Less than a year ago, we were talking about a scandal at Putnam Investments — and many were calling it the actions of “a few bad apples.” Now we are talking about scandal at it’s parent company, Marsh & McClennan. Another “few bad apples”? At what point do we stop talking about bad apples, and instead wonder if the whole tree isn’t rotten? According to at least one analyst, right now: “‘You’ve got to rework the culture of Marsh,” said James Huguet, who manages $1.4 billion at Great Companies LLC and has been selling Marsh shares.”
Here’s the short version of the story. New York Attorney General and future Gubernatorial candidate Eliot Spitzer has launched a probe into a dubious insurance industry practice of “contingent commissions or placement service agreements,” or “fees… over and above ordinary commissions, that brokers receive from insurance companies, mainly for steering volume business the insurer’s way.” In any other industry, we would probably shorten this description to “kickbacks.” As if that weren’t enough, there is also the possibility of nepotistic insider action, as the CEO of MMC is the son of insurance giant AIC’s CEO.
As if this isn’t bad enough, there is the possibility that MMC may have outright fabricated inflated insurance bids to give the illusion of competition, and steer clients to “cheaper” partnering companies.
The fees in question total over a billion dollars during 2003 and the first half of 2004. My inner cynic reminds you that this is $1 Billion in overcharged premiums paid by the public. With this much money at stake, it is no surprise that some investors aren’t sticking around to see who wins.
The Putnam executive who got tossed overboard a year ago has some interesting comments on the whole thing, with what he calls “the luxury of perspective.” Or, maybe you’d like commentary from a guy who has known both Spitzer and the Financial Services industry for decades.
I’m no New Yorker, but I’d vote for Eliot given the chance.