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Larry's Conflicts

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Would Larry Summers know a conflict of interest if he tripped over it? It's an important question, given that Summers is widely reported to be a finalist to be head of the Federal Reserve Bank. Summers knows pretty much everyone in the financial world. How has he handled past situations in which his actions affected the fortunes of his friends, or when his sphere of personal influence overlapped with his professional dispassion?

Summers certainly knows what Harvard means by a financial conflict of interest, though it is hard to be sure that Summers still thinks his primary commitment is to be a University Professor, Harvard's highest academic rank. The Wall Street Journal reports that he consults not only for hedge fund DE Shaw but for venture-capital firm Andreessen Horowitz, asset-management and advisory firm Alliance Partners, stock-exchange operator Nasdaq OMX Group Inc., and for financial services firm Citigroup. He also has a healthy income from speaking -- more than $100,000 earlier this year, for example, for a single speech to a conference organized by Drobny Global Advisors.

That is a busy schedule for a full-time faculty member who, like other professors, is allowed only a day a week for consulting -- and Summers also chairs the advisory board of the Minerva Project, an online university startup, and holds an administrative role as Director of the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.

This is the same Lawrence Summers who told Professor Cornel West to stop spending so much time on his outside activities and get back to his scholarship--because more was expected of a University Professor.

Harvard's definition of a financial conflict of interest goes like this (pdf).

An individual financial conflict of interest is a set of circumstances that reasonable observers would believe creates an undue risk that an individual's judgment or actions regarding a primary interest of the University will be inappropriately influenced by a secondary financial interest.

Summers was listed last year as teaching a course, entitled "Economic Policy," which "analyzes major issues in American economic policy including taxation, Social Security, health care reform, budget policy, monetary and fiscal policy, and exchange rate management." A reasonable observer would believe that there is a pretty high risk that Summers's financial interests might influence his judgment about the things he was teaching.

Now the University may judge certain conflicts to be unproblematic, controllable, or advantageous to the University's interests. After all, computer scientists can learn a lot about computation from technology companies, and economists can learn about the economy from financial institutions.

In Summers's case, approvals, had they been sought, would likely have been easy to get at the level of the Harvard Corporation, the University's principal governing board. After all, while Summers was President of the University, he engineered the election of Robert Rubin to the Corporation, thus returning the favor Rubin did for Summers when he persuaded hesitant members of the Corporation during the presidential search that Summers's reported "rough edges" were ancient history. And the Corporation is flexible about its own conflicts -- it was unproblematic, for example, for Rubin to serve on the Corporation at the same time as Harvard was investing in a fund he advised -- Farallon -- and another -- Old Lane -- which Rubin's Citigroup acquired.

The network of influence of Wall Street over government, extending out from Rubin into the Treasury Department and the White House, has been well documented. Summers himself accepted $135,000 for a one-day visit to Goldman Sachs only a few months before he became Obama's chief economic advisor -- something one commentator described as "basically an advanced bribe."

All this speaks to Summers's impoverished sense of appropriate relations with the financial sector. The financial entanglements compromise his professional credibility -- whether as a professor whose primary commitment is to the pursuit of the truth, not the pursuit of money, or as a government official setting policies to advance the public interest, not the financial condition of friendly parties.

There is plenty of evidence that Summers has an ethical blind spot about the influence of money on human behavior -- which is ironic, given that human response to financial incentives lies at the heart of economic theory. Perhaps Summers didn't come into the Harvard presidency understanding that human behavior, even his own, can be influenced by the unconscious. But as president he certainly became familiar with the work of Mahzarin Banaji on "hidden bias," in the aftermath of his widely reported remarks on women in science. In fact, Summers became a convert to Banaji's thesis, and even recommended that others take Banaji's Implicit Association Test to discover for themselves the unconscious influences on their apparently rational decision-making.

In an article about how well Summers had done for himself financially since leaving the Harvard presidency, the New York Times mentioned in passing that Summers had consulted for a hedge fund even while he was Harvard's president. The article notes that Summers made $5.2 million from D.E. Shaw during one year after his presidency ended. (The Washington Post reports that his Harvard professorial salary was $586,996 that year.) As Obama's chief economic advisor, the Times reports,

... Mr. Summers cultivated a small circle of financial professionals -- particularly hedge fund managers -- to serve as an informal brain trust. ... Among these insiders are Kenneth D. Brody and Frank P. Brosens, the founding partners of another hedge fund, Taconic Capital Advisors, for whom Mr. Summers did consulting work from 2004 to 2006.

Summers was Harvard's president from July 1, 2001 until June 30, 2006. During that time he was also a member of the board of the Harvard Management Corporation (HMC, the entity that oversees the investment of Harvard's large endowment assets), and he became famous for pressing Jack Meyer, president of HMC, to invest more heavily in stocks, private equity, and hedge funds. And yet, for two years of that time he was also consulting for a hedge fund? Standards are shifting for what constitutes acceptable outside activity for a university president -- many members of the Harvard community think it is inappropriate for its current president, Drew Faust, to serve on the Staples board. But for a Harvard president simultaneously to pressure the university's asset manager to buy more hedge funds for the University's portfolio and to serve as advisor to a hedge fund -- that is worse than tone-deaf.

Yet we need to reach back a bit further to find the clearest examples of Summers's self-serving blindness about financial conflicts of interest, to the "tawdry Shleifer affair," as the late professor Farish Jenkins described it in a faculty meeting.

I have told this story before in the Huffington Post:

In 1992, Andrei Shleifer, a Harvard professor and a close friend of Summers since Shleifer's college days at Harvard, became head of a Harvard project that directed U.S. government money for the development of the Russian economy. Tens of millions of dollars in noncompetitive U.S. contracts flowed to Harvard for Shleifer's Russian work, and his team directed the distribution of hundreds of millions more. Through the mid-1990s, complaints accumulated in Washington about self-dealing and improper investing by the Harvard team, and by mid-1997, the Harvard contracts had been canceled and the FBI had taken up the case. For two years it was before a federal grand jury.

In September, 2000, the government sued Harvard, Shleifer, and others, claiming that Shleifer was lining his own pockets and those of his wife, hedge fund manager Nancy Zimmerman--formerly a vice president at Goldman Sachs under Rubin.

Soon after, when Summers became a candidate for the Harvard presidency, Shleifer lobbied hard for him in Cambridge. Rubin assured the Fellows that the abrasiveness Summers had exhibited at Treasury was a thing of the past. They named him president--in spite of what was already known about his enabling role in the malodorous Russian affair, and the implausibility of a personality metamorphosis.

Summers did not recuse himself from the lawsuit until more than three months after his selection as president, and even then used his influence to protect Shleifer. The Fellows -- including Rubin, whom Summers added to the Corporation -- fought the case for years, spending upwards of $10M on lawyers. But in 2005 a federal judge found Shleifer to have conspired to defraud the government and held Harvard liable as well. To settle the civil claims, Shleifer paid the government $2M and Harvard paid $26.5M; Zimmerman's company had already paid $1.5M. Shleifer denied all wrongdoing, and Harvard disclosed nothing about any response of its own -- a departure from its handling of misconduct by faculty farther from the center of power.

Summers remained close to Shleifer, yet claimed in a February 2006 faculty meeting to know too little about the scandal to have formed an opinion about it. This prevarication brought a gasp from the assembled faculty and solidified faculty opposition to the Summers presidency.

It would be one form of ethical obtuseness to put Harvard at risk to protect a corrupt friend. It would be worse if Summers actually believed that there was nothing wrong with Shleifer's self-dealing. Yet the latter seems to have been the case. Summers was deposed in the course of the federal investigation, and his responses to some of the questions are revealing.

Q. During the time that you worked at the United States Government in any capacity, did you make an assessment of the impact on the work that was being funded by USAID of the conduct which was addressed in the investigation?

... [various clarifications and objections omitted]

A. ... I had enough knowledge of Russian mores and Russian practices and Russian views from the conversations that I had with Chubais and Vasiliev to be confident that the set of issues contained the allegations were not issues that were consequential for them; and indeed that they would have, in part, valued advisers more extensively if they were more involved in actual private-sector activities.

Or to simplify: I don't think it was a problem that Shleifer was exploiting inside information to invest in Russian companies, because the Russians would actually consider it a plus that he had some skin in the game. This is pretty much the argument made by one of Summers' backers in the New York Times:

"He had insights into one of the best hedge funds in the world. That can only add value to the things the government is struggling with right now," said Robert Borden, chief investment officer of South Carolina's pension fund.

By this standard, conflicts of interest can never be problematic because one learns so much from them. Later in the deposition, Summers is asked:

Q. ... Did you have any discussion with Professor Shleifer about the fact that his wife's business invested in Russia? ...

A. ... I did, I believe, remark at one stage that because of the sensitivity that I had acquired in Washington to ethics rules, which at least in my experience in Washington I wasn't ever smart enough to predict -- things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to mere were thought of as perfectly fine -- and so I remarked that it would be a good idea for him to make sure that he was operating within the rules of whatever legal arrangements he had with Harvard.

In other words, don't use your moral instincts to decide what is wrong; go by the letter of the stupid rules, which make no sense. No wonder Harvard demanded a jury trial to settle the absurd question of whether Shleifer, having been appointed head of the Harvard Russia project, had been "assigned to" Russia. (He had been, the jury found, having deliberated for a mere two hours after a three-day trial. Shleifer was therefore subject to federal conflict of interest rules.)

Q. Is it your view that it is not necessarily a conflict of interest or it is not per se a conflict of interest or otherwise improper to make investments in a country just because you're providing advice to the government of that country?

[Objections]

A. [long equivocation omitted] So without judging what would or would not be a conflict of interest, what would or would not constitute a conflict of interest, it certainly would be my view and I think would have been the view of other U.S. financial officials that there was no per se disqualifying of the validity or morality of advice based on the holdings of financial positions in the entity, area, place, type of investment, or anything else with which the advice was given.

How conflict-of-interest issues were to be addressed in any particular context was an issue that was left to the lawyers. And it was our practice to ourselves follow the guidelines or the contracts which we signed. But there was no aura of wrongness of any kind that would be associated with providing advice on a financial issue in which one had an interest.

That is: Conflicts of interest are a morass of weird legal technicalities, but nobody thought there was anything wrong with giving advice when you might realize a personal financial profit if your advice was taken.

What else would Summers have to do to make himself ethically unqualified for an executive position with authority over the nation's money supply? But we should dig just a little deeper into what all this says about the man.

I have long thought that the press exaggerated the significance of Summers' remarks at the National Bureau of Economic Research (NBER) about women in science. To be sure, many found those remarks offensive, in part because they came barely two months after Summers offered an unconvincing "trust me" message to women faculty who met with him about the reduced rate at which women were being named full professors. Summers' remarks back in friendly territory at NBER were hardly bold -- they were not even original. The principal thesis is in Steven Pinker's The Blank Slate, and so is a version of the insight Summers reports about girls' toy preferences.

The sleaziness of Summers' involvement with the Shleifer affair and his professed ignorance of it had a larger impact on many more of the faculty, and played a bigger role in his fall from the Harvard presidency. In fact, I suspect that over the years, Summers has found it advantageous to promote the women-in-science story to the media, ever so quietly, as the explanation for his downfall. Making the best of a bad situation, he could try to cast himself as a tragic victim of feminist harpies, but there are no hero's medals for association with a multi-million dollar conspiracy to defraud the government. The media cooperated, naturally preferring a simple story with a sexy axis to a tale that is hard to untangle without a War and Peace style dramatis personae. (See David McClintick's masterful "How Harvard Lost Russia" for the full story, or David Warsh's "The Tick-Tock" for the nickel summary.)

And yet the NBER speech does have a lesson for President Obama as he considers whether Summers is the man to head the Fed. Not in its particular opinions about gender differences, but in its unapologetic arrogance, it is part of the pattern of character flaws that have been recently been cataloged: Summers' recidivist bullying, his insincere promises of change, his tendency to shoot from the hip whether he knows what he is talking about or not. Too little attention has been focused on the opening sentences of Summers' NBER remarks.

I asked Richard, when he invited me to come here and speak, whether he wanted an institutional talk about Harvard's policies toward diversity or whether he wanted some questions asked and some attempts at provocation, because I was willing to do the second and didn't feel like doing the first. And so we have agreed that I am speaking unofficially and not using this as an occasion to lay out the many things we're doing at Harvard to promote the crucial objective of diversity.

In other words, I was invited here as the smartest guy in the room. Don't think anything I say has anything to do with Harvard. I am bigger than that. You came to hear me be smart.

Summers has never learned that powerful leaders have to sublimate their egos for the good of the institutions they lead. In accepting these roles, they give up some of their freedom of speech and action.

A Harvard president is always the Harvard president. The disclaimer "I am here not as president of Harvard but to be provocative" didn't limit the damage his provocations caused Harvard. Likewise, Summers could not see the harm he was doing by steering Harvard's management of the federal lawsuit about his friend Shleifer -- when Summers finally recused himself, it was only because the other members of the Harvard Corporation insisted. Can anyone think that Summers would always speak and act purely in his role as head of the Fed, working judiciously for the good of the nation and the world, when even the tense of a verb or the strength of an adverb can shake markets?

Similarly, Summers' moneymaking is less about greed than ego. In his peer group, financial success is quantitative evidence of smartness. Conflict policies exist not merely to prevent fraud and abuse; they protect the reputation of the institution. Thinking of himself as greater than the institutions he has been called on to serve, Summers is insensitive to the reputational harm he causes, and freely engages in activities that would cripple an institution if everybody did them.

Summers should not be given another role in which his self-importance can threaten the welfare of the people he should be serving. He has proved too many times that he cannot stop playing to win the smartness game, no matter how great the risk of collateral damage.