A lot has been said about the resignation of Lawrence Summers. It seems pretty clear from Matthew Yglesias and the Chronicle of Higher Education articles that the main issues were not those of political correctness, as Alan Dershowitz would have us believe, but more mundane issues of university governance, as Timothy Burke comments. Whatever the underlying reasons, the issue that seems to have brought the battle between Summers and the Arts and Science faculty to a head was something called “the Shleifer affair.”
Here is how Time magazine describes it:
At issue is Summers’ handling of a Russian fraud scandal involving a close friend and colleague, Harvard Economist Andrei Shleifer. Shleifer and Harvard were found liable for combined penalties of nearly $30 million in 2004 after they were charged with defrauding a U.S. government program designed to help Harvard economists privatize the Russian economy in the 1990s. The scandal has long been considered one of Harvard’s darker hours, but a new 28-page exposé by investigative reporter David McClintick, published in the January 2006 issue of Institutional Investor magazine, brought new heat on Summers, whom the article describes as going out of his way to protect his old friend and protégé Schleifer, who is still a senior faculty member at the university.
The article in question can be found here. There is a summary of the story here. Now, it may be that this story simply provided good cover for the faculty who wished to oust Summers for other reasons, but it seems that the recent publication of this article had a significant impact.
J. Lorand Matory, professor of Anthropology and African-American Studies, says that the Shleifer affair had long been whispered about, but in part because the economics department closed ranks around both Shleifer and Summers, few spoke out about it. Until now. “People were coming out of the woodwork,” he says.
One economist who might have some insight into this is frequent Savage Minds commentator, J. Bradford DeLong, who has published a number of papers with both Summers and Shleifer, and presumably knows something of the background behind their relationship and the trial …
On a slightly different note, I’d like to share this quote from my favorite Summers post. Helmut over at Majikthise, digs up this quote from a 1991 memo written when Summers was at the World Bank:
I’ve always thought that underpopulated countries in Africa are vastly under-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City.
Truly a man only an economist could love!
As I understand things, Andrei–in large part because various Harvard bureaucrats told him he was not an employee of but a consultant to the Russia Project–thought that he could advise the Russian government and that his wife and her Wall Street partners could invest in Russia. That was stupid–especially because the technicalities turn out to be that he *was* classified as an employee of the Russia Project and hence he and his family were bound by Harvard’s conflict-of-interest restrictions.
As I understand things, Larry warned Andrei to be careful before things blew up, and afterwards recused himself: that he couldn’t be involved in deciding what to do about the mess or even be looking over others’ shoulders to figure out what went wrong.
It’s not a criminal matter: Andrei never intended to defraud anybody of anything. It is a civil matter: Harvard promised the U.S. government that it would use the AID grant money to run a squeaky-clean conflict-of-interest-free advisory program, it did not do so, and the government wanted its money back.
On the legal side, there is this Civil War-era statute–basically that if you sold substandard boots to General Grant’s army the government could get back the money it had paid you plus three times more in damages, and only had to convince the judge and jury that it was more likely than not that the boots were substandard. As it applies here, as I understand it, the Boston U.S. attorney’s office could have gotten a judge and jury to fine Harvard $160 million if they could have shown that it was more likely than not that the Russia Project had not fulfilled its obligations under its contract with the government. The fact that the case was settled for $30 million tells you something about the government’s estimates of its chance of success in front of a civil jury.
Or the government’s charitableness?
Thanks Brad.
It seems to me that some veterans of the Iraqi war might wish to look into that civil war era law!
Ah. But in those days the U.S. government wanted to make it extremely easy to punish contractors who did a shoddy job in supplying the army…
This was not only stupid (on Shleifer’s part) it was also obviously an unethical conflict of interest. Anybody reading David Warsh’s “Economic Principals” columns or David McClintick’s Institutional Investor article can easily determine this.
If these reporters got the facts wrong, then defenders of Summers and Shleifer need to correct those inaccurate facts. The following attack in the Harvard Crimson doesn’t cut it.
The recent outcry over the Shleifer matter underscored divisions in the [Harvard] Faculty. While many professors have brandished harsh words to describe the University’s handling of the case, Harvard economists have been virtually unanimous in defending their colleague.
Glimp Professor of Economics Edward L. Glaeser said last week that the Institutional Investor article “is a potent piece of hate creation—not quite ‘The Protocols of the Elders of Zion,’ but it’s in that camp.”
This was not only stupid (on Shleifer’s part) it was also obviously an unethical conflict of interest. Anybody reading David Warsh’s “Economic Principals” columns or David McClintick’s Institutional Investor article can easily determine this.
If these reporters got the facts wrong, then defenders of Summers and Shleifer need to correct those inaccurate facts. The following attack in the Harvard Crimson doesn’t cut it.
The recent outcry over the Shleifer matter underscored divisions in the [Harvard] Faculty. While many professors have brandished harsh words to describe the University’s handling of the case, Harvard economists have been virtually unanimous in defending their colleague.
Glimp Professor of Economics Edward L. Glaeser said last week that the Institutional Investor article “is a potent piece of hate creation—not quite ‘The Protocols of the Elders of Zion,’ but it’s in that camp.”
Glaeser’s is the true voice of reason here–the suspicious parallels between the Institutional Investor article and the Protocols of the Learned Elders of Zion should be investigated further. It is an outrage that oppressed social groups such as treasury secretaries and presidents of the most rich, famous and powerful university in the world are still victims of pogroms, blood libel, savage beatings and…oh never mind.
Re: “This was not only stupid (on Shleifer’s part) it was also obviously an unethical conflict of interest.”
As I understand it, HIID had drawn the line by saying that *employees* of the Russia Project couldn’t have family members who were investing in Russia, but that *consultants* to the Russia Project could–and told Shleifer that he was a consultant…
As I understand it, the government did originally intend to make this a criminal case. It was persuaded to make it a civil case. Many people think this was indeed criminal conduct, and would probably have been found in a court of law to be such. I’ll hunt down my source on this, but wanted to add it to the discussion now.
From the McClintick article:
http://www.institutionalinvestor.com/default.asp?page=1&SID=606917&ISS=21210&PUB=243&p=7
WHEN AN AGENCY OF THE U.S. government determines that crimes have been committed, it prepares a “criminal referral” to the Department of Justice, which evaluates the case and decides whether to prosecute. AID made its referral in June 1997. The Justice Department approved the case and assigned it to the U.S. Attorney’s Office in Boston and the FBI. On July 10 a meeting of FBI agents and federal prosecutors was convened at…
Continuation of excerpt from McClintick article:
…at the Boston federal courthouse by Assistant U.S. Attorneys Sara Miron Bloom and Stephen Huggard.
Bloom and Huggard gathered evidence for a year and presented witnesses and documents to a federal grand jury for two additional years. Though they wanted a criminal prosecution, the government, in the end, filed civil charges only.
In other words, the Grand Jury did not indict. Grand Juries usually–an overwhelming proportion of the time–do what prosecutors ask them to do.
As I understand it, Sara Miron Bloom and Stephen Huggard had three theories of the case. The first theory was that Andrei had stolen some of the AID money–had funneled it into his bank account. That turned out to be false. The second was that AID money had been used to fund analysts doing due diligence for Bracebridge-Farallon investments. That turned out to be false.
The fact that Bloom’s and Huggard’s first two theories of the case were simply wrong did, I think, influence the situation, and is a big reason behind the absence of a Grand Jury indictment here.
The third theory they came up with was that Andrei had filed a false claim against the government by stating that the Russia Project was following all the conflict-of-interest rules. That was the theory that led to the civil settlement.
The subsequent career of the illustrious investor John Pierpont Morgan, who sold defective guns to the Union Army, wasn’t hindered by the Civil War statute, so why should this old statute hinder Andrei Shleifer’s career in today’s Gilded Age?