healthy4u: Goldman Sachs

What a Conflicted Web We Weave: Academic Economists, Finance, the Global Economic Meltdown, and the Impending Health Care Collapse

We have been writing about <a href="http://hcrenewal.blogspot.com/search/label/conflicts%20of%20interest">conflicts of interest</a> in health care now for a long time.  We started with a focus on academic physicians'  and leaders' financial ties to pharmaceutical/ biotechnology/ device companies, then went on to the intense conflicts generated by academic medical and other health care non-profit leader who also <a href="http://hcrenewal.blogspot.com/2006/03/new-species-of-conflict-of-interest-in.html">sit on boards of directors</a> of for profit health care corporations, and to conflicts affecting various kinds of respected not-for-profit health care organizations, like medical societies and patient advocacy groups. Meanwhile, we uncovered the curious dominance of the boards of some health care organizations by leaders in the<a href="http://hcrenewal.blogspot.com/search/label/finance"> finance</a> world, including some of the leaders of the failed companies that brought us the "great recession."  This did seem like a leadership problem for health care, in terms of the dominance of health care leadership by the elite of another industry that did not exactly seem to share the values we physicians swear to uphold.  However, it did not seem to be a conflict of interest problem, until now. The Chronicle of Higher Education just published <a href="http://chronicle.com/article/Larry-Summersthe/124790/">an article</a> by the director of a soon to be released documentary on conflicts of interest and academics, but this time academic economics. Charles Ferguson, the author, used as an example the Larry Summers, the former President of Harvard University (and hence leader of the Harvard Medical School, School of Public Health, and Harvard's teaching hospitals).  We had commented <a href="http://hcrenewal.blogspot.com/2009/04/hedge-fund-u-version-2.html">here</a> about Summers' poor fit for the role of an academic medical leader, and <a href="http://hcrenewal.blogspot.com/2010/04/very-well-paid-boob-on-harvard.html">here </a>and <a href="http://hcrenewal.blogspot.com/2008/12/what-linked-parallel-declines-of.html">here</a> about the dominance of Harvard leadership by leaders of (sometimes failed) financial institutions.  Ferguson summarized (bad pun, sorry) the problem thus: <blockquote>Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy.</blockquote> The problem is essentially one of huge conflicts of interest: <blockquote>the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.</blockquote> Summers bear huge responsibility for the current economic mess: <blockquote>Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.</blockquote> Also, <blockquote>Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency.</blockquote> Not only did Summers set up the structure that allowed reckless bets with other people' money on opaque financial derivatives by finance leaders who stood to make huge gains if they won their bets, but could foist all losses on others, but he actively attempted those who tried to warn us all of the impending economic collapse. <blockquote>Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a 'full-blown financial crisis' and a 'catastrophic meltdown.' When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a 'Luddite,' dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.) </blockquote> Amazingly, rather than ending up an economic pariah after that, Summers regained power over the economy in the last few years. <blockquote>Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.</blockquote> Summers was tightly aligned with the finance world, and benefited from the dominance of financial leaders on Harvard's board (see post here): <blockquote>After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department—where he championed the law that made Citigroup's creation legal—became both vice chairman of Citigroup and a powerful member of Harvard's governing board.</blockquote> Yet in between his government and academic leadership roles, Summers got rich from finance firms' money. <blockquote>Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)</blockquote> Ferguson went on to list several other conflicted academic economists: <blockquote>The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money. Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. [Ed: they are thus the "key opinion leaders" of economics and economic policy.]  This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates. In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from: Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation. Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy. Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million. Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year. Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed. And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.</blockquote> I once naively thought that the primary conflict of interest problems affecting academia involved health care, the dependence of medical schools and academic medical centers on commercial research funding, the emphasis these schools placed on faculty ties to commercial firms, leading to faculty "key opinion leaders" functioning as marketers of drugs and devices operating under the cloak of academia, and the major conflicts of academic leaders who also sit on health care corporate boards. Now I wonder if all this came to pass because academic leaders already were comfortable with conflicts of interest after having profited from conflicts generated by relationships with the finance industry. This now suggests that the dominance of university boards of trustees by finance leaders is a conflict of interest issue, too. It also suggests that we in medicine should be paying more attention to how conflicts of interest shape not only the marketing of drugs and devices, but the health care policy that has lead to our currently dysfunctional system. If economists paid by finance companies could have been a major cause of the global financial meltdown, could health care policy experts paid by health care corporations be a major cause of our collapsing health care system? Hat tip to the <a href="http://www.nakedcapitalism.com/2010/10/links-10510.html">Naked Capitalism blog</a>. See additional comments on the <a href="http://www.margaretsoltan.com/?p=26680">University Diaries blog</a> and on <a href="http://blogs.reuters.com/felix-salmon/2010/10/05/inside-job/">Felix Salmon's blog</a>.

What a Conflicted Web We Weave: Academic Economists, Finance, the Global Economic Meltdown, and the Impending Health Care Collapse

We have been writing about conflicts of interest in health care now for a long time. We started with a focus on academic physicians' and leaders' financial ties to pharmaceutical/ biotechnology/ dev…

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06 Oct 2010

A University President, But No Longer a Goldman Sachs Director

A frequent topic on Health Care Renewal is how leaders of not-for-profit health care organizations now frequently value their "margin," that is, revenue generation more than mission.  (One good example <a href="http://hcrenewal.blogspot.com/2007/04/medical-schools-to-faculty-show-me.html">here</a> shows how medical school leaders value faculty most for how much money they bring in, rather than the quality of their teaching, research, or patient care.)  "Masters of the Universe" as Leaders of Academic Medicine As we have cast about for reasons behind this important and unfortunate transformation, we noticed that many of the members of the boards of trustees of some of the most prestigious universities that house medical schools, medical schools, and teaching hospitals seemed to be leaders in the finance industry. The importance of that finding became more relevant after the global financial collapse, aka "great recession," became evident.  Since then, we noted the influence of finance leaders on the leadership of <a href="http://hcrenewal.blogspot.com/2009/04/investment-bankers-strike-back.html">Dartmouth College</a>, <a href="http://hcrenewal.blogspot.com/2008/12/what-linked-parallel-declines-of.html">Harvard University</a>, <a href="http://hcrenewal.blogspot.com/2009/04/hedge-fund-u.html">Yeshiva University</a>, and the <a href="http://hcrenewal.blogspot.com/2009/10/board-of-trustees-or-social-club-for.html">Hospital for Special Surgery</a>. Although it seems that the complex relationships between various "masters of the universe" and academia, particularly academic medicine ought to have generated considerable discussion, they remained almost as <a href="http://hcrenewal.blogspot.com/search/label/anechoic%20effect">anechoic</a> as many of the other issues discussed on Health Care Renewal. Therefore, with some regret, I will take up the latest example of such relationships from my own alma mater, Brown University.  ((Full disclosure: I am an alumnus of the College at Brown, and of the Medical School. I am a former full-time Brown faculty member, and currently a voluntary Clinical Associate Professor in the  Alpert Medical School.)  (Also note that <a href="http://hcrenewal.blogspot.com/2009/04/pension-fund-scandals-payment-agents.html">here </a>we discussed some of the questions about the financial dealings of a prominent member of Brown's Board of Fellows, the inner circle of the Brown Corporation, the equivalent of its board of trustees, who was also the very wealthy leader of a prominent hedge fund.  We noted then that his connection to Brown was not noted in current media stories about the controversy.) A Goldman Sachs Director as University President Last week (9 February, 2010), the Brown Daily Herald published <a href="http://www.browndailyherald.com/simmons-won-t-be-buffeted-about-on-boards-1.2144610">an interview</a> with the President of Brown, Ruth Simmons, about her service on the board of directors of Goldman Sachs, one of the most prominent, profitable and controversial investment banks.  Some of the main points were: - President Simmons seemingly denied responsibility for any of the company's past actions that have inspired criticism: "There are lots of things in a complex institution that go on." So, "you're not in charge of everything that your friends do and every policy that organizations that you're affiliated with issue." - She also implied that she joined the board expressly and only to advocate for women and minorities in finance: "We had a big push to think about how we could improve the knowledge and ability of women to manage their financial affairs." Also, "at the same time, there was a good deal of interest in the fact that women have not done so well in the financial sector and on Wall Street." The goal was "to make certain fields more accessible to women and minorities through her service on the boards of Goldman, Texas Instruments and Pfizer." "She called her work with women and minorities on boards meaningful to her in 'a way that a lot of people won't understand.'" She stated "the seniority she now enjoys on Goldman's board allows her to advocate for programs to help women and minorities." - She implied that she served on the board to learn something about economics, "her service on Goldman's board gave her the economic savvy to take certain risks...." So in summary, in her role as a member of the board of Goldman Sachs, one of the most important financial companies in the world, which had major involvement in the events that lead to the global economic collapse, or "great recession," President Simmons claimed that her major role was to advocate particular political positions on the board, implied that she did not know much about the company's core business when she joined the board, and took no responsibilities for any actions of the company which might have inspired criticism. Presdient Simmons' responses might have made sense were she just a member of an advisory board on diversity.   However, she <strike>is</strike> was a member of the board of directors. In this interview, she seemed to ignore her fiduciary duties as a board member to show "unyielding loyalty"  to the stockholders of the company and their interests  [Per Monks RAG, Minow N. <a href="http://www.amazon.com/Corporate-Governance-Robert-G-Monks/dp/1405116986">Corporate Governance</a>, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.]. She in particular seemed to disavow any responsibility for overseeing the actions of hired Goldman Sachs management.  It is a testament to the power of the anechoic effect that an interview showing a member of the board of directors of one of the most important and controversial finance firms involved in the global financial collapse seemed to dodge responsibility for the firm's overall direction and financial practices seemed to inspire only one piece of commentary beyond Brown.  Felix Salmon <a href="http://blogs.reuters.com/felix-salmon/2010/02/10/revamping-goldmans-board/">opined</a> <blockquote>In all the bellyaching about the governance of the biggest banks, and the fact that their boards were spectacularly unqualified to provide any kind of oversight of what they were doing, Goldman Sachs has gone largely unmentioned. But what’s true of Merrill Lynch and Bank of America is true of Goldman too: its executives need some kind of adult supervision, seeing as how they work for their shareholders, rather than just for themselves.</blockquote> He then noted, <blockquote>this interview with one Goldman board member, Ruth Simmons, hardly instills in me the confidence that she can or will understand what Goldman is doing, stop them from acting in a reckless manner, or keep a close eye on compensation as she wears her hat as a member of the compensation committee....</blockquote>A Rapid Resignation However, what happened next does suggest maybe the times they are "a-changing." On 13 February, 2010, <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=aNg3joWQ08zs&pos=5">per Business Week</a> <blockquote>Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, said Ruth Simmons will leave its board after 10 years because of 'increasing time requirements' in her role as Brown University president. </blockquote>This despite the small fortune that President Simmons had made learning to develop "economic savvy," <blockquote>According to a Feb. 5 filing with the U.S. Securities and Exchange Commission, Simmons owned 27,386 restricted stock units in Goldman Sachs, worth $4.2 million at yesterday’s closing share price of $153.93. According to the filing, the units convert to shares on the first trading day in the third quarter of the year following her retirement from the board. Simmons also has 10,000 options that she can exercise on the date she ceases to be a director, according to the filing. </blockquote> Felix Salmon then <a href="http://blogs.reuters.com/felix-salmon/2010/02/13/simmons-leaves-goldmans-board/">commented</a>, <blockquote>I said after Tuesday’s interview with Simmons was published that she seemed to think about her membership on Goldman’s board much more in terms of what it could do for her and her pet causes than in terms of being a shareholder representative tasked with overseeing senior management, and I called for a revamp of the board. Friday’s news is exactly the step in that direction that I was looking for: maybe Simmons took my comments to heart!</blockquote>Summary So in the end, the complex relationships among academic, and academic medical leaders and the finance industry are at least less anechoic. The issue is likely not over at Brown. While the initial Brown Daily Herald interview focused on whether President Simmons' position on the Goldman Sachs board might have lead to a direct conflict of interest, he did not ask whether her position in the leadership of Goldman Sachs had any relevance to the prominence of financial leaders on the Brown Corporation.  In fact, the same day that the Brown Daily Herald published the interview, it published <a href="http://www.browndailyherald.com/trustee-may-face-lawsuit-from-ex-wife-1.2144625">an article</a> on the legal travails of a Brown Corporation who has become one of the richest hedge fund leaders in the world.  The 2008-09 Brown Corporation (webpage no longer works <a href="http://brown.edu/Administration/News_Bureau/Info/Corporation.html">here</a>, but cached <a href="http://74.125.47.132/custom?q=cache:ZAu0jiCokecJ:brown.edu/Administration/News_Bureau/Info/Corporation.html+Brown+Corporation&cd=5&hl=en&ct=clnk&gl=us&client=google-coop-np">here</a>) included three other current or retired Goldman Sachs leaders, a <a href="http://www.brown.edu/Administration/News_Bureau/2004-05/04-022.html">former partner</a>, <a href="http://www.brown.edu/Administration/News_Bureau/2004-05/04-146.html">head of merchant banking</a>, and former leader <a href="http://www.brown.edu/Administration/News_Bureau/2006-07/06-166.html">with less specified responsibilties</a>.  It also included numerous other leaders of various other finance companies.  In the aftermath of the global economic collapse, and in an ongoing health care crisis, it seems reasonable to hypothesize that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission.  I hope that Brown's latest travails will inspire more interest in who now leads academia, especially medical academia, how they got there, and what they have wrought.  Academic medical institutions and other not-for-profit health care organizations need leaders who value their missions more than the money they may bring in.

A University President, But No Longer a Goldman Sachs Director

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15 Feb 2010

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