Values Matter, A Lot

Published on 02 January 2011 by in Uncategorized


Golden Boy Steven Rattner Crossed the Line

He had it all: Brown, Partner at Lazard, started his own firm, Quadrangle Group, appointed Car Czar by President Obama, reported net worth of between $188 million and $608 million, and he regularly rubbed elbows with the likes of Bill and Hillary Clinton, Robert Rubin and Michael Bloomberg.

Wasn’t that enough?   What more did he want?  Another vacation house, a bigger bank account, more accolades?

On December 31st, when most of Wall Street either was sun worshipping in St. Barts, or dining on sushi at Nobu in Aspen, the NYTimes reported, New York Closes Pension Inquiry: Gets $10 Million.  So ends the drama surrounding Mr. Rattner, the Quadrangle Group, the SEC and Andrew Cuomo, the former Attorney General, and now Governor, of New York.   On probably one of the slowest news cycle days of the year, Mr. Rattner’s transgressions are practically swept under the rug.   Who is even paying attention?

I purposely characterized Mr. Rattner’s actions as transgressions rather than “alleged transgressions.”  No doubt Mr. Rattner vigorously denies any culpability.  However, from the perspective of a fiduciary, simply being involved in activities giving rise to ambiguous behavior is transgression enough.

For fiduciaries, there can be no ambiguity:  No conflicts of interest.  No acts of self-dealing. No questionable payments. No movie deals.

Mr. Rattner, and thousands of hedge fund, private equity, venture capital and investment managers, hold and manage assets that belong to other people — retirees who accumulate benefits over decades of employment.  They work “on behalf” of other people.  They are fiduciaries.

The investment stewards of pension funds must demand that all investment managers abide by fiduciary standards.  They must rebuff attempts by ERISA lawyers working on behalf of their investment management clients to eschew fiduciary responsibility .

Over a century ago, Justice Benjamin Cardozo eloquently wrote;

A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd. (Meinhard v. Salmon)

Though the language is flowery, and some criticize it for being to0 vague, and therefore impractical,  the principle and spirit abides; fiduciaries are held to a higher standard.

Notwithstanding his education, prior business successes and stellar reputation, Mr. Rattner failed to conduct himself “at a level higher than that trodden by the crowd.”  That is a disappointment.  Let’s not gloss over this behavioral misstep.  Upon reflection, it may present a critical insight to the future of our financial system.

After the crisis of ’08-’09, academics, businessmen and legislators endlessly debate the pros and cons of the various proposals to shore up our financial institutions and markets.  However, the simplest, least costly and most effective remedy lies in a change of behavior.  We need leaders in the financial community to abide by principles “stricter than the morals of the marketplace.”

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