When Will Harvard Wake Up?
Posted on April 28th, 2010 in Uncategorized | 13 Comments »
Following up on a Crimson report (excellent catch, Crimson), the Globe reports that Goldman Sachs knew it was screwing Harvard.
A Goldman Sachs e-mail from February 2007 acknowledged that a large trade in complex mortgage-related securities would be “good for us’’ but bad for several customers, including Harvard University.
…In a Feb. 14, 2007, message detailing the decline of high-risk subprime mortgages, Goldman executive Daniel Sparks wrote to colleagues: “That is good for us position-wise, bad for accounts who wrote that protection,’’ citing Harvard and three others.
The plot thickens.
Couple things.
One, Goldman Sachs didn’t hesitate to screw a counterparty on whose board sat one of its former partners (not to mention the former US Treasury secretary).
Two, that partner—Bob Rubin, of course—either wasn’t in the loop on this deal or didn’t understand it or was just wrong.
From his steadfast support of Larry Summers, to his part in negotiating Summers’ obscene golden parachute, to fiscal irresponsibility such as the above, to his demonstrated lack of interest in the work of the Corporation, Rubin has been a disastrous member of the Harvard board. (That’s not even mentioning his disastrous tenure at Citigroup and his absurd nine-figure compensation.)
So why is he still on it?
13 Responses
4/28/2010 9:42 am
Somebody in the Spitzer post asks a question to which this is the answer:
http://www.thecrimson.com/article/2009/9/1/ex-vp-forst-returns-to-goldman-edward/
Sam?
4/28/2010 9:58 am
Rubin is still on the Harvard Corp because there is no mechanism for removing him. He’ll be there for life. Get used to it.
4/28/2010 10:22 am
Thanks for bringing this topic forward, Rich. I hope we’ll see a detailed and informative discussion of it.
4/28/2010 11:15 am
Anon 9:58, I had understood that any Corporation member could be removed by majority vote of the Corporation (with consent of the Overseers). Is that not the case?
Obviously, such a vote is unlikely to occur, but that’s not the same as there being no mechanism.
4/28/2010 11:28 am
A few things.
Richard T. I don’t think Forst had anything to do with this. According to the article, the trade was put on in 2007 and he didn’t come to Harvard until the summer of 2008. I’ve said this before on the blog: the fact that he came and went (within effectively nine months) and didn’t keep what I presume was his promise to stay for a much longer period, screwed things up badly. But that’s over and done with and has nothing to do with this.
Richard B,
I think your statement is not the correct one to make i.e “One, Goldman Sachs didn’t hesitate to screw a counterparty on whose board sat one of its former partners (not to mention the former US Treasury secretary).” I would doubt if Bob Rubin knew anything about this. That’s not how HMC and The Corporation operate.
This is not the Paulson/GS deal where it was clear (a friend sent me all the public SEC memoranda, a huge huge pdf of 173 exhibits, most of them many pages long, with some great emails… and unlike what Senator Levin was (falsely) accused of, I didn’t take anything out of context), that on that deal a lot more should have been disclosed. As an aside, where was Goldman’s board in what I presume to be its approval of not disclosing the Wells notice last summer. Oh, I know… could it be that Ruth Simmons didn’t think it was material; yes, that Ruth Simmons in Providence.
No, something such as this is different. HMC is a very sophisticated investor. HMC obviously thought that either this was a great way to play the strength in the housing market going forward or it was used as a hedge in some way against some other investment. If it were the first, and it most probably was, then clearly HMC was wrong in its thought and lost money, perhaps a lot of money.
El -Erian was in charge at the time of the transaction (assuming it was done early in 2007; if it were done later, the acting head of HMC was Rob Kaplan, a professor at HBS and former Vice-Chair of guess where) and so this was El-Erian’s blunder, among many others. Then, of course, he merely walked away and went back to Pimco. Why El-Erian was hired was beyond me. Clearly a very smart guy, but he had very limited investment experience and from first hand knowledge, I know he had scant knowledge of equities.
It is interesting to note that at about the time Larry left (in mid 2006) a few more new people were put on the HMC board, including Jacob Goldfield, a graduate of The College (’81?), and a former trader at guess where.
And then of course you have Lloyd Blankfein ’75. Harry, did you teach all these guys
No, I don’t think my friend Bob Rubin had anything to do with this (nor did Ed Forst), but the ties with Goldman are clearly close and it is amusing to contemplate if it weren’t so sad.
As another aside, the hearings yesterday were a joke. The Senators can’t even ask the pertinent questions. They don’t understand the terminology. They have no idea about what happened and how to prevent taxpayer dollars from being used again to bail out those entities that took risk…speaking of which, your taxpayer dollars are a big source of IMF dollars that will be (ineffectually) used to bail out Greece.
It is pathetic that this is The United States Senate. Claire McCaskill should be ashamed of herself, as should her staff.
Where are you Henry Clay and Daniel Webster?
I guess it’s full disclosure time for those who want to jump on me. My wife, Ann Berman, was the CFO of Harvard from January 2003 to April 1, 2006. She had given a commitment to President Summers to stay for three years and no more, and she kept that commitment.
4/28/2010 11:34 am
The current issue of Harvard Magazine contains thoughtful advice to the Corporation in a comment titled “Self Improvement”:
http://harvardmagazine.com/2010/05/self-improvement
Replacing Rubin might come under the heading of what in this comment was called, “organic alterations in [the Corporation’s] membership.”
4/28/2010 11:45 am
Thanks,Sam, and you would know better on Forst. Larry’s getting $225,5000 for a couple of lectures at you know where (and lots of other places) in 2008 is also unrelated I guess, though it continues to trouble.
I too, just from reading The Big Short and a few other things, thought the Senate questions were pretty feeble, not just the Rep. ones, which were just for the home crowd. Should have been more on Paulson, right?
I take it any aides who get any sort of expertise in these things head pretty quickly for K Street. Even Barney Frank’s:
http://www.huffingtonpost.com/2010/04/01/barney-frank-permanently_n_521740.html
4/28/2010 12:10 pm
Just to be clear, Sam, you’re saying that Goldman Sachs didn’t screw Harvard. Rather, Harvard knew what it was getting into.
4/28/2010 1:00 pm
Feste,
I can’t be absolutely sure what happened in this case. However, a transaction such as this one, with a very sophisticated party on one side (a party which had at one time close to 100 billion in derivatives footnoted on its balance sheet) wasn’t screwed by Goldman. Harvard knew what it was getting into. How could it not?
From what has been reported in The Crimson, and I’ll try to look at the SEC material in the next day or so, Harvard decided it wanted to go one way with regard to MBSs and Goldman accommodated them. It probably was a losing proposition for Harvard.
Assuming there are no other things we don’t know about (i.e. non disclosure of important information), there is nothing wrong with a transaction such as this one except for one thing and that one thing has nothing to do with Harvard.
The real problem is what Michael Lewis so well pointed out in The Big Short. What was being created in many instances was nothing that had economic value (i.e. synthetic “stuff”).
Why was this allowed and if it were allowed, why was it not regulated? Why did taxpayers have to take all the risk (i.e. bailouts) on something that had no economic value? Why were I banks and banks paying out tremendous bonuses on transactions that later went sour? Why? Why is it still happening?
Hopefully, the financial reform bill will see that if this is allowed to continue, it will have to be done in entities that are not backed by the government.
4/28/2010 4:09 pm
Thanks for elaborating, Sam.
In answer to the questions posed in your second to last paragraph, William Black in a recent interview cited the denial of the existence of fraud in neoclassical economics, and described the Wall Street players as “sociopaths”:
http://www.pbs.org/moyers/journal/04232010/transcript4.html
I think there is merit in Black’s interpretation.
4/29/2010 7:26 am
Finally bought The Big Short on Monday, finished it last night. Very very highly recommended. Found it 30% off at Barnes&Noble.
At the end he likens derivatives to deviled eggs. Brilliant!
It constitutes among many other things a nice reminder that in cultures adrift being right earns you much more resentment that anything else — even AFTER you’re vindicated. Would that universities were a bulwark against this syndrome, as they should be.
SE
4/29/2010 7:48 am
Jim,
Glad you enjoyed the book.
Your last paragraph is spot on!
Here is a very good C-Span interview with Lewis. http://www.c-spanvideo.org/program/292621-1
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