Josh Lerner


On his book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do about It

Cover Interview of October 11, 2009

A close-up

It is hard to choose just one from the plentitude of examples—from all corners of the world—for how not to promote entrepreneurship.

But here is a striking case.

In 1970s and 1980s, the state legislature sought to boost economic development in the State of Kansas.  Appropriating funds for this would have meant higher taxes and angry voters.  So they simply mandated that the state’s pension for state employees loan money to local businesses and to Kansas real estate developers.  And they somehow forgot to ask the public retirees if this was how they wanted their savings to be invested.  By the mid-1980s, a full twenty percent of the multi-billion dollar pension had been earmarked for these home-grown investments.

Rather than undertaking the investments themselves, the pension recruited two local investment firms for the task.  By the mid-1980s, frustrated at the slow investment pace, the State changed the instructions to the investment groups.  Instead of backing seasoned and sound firms, they were now ordered to include new or expanding Kansas businesses that were unable to get credit elsewhere.  The investment firms, who collected a fee on each transaction and had little supervision, began putting money to work much more quickly.

And they made some high-risk choices indeed.  $14 million went to a manufacturer of microcomputer memories that never saw a profit, $8 million into a steel fabricating plant that would soon go belly-up, $6.5 million to a start-up that was going to develop a revolutionary hydrogen-based energy source, and so forth.

The most memorable investment was doubtless $65 million in loans to a local savings and loans institution which was seized by regulators as insolvent soon thereafter.  Its loan portfolio, subsequent investigations revealed, included an uncompleted Hungarian film about a man-eating bear on chase of a rock-and-roll band—and a $40 million loan to the pension fund’s chairman!

In all, the fund ended up losing the state’s pensioners and taxpayers $265 million, or about seven percent of the pension’s assets at the time.  After 13 years of litigation and $28 million in legal fees, the state recovered $41 million of those losses.  The chairman ended up being ordered to perform 200 hours of community service.