THE BLOG

The Harvard IKB School of Engineering

06/05/2015 08:53 am ET | Updated Jun 05, 2016

The good people of Dusseldorf, Germany, and specifically the IKB Bank, which specializes in loans to small and medium-size businesses, has kindly endowed Harvard University's engineering school with a gift of $400m. Harvard President Faust announced the endowment on June 3, the most generous in the University's history. Strangely, though, the Harvard Engineering School was renamed after hedge-fund manager John A. Paulson, not IKB, and thereby hangs a tale.

You see, the gift by Dusseldorf was not made in its own name. In fact, the money en route to Harvard was taken from IKB through an infamous swindle. Back in early 2007, before the 2008 financial crash, hedge fund manager John Paulson approached Goldman Sachs with the idea of ripping off unknowing investors to the tune of $1 billion. In essence, Paulson would assemble a $1 billion portfolio of toxic assets (known as Abacus) that Goldman Sachs would market to its unsuspecting clients. Paulson would bet against the portfolio, so that the investors' $1 billion loss would be Paulson's gain. Goldman would pocket some fees for its service in this treachery against its own clients.

As planned, the $1 billion portfolio of securities collapsed in value soon after IKB (with its $150 million purchase) and other hapless investors bought in. Paulson walked away with $1 billion. Goldman got paid its fees. IKB lost its investment, collapsed, and was bailed out by the German taxpayers.

When the Securities and Exchange Commission got wind of this duplicity, it charged Goldman Sachs with financial fraud, in a complaint that details the timing and particulars. A few months later, Goldman settled with the SEC by paying a fine of $550 million.

Paulson, strangely enough, was not charged by the SEC, and walked away with the ill-begotten $1 billion. In a Wall Street community that prizes money far above honesty, Paulson was hailed for his genius in the deal. He was the toast of the town. Goldman's CEO Lloyd Blankfein, for his part, was so satisfied following the onset of the financial meltdown that he boasted that he was doing "God's work."

In giving away the money of the German people, Paulson did not display any evident acknowledgement of the true nature of his ill-gotten gains. Nor did Harvard make a fine point of the matter. The Harvard Business School Dean described Paulson as "the epitome of a visionary leader." The Romans used to say of ill-gotten lucre, "pecunia non olet" ("money doesn't stink").

Note that Paulson only turned over to Harvard less than half of his ill-gotten windfall from the Abacus fraud, $400 million of $1 billion. He has pocketed the rest, plus billions dollars more that one reasonably suspects have a similar origin. The whole sordid experience reminds one of a Soviet-era story.

A Russian babushka (grandmother) is praying in a church for 10 rubles for a winter coat. The Soviet commissar passing by the church is disgusted, and hands the women 5 rubles to go buy a tattered winter coat. Later he is surprised to see her back at the church praying once again. He moves closer to listen in on her prayers. "Thank you, God, for sending the 10 rubles, but next time don't send it through the Communists; they kept 5."

We can say the same to the German people. Thank you for endowing Harvard's Engineering School. But next time don't send it through John Paulson; he kept $600 million of it. The least the rest of us can do is call the school by its rightful name: the Harvard IKB School of Engineering.