Larry Summers continues to refuse comment on his disastrous management of Harvard University’s finances, according to a lengthy Bloomberg article out Friday (aptly titled “Harvard swaps are so toxic even Summers won’t explain”). The former Harvard president’s failed bets on interest rates led to a historic liquidity crisis last fall that forced the school to take on an additional $2.5 billion in debt and implement campus-wide austerity measures.* Kudos to the Bloomberg reporters for continuing to chase this story (which carries national implications given Summers’s role in the White House).
One aspect of the story that has yet to break: Harvard’s leadership, including key members of its financial team, were severely conflicted by official roles with several of the university’s counterparties on the swaps.
The Bloomberg story notes that Harvard’s biggest counterparty on the swaps was JP Morgan, and mentions that the bank’s CEO, Jamie Dimon, is a graduate of Harvard Business School. New York Magazine has a light-hearted take on his treatment of Harvard, as debt collector and alum. But both articles fail to mention that Dimon is also a trustee of Harvard Business School (according to his March 2009 JP Morgan bio). So Dimon held leadership positions in two institutions which were involved in a high-stakes negotiation that resulted in a massive payout for one of those institutions.
But Dimon’s apparent conflict pales in comparison to the conflicts surrounding Goldman Sachs, another large counterparty to Harvard on Summers’s failed swaps. As a trustee of HBS, Dimon wouldn’t necessarily have his hands directly in Harvard’s finances. Goldman Sachs executives did, however.
No press outlet has yet reported an unsettling fact: Robert Kaplan, the interim head of Harvard Management Company from November 2007 to June 2008, has been a senior director at Goldman Sachs since 2006. He continues to serve on the board of HMC, and was in this position of oversight when Harvard entered negotiations with its counterparties. He is currently a professor at Harvard Business School, as well. Kaplan replaced former HMC chief Mohamed El-Erian, who was reportedly “having a heart attack” over investment decisions made by Summers.
Furthermore, Harvard’s first-ever executive vice president, Edward Forst, was Goldman’s head of investment management before joining Harvard in September 2008, just weeks before the crisis hit. He was also an HMC board member. Forst re-joined Goldman as a “senior strategy executive” after less than a year at Harvard, but continues to serve on the university’s newly-formed financial management committee.
Forst played a prominent role in managing Harvard’s response to the financial crisis, according to a Harvard Magazine article on his departure:
The announcement [of Forst's departure] comes after Forst had played an important role in leading Harvard’s response to the international credit-market crisis and recession—for example, the planning that culminated in the University placing $2.5 billion in new debt offerings last December, to reduce liquidity risk and protect the institution’s financial flexibility in straitened circumstances; and directing efforts to consolidate operations and trim administrative expenses.
Did Forst and Kaplan recuse themselves from negotiations with Goldman Sachs? If not, they were negotiating on behalf of Harvard with a counterparty in which they likely had substantial financial stakes. The potential conflicts of interest here are astounding.
Perhaps that’s why these negotiations turned out so badly for Harvard. The Bloomberg article reports that Dartmouth had similar swaps, but “didn’t post collateral on their swaps because their investment banks agreed to waive the requirement to win the business, according to a person familiar with the contracts.” It seems Kaplan, Forst, et al saw no need to use this kind of bargaining chip against their lifelong employer.
Harvard also exited the swaps at exactly the wrong time — at the moment when it was most expensive to do so. Meaning that the timing was perfect for JP Morgan, Goldman Sachs, and the other counterparties, which were in the midst of a historic financial crisis and desperately needed the cash.
Even Summers was potentially conflicted during his tenure as president. He consulted for a hedge fund, Taconic Capital, from 2004 to 2006, while he was serving as president and making aggressive, misguided investment decisions in that role. Taconic is run by two former Goldman Sachs partners, Frank Brosens and Ken Brody. Harvard Corporation member and former Goldman partner Robert Rubin is also an adviser to Taconic.
Summers’s consulting relationship was mentioned in passing in a New York Times article. Despite concerns from prominent Harvard alumni, the university has released no information on the nature of Summers’s work for Taconic, or his compensation as a consultant there. Did Harvard invest with Taconic? Was Summers abiding by the university’s own conflict of interest policy?
There are many unanswered questions here. Other news organizations would do well to join Bloomberg in devoting significant resources to this story. After all, there is big upside in being a counterparty to Harvard and Summers.
* Full disclosure: I went to college there.
Update: My original post stated that Forst still serves on HMC’s board; he continues to serve on Harvard’s newly-formed Financial Management Committee, but resigned HMC’s board when he left the university. The above post has been updated to reflect this correction.