You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

The Car Czar's Recall

I don't know whether the car czar's tenure was the shortest of any appointee in the Obama administration. But it is certainly the most important resignation. It made the front page of today's Wall Street Journal and New York Times, and my guess is that you will be seeing the name of Steven Rattner in the news columns for a long time to come.  

Rattner was offered and took a burdensome and important job in the government. And maybe he assumes that it is now over. I doubt it, however, and almost everybody else doubts it, too. Now, he could have taken an ambassadorship and, given the huge amount of money he contributed and raised for the Obama campaign, he might have gone to the Court of St. James in the tradition of Ronald Reagan's posting of Walter Annenberg to London. But, although seen on Park Avenue as a golden boy for many years, Steve had a sense of gravitas about himself which made spending time in Detroit appear attractive. That's a plus for Rattner.

But he also had a tremendous sense of gravitas about his investment business which, alas, a very serious attorney general cannot ignore. Rattner seems to have cut corners and padded commission checks in his Quadrangle Group's stampede to get investment money to manage. It was a bad crowd with which Rattner got involved, a crowd that--as Edward Jay Epstein writes--sold access to the New York State Common Retirement Fund. And a Los Angeles Pension Fund. Also a New York City pension fund. Plus a New Mexico pension fund.

So here's Ed Epstein's take on the details, smarmy details:  

The Car Czar's Recall

By Edward Jay Epstein


On March 29th 2009, Steven Rattner, the co-chairman of President Obama's auto task force, met with Rick Wagoner, the chairman of General Motors, in Rattner's new office in the Treasury Department, and in one of the most dramatic confrontations of the Obama administration in its first 100 days told him he would have to resign because he had lost the confidence of the Obama Administration. Wagoner, a 30-year veteran of GM,  fell on his sword. Now, Less than 4 month after disposing of Wagoner, Rattner has announced he himself is resigning.  

He now has to deal with the investigation by New York Attorney General Andrew Cuomo into the role that bribes played in inducing public officials to invest pension funds in private equity deals. What brought Rattner, a former golden boy of investment banking,  into Cuomo's investigative cross-hairs was deals he made when he headed Quadrangle Group, which specialized in raising money for leveraged buy-outs in the communications industry. The largest source of money for such buy-out funds was pension funds, which collectively manage about $2.3 trillion, and so he actively recruited money from state and municipal pension funds.  To get business. he had employed   Henry "Hank" Morris, a top advisor for then-New York State Comptroller Alan Hevesi to act as a placement agent for Quadrangle. In March 2009, Morris was arrested and charged in a 123-count criminal indictment for, among other things, "enterprise corruption" and "money laundering"  in regard to selling access to the New York State Common Retirement Fund. Quadrangle had received  $100 million from this pension fund just after paying Morris's firm a placement fee. It also paid Morris for his help in getting money from the Los Angeles pension fund , the New York City pension fund and the New Mexico pension fund.

It is perfectly legal in these states for a private equity fund to pay fees to placement agents for this service so long as it discloses the, Such disclosures are necessary to identify possible conflicts of interest. Rattner presumably was familiar with these requirements since he had himself worked as a placement agent while at Lazard. However, in garnering investments from the Los Angeles and New York City pension funds, Rattner's firm reportedly failed to disclose the placement fees that went to Hank Morris. In the case of the Los Angeles pension fund, Quadrangle identified two other placement agents it used, but not Morris' firm. One of the key issues  New York's  attorney general is now  investigating is whether the New York City Pension Fund was"intentionally misled or deceived "in 2005  by Quadrangle's  failure to disclose paying finder's fees to Hank Morris's firm.

Further increasing Rattner's exposure to the bribery scandal, the New York  attorney general's office  is also investigating whether Quadrangle might have evaded  crucial reporting requirements with New York State Common Retirement Fund in 2005 by having one its private equity holdings buy DVD rights to a movie that was produced by the brother of David Loglisci, New York's deputy comptroller.  Loglisci, a close associate of Morris, was also indicted with Morris on corruption charges. The low budget movie entitled "Chooch,"  an Italian expression for a bumbling idiot, had failed at the box-office, taking in less than $40,000, before Quadrangle's private equity holding bought the DVD rights  for $88,000. According to a studio executive who deal with  DVD distribution, the DVD rights to a movie like "Chooch" would be worth "zilch" since it would "cost more to manufacture the DVDs than a distributer could realistically hope to make from their sales." So was there another benefit to investing in Chooch? About three weeks after buying these DVD rights, Quadrangle got its $100 million from the New York State Common Retirement Fund for which Loglisci was the top investment officer. Adding to the intrigue, an executive at the CarlyleRiverstone fund, a joint venture of the Carlyle Group, which also used Morris' firm to get money from the New York State pension fund, made a similar investment in Loglisci's "Chooch." Among the charges against Loglisci (as well as Morris) is "money laundering."

To be sure, Rattner himself may  be innocent of any wrong doing in making  payments to Morris' placement agent company and having a subsidiary invest in Loglisci's "Chooch" venture. But with both the SEC and New York Attorney General Andrew Cuomo investigating these charges, and Morris and Loglisci due to go on trial in New York, Rattner may have unfinished business to settle with Cuomo, and reportedly hired his own lawyer. So ends the brief tenure of Obama's auto czar.

http://www.edwardjayepstein.com/