What's the Matter With Ohio?
The Toledo Blade's reports on Coingate - the unfolding tale of how Ohio's Bureau of Workers' Compensation misused funds - deserve much more national attention than they have received so far. For one thing, it's an entertaining story that seems to get weirder by the week. More important, it's an object lesson in what happens when you have one-party rule untrammeled by any quaint notions of independent oversight.
In April, The Blade reported that the bureau, which provides financial support for workers injured on the job, had invested $50 million in Capital Coin, a rare-coin trading operation run by Tom Noe, an influential Republican fund-raiser.
...Meanwhile, The Blade uncovered an even bigger story: the Bureau of Workers' Compensation invested $225 million in a hedge fund managed by MDL Capital, whose chairman had strong political connections. When this investment started to go sour, the bureau's chief financial officer told another top agency official that he had been told to "give MDL a break."
By October 2004, state officials knew that MDL had lost almost the entire investment, but they kept the loss hidden until this month.
How could such things happen? The answer, it has become clear, lies in a web of financial connections between state officials and the businessmen who got to play with state funds.
Oh, boy, politicos and businessman in bed together - wake me up if the subject turns to cattle futures, real estate, and balked S&L investigations.
Krugman presents the Big Picture:
Now, politicians and businessmen are always in a position to do each other lucrative favors. Government is relatively clean when politicians are sufficiently afraid of scandal to resist temptation. But when a political machine controls all branches of government, and those officials charged with oversight are also reliably partisan, politicians feel safe from investigation. Their inhibitions dissolve, and they take full advantage of their position, until the scandals become too big to hide.
In other words, Ohio's state government today is a lot like Boss Tweed's New York. Unfortunately, a lot of other state governments look similar - and so does Washington.
...The message from Ohio is that long-term dominance by a political machine leads to corruption, regardless of the policies that machine follows or the ideology it claims to represent.
And he concludes with some ritualistic Rep-bashing (I can almost smell the incense, but that might be this especially aromatic blend I am sipping). [UPDATE: Somehow Krugman misses all these Dems and independents with union ties found by RedState - a majority of the oversight board, actually.]
So what does it mean? Surely the Earnest Prof does not expect his metropolitan readers to give a rat's rear area about financial shenanigans in Ohio. We have Eliot Spitzer to keep an eye on - NYC is the Big Leagues of financial scandal, and all we want or need to know about Ohio is that Columbus is where the Yankees have a farm team.
So here is the Bold, Caffeine Enhanced Theory (and do not attempt this at home!) - this column can only be read as a subtly disguised Hillary-basher. The ominous warnings about the perils of one party rule, the cozy financial dealings - he is taking us to Arkansas.
And why might the Earnest Prof be so reluctant to board the Hillary bus? Well, he was passed over for a spot in Clinton I, and showed his characteristic warmth and good humor after his rejection, so he may be on the outs with the future Ins. Or he may be heeding the guidance of his colleague Brad DeLong, who parked himself in the "Anybody But HER!" camp two years ago.
Time will tell. But if the next three years bring more of these disguised Hillary hit pieces, I will stand ready to decode them!
Meanwhile, this column also embeds a deeper riddle, with a funnier answer. Krugman identifies by name the chairman of the coin dealing company, but skips right past the chairman of MDL Capital. Why?
Why indeed, when a bit of research tells us that MDL Capital was founded by Mark D. Lay? How often does heaven rain these delightful coincidences down upon the Earnest Prof? Here is a name that evokes both Ken Lay *and* Tom DeLay in a column bashing Evil Reps for financial scandals - can it get any better, and how did Krugman miss this?
I'm only guessing here, but what may have given the Professor pause is this:
Mark D. Lay, an Aliquippa native who built his MDL Capital Management into the fourth-largest minority owned asset management firm in the country, appeared to be riding high in 2003.
In June of that year, the politically connected and civic-minded Lay was named Ernst & Young's Western Pennsylvania Entrepreneur of the Year for financial services. Four months later, Gov. Ed Rendell and the deputy premier of Bermuda joined Lay as he opened his firm's new headquarters on Smithfield Street.
Not so evident at the time was the mounting pressure some investors were putting on Lay and MDL, whose list of public and private clients ranged from the National Basketball Association to Allegheny County. Even as Lay offered in September 2003 to help the $14 billion Ohio Bureau of Workers' Compensation fund reduce its exposure to an anticipated rise in long-term interest rates, other clients were dropping him for subpar performances.
Lay, named one of the Top 50 African Americans on Wall Street by Black Enterprise Magazine, still lives in Aliquippa and teaches Sunday school at Tried Stone Baptist Church.
His higher profile engagements include serving as a director of the Pittsburgh History and Landmarks Foundation, the Manchester Youth Development Center, Howard University's School of Business, Beaver County Head Start, and the Negro Educational Emergency Drive.
In the pension fund business where political ties frequently open doors to business, Lay had his share.
In Ohio, eyebrows were raised by the fact that MDL Capital's chief compliance officer is Mildred O. Forbes, daughter of Cleveland NAACP President George Forbes. The elder Forbes is also a member of the Ohio Bureau of Workers' Compensation oversight board. George Forbes said yesterday he will step down.
Emphasis added. Let's revisit Krugman's presentation of that web of connections:
We're talking about personal payoffs: bargain vacations for the governor's chief of staff at Mr. Noe's Florida home, the fact that MDL Capital employs the daughter of one of the members of the workers' compensation oversight board, and more.
I have not yet verified that Cleveland NAACP President George Forbes is a Democrat, but I'll go on a limb here and bet he is. In fact, as some Dems bitterly recall, there are almost as many Dems as Reps in Ohio (Almost!). I'm guessing this little fact, if disclosed, might have jarred Krugman's moralistic tale.
[UPDATE: RedState thumps this point - of the five commission members, two were Dems and one was an independent with strong union ties. Oh, those evil Republicans!]
I wish I were done, since it has been delightful so far, but Mark D. Lay sounds like a good man with an interesting defense, and one might have hoped that an economist such as Paul Krugman would weigh in on it.
All of MDL's fixed income products have made money and returned positive financial gains to its clients and investors consistently. In fact, with the exception of the MDL Active Duration Fund. Ltd. in the State of Ohio, no fixed income client of MDL has lost money since our founding in 1992. With regard to a portion of our work with the Ohio Bureau of Worker's Compensation ("BWC"), MDL assumed a very specific and narrowly defined role to deploy what is known as an "overlay strategy." That strategy is designed to protect the overall fund against interest rate increases that could diminish the value of the overall fund. A strategy of this nature is a commonly accepted practice.
It must be maintained and understood that an overlay strategy of this nature and magnitude is prudent when protecting an overall fund valued at over $10 billion dollars."
More details are in the Pittsburgh Post-Gazette, and the Daily Kos. The gist - Mark D. Lay claims that his firm was running a hedge of Ohio's $10 billion bond portfolio. In Sept 2003, with the ten year Treasury ranging from 4.50% to 4.16%, Ohio was worried about rising interest rates (they were catching up to Krugman!). Last fall when the fund blew up, the ten year was around 4.20% to 4.03%. Using Fed Funds as a proxy for the repo rate, and seeing a range from 1% to 1.5% over the year in question, we will note that funding costs alone on a short position could exceed 2.5%.
So. might MDL Capital have lost $215 million by mimicking a short position in $10 billion of Treasuries? Yes. Was that what they contracted to do? Evidently, the state is saying no, MDL Capital is saying yes, and Paul Krugman is punting.
Too bad - throwing the Sinister Wall Streeters under the bus when deals go sour is a time honored tactic for municipal financiers across America, and that may be exactly what is happening in Ohio. If The Earnest Prof had made it to Update 2 when he read the Daily Kos, he might have delivered something stronger than his silly side-step.
MORE: More on Orange County and how County Treasurer Robert Citron was a genius until it all blew up, at which point he retroactively became a passive and compliant sheep led by unscrupulous Wall Streeters.
UPDATE: Let's bring RedState into the mix.