chair of Trump’s inauguration committee Tom Barrack, who was charged last year by a New York federal court for acting as a foreign agent while seeking to raise funds for his investment management business from the United Arab Emirates (UAE.) Or Jared Kushner, Trump’s son-in-law, who six months after leaving the White House launched an investment fund with a promised $2 billion check from the Saudi government’s main sovereign wealth fund. Congress is investigating

How do you solve a problem like MBS? Saudi Arabia presents a governance risk impact investors can’t ignore

Charter schools, pension reform and the empire of pain 

We need to stop enabling these assholes. 

By giving them money, pandering to them in order to invest their money, or writing about them as though they are somehow above scrutiny. And we need to stop investing with people who are actively funding those who are working against our, and the country’s, best political interests. 

I know it’s hard. 

I’m not proposing a purity test of ESG or impact investment managers. Or in any way suggesting either that people should stop making political donations, or only make them to “good” Democrats. (Democrats can be awful, corrupt sleazebags as well – looking at you John Edwards. And the First Amendment is a thing.) But we have to stop pretending that people’s political activities are unconnected from their day jobs, or the way in which they make their wealth. 

Recently I read Patrick Radden Keefe’s excellent book, “Empire of Pain,” on the Sackler family, their development and promotion of Oxycontin and responsibility for the ongoing opioid crisis. The first third of the book focuses on eldest brother Arthur Sackler. His branch of the family did not own Purdue Pharma, the manufacturer of Oxycontin (though Sackler bought the original drug company, Purdue Frederick Company, for his two younger brothers.) Exceptionally driven and exceedingly ambitious, Sackler made his fortune partially through the marketing of Valium. But he also developed the industry infrastructure, marketing, conferences, journals, friendly academics, doctors, and politicians used to sell pharmaceuticals, which was leveraged so effectively by Purdue and other members of the Sackler family to sell Oxycontin.

What struck me was how similar this pharmaceutical infrastructure is to the asset and wealth management industry. The magazines and the journals (in particular Institutional Investor Magazine and the Journal of Portfolio Management), the conferences, the friendly politicians. All designed to coax people to sell, or invest in, a product. Sure, in our case the product doesn’t kill anyone. But it does generate an enormous amount of wealth for a handful of people at the very top of the heap, for which rank and file investors (including pension beneficiaries) pay in the form of fees. 

Where doctors take a Hippocratic Oath, investors have their fiduciary duty. The justification for investing with fund managers whose political activities that went against the goals or missions of, say a public pension plan or a philanthropic foundation, used to be “fiduciary duty.” 

Sure, Paul Singer funds initiatives aimed at dismantling defined benefit pension plans. But his hedge funds have good returns, the argument goes, so those same pension systems should invest in them and, by doing so, give Singer money to continue his defined benefit work. 

The hedge fund manager Dan Loeb hates it when I write about how he was seeking money from public pension systems, including teachers retirement funds, while being a major proponent for charter schools, something teachers’ unions hate. Loeb makes the point that by letting those pension plans invest their assets in funds managed by his hedge fund firm Third Point Partners, he was actually helping teachers. 

But the fiduciary duty argument falls apart when the individuals getting rich from these investments are actively contributing to the long-term destabilization of society and the economy. 

In the case of hedge funds, teachers unions have had some success at pushing back at teachers pension plans that are investing in hedge funds with senior leadership that supports charter schools. And while I may or may not agree with the unions, it seems logical that a pension plan not invest in firms where those in power are bankrolling efforts that would put public schools and their teacher benefits out of business. The same is true of defined benefit pension reform (and I say this as someone who agrees public pension reform is necessary. But shhh, don’t tell anyone, it makes labor very mad.)

Now, however, in the wake of last month’s SCOTUS decisions – decisions which effectively gutted the EPA, set civil rights back by 50 years, made the country less safe, eviscerated native sovereignty, and made a joke of Miranda rights – we need to ask ourselves the bigger question. When does our civil and fiduciary duty mean that we should stop paying fees to the people funding this broken regime? It’s beyond time to stop avoiding the elephant in the room. 

We talk about asset management as being a people business, that the people in the seats matter. So maybe it’s time that so-called mission-aligned investors, including foundations and endowments, not just public pension funds, look a bit harder at what those people do with their money. 

P.S. We desperately need campaign finance reform.

P.P.S. Confidentially to Boris Johnson. Ha ha ha ha ha ha ha ha. It’s always the sleaze that gets you in the end.  

Imogen Rose-Smith is a contributing editor at ImpactAlpha. A longtime senior writer for Institutional Investor, she was most recently a fellow in the Office of the Chief Investment Officer of the University of California.

Catch up on all of Imogen’s Institutional Impact columns.