My favorite Warren Buffett saying is, "you don't know who's been swimming naked until the tide goes out."

Well, the Wall Street tide has gone out, and it appears that lots of people were swimming naked in the pension business.

What started as an investigation by the New York attorney general, Andrew M. Cuomo, into the state comptroller’s office — where Mr. Cuomo says favors were being exchanged for contracts to invest pension money — has mushroomed into a broad look at more than 100 firms by attorneys general in at least 30 other states.

A survey of practices across the country portrays a far-reaching web of friends and favored associates: political contributors, campaign strategists, lobbyists, relatives, brokers and others, capitalizing on relationships and paying favors. These influential figures can determine how pension funds are invested, as well as state university endowments, municipal bond proceeds, tobacco settlement funds, hurricane insurance pools, prepaid tuition programs and other giant blocks of public money.

“What has developed is a corrupt system, where Wall Street, various fiduciaries, politicians and corporate managers are draining America’s savings,” said Frederick S. Rowe, a hedge fund manager who serves on the Texas Pension Review Board, an oversight body.
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Investing public money on the basis of political considerations, rather than merit, heightens the risk of waste and loss, an urgent issue given the market losses of the last year. In 2007 the Government Accountability Office studied a group of pension funds known to be advised by consultants with conflicts of interest, and found their average yearly investment returns were 1.3 percent lower than those of other pension funds.

That may sound small, but it can severely erode a fund over time because the losses multiply.

“If compound interest is the eighth wonder of the world, then it’s the plague of all time when it’s working against you,” Mr. Rowe said.

Mr. Cuomo has said it is too early to estimate the size of any losses caused by the improprieties in New York.

This story will be developing all year long.