Monday, November 4, 2013

Financial News from All Over Harvard

A few news items of interest, only vaguely related to each other, but I'll draw them together under that rubric!

First, Robert Rubin is leaving the Harvard Corporation after 12 years. Rubin is credited with having reassured skittish members of the presidential search committee about Summers' suitability to be Harvard president. As Richard Bradley tells the story in Harvard Rules,
Rubin called three members of the search committee who had particular doubts …. It was true, Rubin admitted, that Summers had once had what Rubin would call "a rough edges" issue. But he'd mellowed, Rubin insisted. This was a man who'd successfully negotiated with congressional leaders and foreign treasurers, who'd survived and prospered for a decade in a viciously partisan Washington environment. His temper existed more in legend than in reality. Rubin's seal of approval worked. "Rubin made us confident that we weren't getting a bull," one member of the committee later said. 
A year after Summers became president, lo and behold, Rubin was named to the board. He has been quite invisible–not that visibility is typical of Fellows of Harvard College. But when other Fellows (Robert Reischauer, for example, who is also stepping down) communicated and met with faculty during the Summers troubles, the one most responsible for his appointment was nowhere to be found. Similarly, when the Harvard endowment tanked in the great financial meltdown, the sometime chair of Citigroup had nothing to say.

On December 12, 2009, Fred Abernathy and I vented our frustration in the Boston Globe.
IF AN ORDINARY corporation had the kind of fiscal year Harvard University just had, some of its directors would be gone. Long-term investments down $11 billion; another $1.8 billion lost by top management speculating with cash accounts; another half-billion gone in an untimely exit from a debt rate gambit. The institution left so illiquid that it was forced to sell assets and issue bonds at the worst possible time, just to pay the bills. A publicly held company would have experienced a shareholder rebellion - especially after the Globe reported that the chief investment officer had repeatedly warned the president about the risks he was taking with the institution's cash. …The Harvard Corporation is a dangerous anachronism. It failed its most basic fiduciary and moral responsibilities. Some of its members should resign. But the Corporation's problems are also structural. It is too small, too closed, and too secretive to be intensely self-critical, as any responsible board must be. Until the board can be restructured, the fellows should voluntarily share their power with the overseers. And Harvard should reveal the risks of its business plans, as would be required if it were a publicly held corporation. That exercise in transparency would surely serve Harvard well. 
Two days later, Jamie Houghton announced his resignation–an accident of timing about which I feel a bit badly, since of course it was of Rubin that Fred and I were mostly thinking. Almost at the same time as Houghton's resignation was announced, a structural review of the Corporation was announced. It ended a year later with a set of measures aimed at correcting some the things Fred and I had pointed out. There would be term limits. The board would be enlarged.

Opinions differ about whether these changes are having the right effect. Some people I respect tell me that the main effect of enlarging the board has been to make responsibility more diffuse. But I can't help thinking that having more voices around the table must reduce the dominance of any one of them (as well as compensating for systematic absenteeism–which I gather has been a not unheard-of problem).

And I also can't help thinking that the other recommendation Fred and I made would also serve Harvard well: that Harvard should disclose the risks of its business plans, exactly as a publicly held corporation has to do. After all, if it is going to collect $6.5 billion–and I hope it succeeds in doing that–why shouldn't its annual report disclose to donors, and to the public by whose benevolence those donations are untaxed, the ways in which it is running the risk of losing lots of money?

Who will replace Rubin and Reischauer? I am glad that Bill Lee will become Senior Fellow–he has the energy and the open ears to engage the issues and not wait for them to overwhelm the board. My hope for the vacancies would be someone with some sense of the civic role of the university in society. (And I don't mean another former Treasury secretary.) It will be hard to resist the pull of money as a qualifier, what with Harvard being in the middle of a campaign and all, but the board that oversaw the collapse of the endowment was not short on allegedly smart investment types anyway.

Which brings me to news item #2: The grim report about Harvard's investment performance over the past few years. Fortune has a searing article entitled "Harvard: Great School, Lousy Investor." The lede:
Harvard University has the nation's largest college or university endowment, valued at $32.7 billion through the end of June. It also has worse investment returns than any of its peers over the past five years, according to a Fortune analysis. 
The article acknowledges some of the special challenges in managing the largest university endowment, but specifically counters each excuse for the poor performance. Most importantly, the article notes with arched eyebrow the omission from Harvard's report of the industry-standard 5-year investment return (presenting instead the returns over 1, 3, 10, and 20 years). Harvard's performance over 5 years is 1.7%, the only 5-year performance figure less than 2% among the 25 largest college and university endowments. Knowledgeable alums have written to me in some annoyance about this exercise in opacity.

To be sure, Jane Mendillo, the HMC head, entered her job at the worst possible moment. But I can't help wondering if everything that has happened since whatever happened to Jack Meyer has not been a downward slide. (I never bought into the indignation over the compensation of the high performing HMC managers.)

And finally, item #3: SAC Capital Agrees to Plead Guilty to Insider Trading. That's a Harvard story? Well, yes: Harvard grad Noah Freeman, fired from SAC for poor performance, was the first guy who went down in the SEC probe, and he wore a wire so his best buddy would go down with him. I have always wondered what Ethical Reasoning course Freeman got credit for as part of his undergraduate requirements. I remember him well, and I wonder if Harvard failed him somehow. In those days he was a progressive, lecturing the deans on Harvard's capitalist evils. He protested when Shell Oil came to Harvard to recruit, explaining, "[One of my goals was to] make any Harvard students who are interested in working for Shell think twice about working for a company whose hands are so bloody in so many ways." Noah also was in the vanguard of the fight to keep Harvard from dirtying its hands by serving Pepsi in the dining halls:
Noah R. Freeman'98, a member of the Progressive Undergraduate Council Coalition, an organization within the Undergraduate Council, said he believes PepsiCo has an obligation to deal with human rights issues. "The way the government is set up, foreign investment profits only the military government and in no way profits the people of Burma," Freeman said. He also stressed that a fundamental problem with international business was that it places profit before ethics [my emphasis].
Ah, the irony. Freeman once apologized to me for acting like a jerk, but it doesn't seem he really learned anything. He got his insider tips from Taiwan and that cost him big time. Could Harvard have done anything to have made this tragedy less likely, a personal tragedy for Freeman, a tragedy of lost opportunity for someone else, and a tragedy for the people he swindled? Isn't this question a lot more significant than trying to figure out if making thousands of students write out an honor pledge every term would prevent the next Gov 1310 fiasco?

One other thought. It is unimaginable that the Shleifer mess, had it come up today, would be let go with a civil suit against the professor and the university. The Feds have gotten tougher and society has gotten less patient. I'll bet that in today's atmosphere, both Shleifer and Harvard would have to deal with criminal charges, and it remains a puzzle why that did not happen at the time.

P.S. Nice story in the Crimson a few days ago about SEAS growth. I wish it had said a bit less about the problems we were facing and a bit more about how hard we worked to create them! A lot of people, both in CS and elsewhere in SEAS, have worked to create an atmosphere that the applied sciences are not only exciting but welcoming, and students have figured it out. I have just come from a packed sophomore advising fair and it looks like the boom is continuing.

PPS. added 11/6: If you are new to the Rubin-Summers-Shleifer tale, I summarized it in the Huffington Post a few years ago.


  1. Well, Moral Reasoning is an easy target. But teaching people how to think through moral decisions isn't the same as giving them the commitment to make moral decisions.

    So no, I don't think Harvard failed Freeman, or any of the other alums who've behaved badly after leaving Cambridge. Colleges can open minds. They can't save souls.

    1. That is a plausible defense. But we actually know that studying a standard freshman economics course makes students more selfish and less altruistic. So it seems to me if we can affect students' morality for the worse, we can probably affect it for the better.

    2. Well, if you'll forgive the belated reply, I'll make the Philip Sidney claim:

      Philosophy teaches what virtue is, and Moral Reasoning class is designed to teach students to define virtue. But Sidney claims that philosophy does not actually stir people *toward* virtue, and that other disciplines (he singles out literature, for his own reasons), are needed to impel people's hearts toward goodness.

      A standard freshman economics class typically builds in a rhetorical appeal: "pursuit of self-interest leads to the greater aggregrate good." That is a side effect of teaching marginal analysis, but it is an attempt to shift the student's moral world view.

      Moral Reasoning begins with the presumption that students wish to be good, which may defeat the purpose.

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