Roger points to one of the many misguided provisions that wormed its way into the Dodd-Frank financial-reform law, which will force firms under the purview of the law’s agencies to carry out a range of reporting and recruiting efforts to demonstrate adequate commitment to diversity. It’s not clear how such a provision is relevant to promoting a stable, prosperous financial sector and preventing the next financial crisis, but these bizarre priorities are not that surprising. For years, public pension funds have been using their gigantic financial clout, as the countries’ largest institutional investors, to try to enforce certain diversity standards in their selection of investment managers, at unavoidable but unclear costs to their beneficiaries (public employees) and the funds’ backstop (taxpayers).

They do so most overtly via “emerging managers” programs: Public pension funds, which control a huge amount of investable capital in this country, almost always hire investment firms to invest their funds in various asset classes (some do some management in-house), and when picking them, many of them, especially because liberal unions exert control over the process, either place an emphasis or quota on picking “emerging managers” to invest some of their money. “Emerging manager” technically denotes firms that are relatively new and have less assets under management than others, which some believe has some merit as an investment strategy, though such firms tend to charge higher-than-standard fees. But the term is often informally qualified to emphasize or require that they should be minority- or women-owned firms (see, for example, this document from North Carolina’s pension system), and sometimes is just entirely redefined by state law (like in Illinois) to mean managers that are majority-owned by women, minorities, or disabled persons.

Some unions and governments may be comfortable acknowledging the political, ideological motivation behind such efforts, but the fund’s overseers have to attempt to justify it as a sound investment strategy, leading them to make statements such as this one from the CEO of CalPERS, America’s largest institutional investor (which was under fire for being insufficiently committed to the emerging-manager strategy): “We’re in the state of California – the nation’s largest state, the nation’s most diverse state, ethnically and culturally. . . . It is in our economic interest to have as wide a pool of talent as possible available to us so that we can achieve our investment target.”

In some sense, this isn’t as bad as making certain kinds of diversity efforts a requirement of being overseen by the FDIC, the CFPB, etc., since no private firm has a right to win a public-pension investment, but in another, it’s much worse: The people running public-pension funds have a fiduciary responsibility to the plan’s beneficiaries — the public employees — to act solely in their financial interests of their clients and to carry out their investment duties prudently and responsibly. There is no reason to believe, of course, that picking a manager based on the color of his skin comports with those aims. Further, while managers don’t quite have the same legal responsibility here, taxpayers also have a financial stake in the performance of public pension funds — if they underperform their projected returns, as many have done, taxpayers owe the difference, and therefore hold a significant interest in seeing the best management of the funds possible. While there are fundamental problems with our public pension systems, mismanagement and exceptionally poor performance has played a role, too: Detroit, for instance, probably lost millions of dollars in pension investments because of poorly conceived, corrupt, or politically motivated investments, like one real-estate deal touted by former mayor Kwame Kilpatrick. Pension funds won’t always meet their expected returns and financial firms won’t always be well-managed and meritocratic in their hiring, but the dilution of reasonable, longstanding norms and standards by “diversity” priorities certainly won’t help.