Ohio’s experiment in diversifying its ranks of money managers isn’t helping the cause.
In 1997 Ohio’s workers’ compensation fund embarked upon a diversification goal: Dish out 10% of the assets to portfolio management firms that didn’t get this lucrative work before but deserved a shot. Either they were too small to be noticed in the usual money management bake-offs, or they were run by women or members of racial minorities.
A seemingly worthy effort. Alas, this diversity strategy, combined with old-fashioned pay-to-play politics, has enveloped the state in scandal.
Consider the case of MDL, the Pittsburgh bond gambler. It was hired by the bureau in 1998 as a minority manager. MDL also used Jesse Jackson’s Rainbow/ Push Coalition to help win jobs investing for Raytheon and Boeing. But, its performance lagging, in 2003 it was fired from those two companies as well as from a few public funds like the Philadelphia Gas Works and the Illinois Teachers’ Retirement System. It was in trouble in Ohio, too. That same year a consulting firm had recommended putting MDL on probation for poor performance—but to no avail.
MDL not only had donated money to the campaigns of Ohio politicians but also had on its payroll the daughter of George Forbes, who until recently was one of a five-person committee overseeing the choice of money managers and had suggested starting the emerging and minority program years earlier. MDL and many other bureau hires also gave to the Cleveland chapter of the NAACP, which was run by Forbes. He declined to comment for this article.
In August 2003 Ohio began to shift what would eventually total $225 million into a new MDL hedge fund shorting Treasurys, on a hunch they would fall. At one point MDL was leveraged up 19-to-1 on this bet. But Treasurys didn’t fall. They rose—and wiped out nearly all of the investment. Ohio’s Attorney General is suing.