When we began this blog, I never dreamed I would do so much writing about finance and the financial services sector of the economy, but,... 

The Governance of Citigroup

The discussions and revelations generated by the global financial collapse/ great recession continue to provide insights into the ongoing health care crisis.  Let me start with a small item from the Dow Jones Newswire this week:

The California Public Employees' Retirement System said it opposes the re-election of two Citigroup Inc. (C) directors, in part because of their roles in the recent financial crisis.

The nation's largest public pension fund, which owns about 61.2 million Citigroup shares, plans to cast 'withhold' votes for board nominees Andrew Liveris, chairman and chief executive of Dow Chemical Co. (DOW), and Judith Rodin, Rockefeller Foundation president, at the annual shareowners meeting Tuesday.

Both served on the company's audit and risk committee before the financial crisis. During the crisis, the banking giant accepted a total federal government infusion of $45 billion, which it has repaid.

'It's time for new blood in the boardroom,' said Anne Simpson, the senior portfolio manager who heads the Calpers corporate governance program....

Let me back up a bit.

The near-failure of global banking giant Citigroup, prevented only by a massive US government bail-out, was one of the central components of the global financial collapse. We noted recently how Mr Robert Rubin, one of the key leaders of Citigroup was accused of "being asleep at the switch," "irresponsibility and misjudgment," and being a "very well paid boob" after his testimony at hearings by the committee investigating the collapse. We also noted his link to health care. As senior member of the Harvard Corporation, Rubin is one of six top stewards of the US' oldest and arguably most presigious university, containing one the country's most prestigious medical schools and teaching hospitals.

Although all those who were members of the Citigroup at the time it collapsed have not been hauled in front of the committee, there has been considerable discussion of their responsibility for the company's failures. For example, in 2008, soon after the government rescue of Citigroup began, the Wall Street Journal published an editorial:

"Citi never sleeps," says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board?

While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi's ability to make acquisitions because of the bank's failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.

Last year, as reported by Bloomberg,

Citigroup Inc. investors should vote against re-electing four of 14 board members, including John Deutch and Michael Armstrong, to improve management of the company’s risks, a shareholder advisory group said.

Deutch, former U.S. Central Intelligence Agency director, Armstrong, former AT& T Inc. chief executive officer, and Alain Belda, chairman of Alcoa Inc., should be opposed 'for poor risk oversight,' RiskMetrics Group Inc.’s ISS Governance Services said today. Xerox Corp. CEO Anne Mulcahy shouldn’t be re-elected because she sits on more than three boards, which may limit her effectiveness, the group said.

'The pattern of chronic oversight failure at Citi and the magnitude of the corresponding shareholder losses warrant removal from the board of directors most responsible for risk oversight,' RiskMetrics said in the statement.

Furthermore,

'Despite the fact that the board has many incumbent directors that have been successful in their respective fields and have been on the board for some time, their track record taken as a whole is dismal given that the company is currently surviving on federal assistance,' RiskMetrics said.

Rick Conrad, of the Seeking Alpha blog, thus berated the CEO of Citigroup at its 2009 shareholders meeting,

Mr. Armstrong, who has been a director since 1989 is no longer part of the Audit Committee, as of this year, continues his 'service' to our Company on the Nomination as well as the Compensation Committee. Much as this company has suffered under an illusion of prosperity, it appears to continue to suffer under an illusion of competence.

John [Deutch] has served on the Audit Committee of our Company since 1997 and hence, likely drank the Kool-Aid as to the Illusion of Prosperity.

I note that the audit and risk management committee has many members who, like Mr Deutch and MrArmstrong presided over this seemingly out of control disaster.

Andrew Liveris since 2005 on Audit

Ann Mulcahy since 2007 on Audit

Dr Judith Rodin since 2004 on both Executive and Audit Committees.

Overlaps Among Citigroup's Board and Health Care Organizations' Leadership

So there seems to be good reason to believe that the board of Citigroup at the time the firm collapsed were a collective example of inattentive goverance and poor stewardship. We have previously documented overlaps among poor governance and leadership of finance, and the governance and leadership of health care, suggesting that the poor leadership and governance of the latter may be in part a result of infection from the former. So I looked for overlaps among the Citigroup board and health care organizational leadership.

A list of the membership of the failed board comes from the 2008 Citigroup proxy statement.  The biographies provided therein, supplemented with some Google searching, produced the following overlaps:

- C Michael Armstrong - is also Chairman, Johns Hopkins Medicine, Health Systems and Hospital

- Alain J P Belda - was a Trustee and member of the Corporation of Brown University (including the Warren Alpert Medical School)  (He stepped down prior to 2009 at an unknown time.)

- Sir Winfried Bischoff, Chairman of the Board - is a director of Eli Lilly and Co.

- Kenneth T Derr - is a director of the University of California San Francisco Foundation.

- John M Deutch - no overlap found

- Roberto Hernandez Ramirez - no overlap found

- Andrew N Liveris - is a Trustee of Tufts University (including the School of Medicine and Tufts- New England Medical Center)

- Anne M Mulcahy - in 2009, was appointed to the Board of Directors of Johnson and Johnson

- Vikran S Pandit, CEO - is a Trustee of Columbia University (including the College of Physicians and Surgeons and Columbia University Medical Center)

- Richard D Parsons - is a Trustee of Howard University (including the College of Medicine and Howard University Hospital)

- Judith Rodin - is President of the Rockefeller Foundation

- Robert E Rubin - is a member of the Harvard Corporation (including Harvard Medical School and multiple Harvard teaching hospitals), and a Trustee of Mount Sinai Medical Center

- Robert L Ryan - was a director of UnitedHealth Group, is a Trustee of Cornell University (including Weill Cornell Medical College, and Weill Cornell Medical Center), and was a Senior Vice President and CFO of Medtronic

- Franklin A Thomas - no overlaps found

Summary

So in summary, of 14 board members, 2 are trustees of major medical centers (Johns Hopkins and Mount Sinai), 6 were or are trustees or equivalent of universities that include medical schools and medical centers (Brown, Tufts, Columbia, Howard, Harvard and Cornell), one is a trustee of such a university's foundation (University of California San Francisco Foundation), 2 are or would be board members of pharmaceutical corporations (Eli Lilly and Johnson and Johnson), one was a board member of a commercial managed care organization/ health insurance company (UnitedHealth), one was a former top executive of a medical device company (Medtronic), and one is the President of a large charitable foundation which historically has supported multiple medical and public health initiatives (Rockefeller Foundation).  Only 3 of 14 did not have a major leadership role of a health care organization.  

Most of these health care organizations have been involved with cases we have discussed on Health Care Renewal (see links above).

Given the seriousness of the failure of Citigroup, one has to wonder why so many of the directors who presided over it still have such influential positions in health care organizations?

As we have pointed out, as the world economy was driven to near ruin by "masters of the universe," some of the same also became leaders of academia and academic medicine in their spare time. Maybe this made sense 10 or 20 years ago, but why does it still make sense? On the other hand, now that we understand how bad the leadership of finance really was, it is a little easier to understand why the leadership of health care has become so bad. Iit 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.  The failures of the leadership and governance of finance thus suggest we need to re-examine the leadership of health care.

In the last few years, it seems that the whole world got tangled up in a web of complex financial dealings that mostly benefited those moving the money and paper, but often harmed everyone else.  So it should be no surprise that health care was similarly affected. 

A story from the St. Louis Post-Dispatch provided an illustrative case.  The news article began discussing the current difficulties of two local St Louis hospitals, then provided an explanation in what amounted to a series of flashbacks. Let me re sequence it a bit, starting with the background of two local hospitals that got caught up in web.

Background

For several decades, Forest Park Hospital — founded in 1889 as Deaconess Central Hospital — was one of the city’s leading community hospitals, serving a broad spectrum of patients including many African-American residents from north St. Louis.

But in recent years, the hospital’s revenues and its number of patient visits had waned because, in part, of the emergence of major hospitals in west St. Louis County and its decision in 2006 to discontinue obstetric services.

As the hospital struggled, it continued to be passed along from one owner to the next. In 2004, it was acquired by Argilla Healthcare Inc. Argilla merged with Doctors Community Healthcare Corp. of Scottsdale, Ariz., which became Envision Hospital Corp.

Former board member Buford said Forest Park’s downfall began several years ago when Envision executives made the decision to use the hospital’s profits to help prop up a faltering hospital that Envision owned in Washington.

In 2005, Envision sold the buildings and land of Forest Park Hospital and St. Alexius Hospital to Medline Industries, the Illinois manufacturer of surgical supplies.

How the Hospitals were Sold to Success Healthcare LLC

To address its financial problems, Envision decided to sell its accounts receivable to a firm in Florida. Here is the rationale:

Less successful hospitals operate on razor-thin profit margins, waiting for slow-paying state and federal agencies to provide Medicaid and Medicare reimbursements. Such hospitals have difficulty obtaining financing and lack dependable cash flow.

To provide support to a distressed hospital, the Florida partners would purchase its accounts receivables at a discount. For instance, if the government, a health insurer or patient owed a hospital for services, the partners would purchase that invoice for less money. The hospital, in turn, would have cash in hand.

Note that "hospitals tend to avoid such cash-flow companies, because some of them use heavy-handed collection tactics." However,

For struggling Forest Park and St. Alexius, selling their accounts receivables was an alluring option.

So,

Forest Park also was dogged by creditors and having difficulty making its payroll and paying utility bills.

That’s when Envision began doing business with one of the Florida partners’ firms, Sun Capital Healthcare Inc., which purchased $61 million in receivables from Forest Park and St. Alexius.

When Envision defaulted on its sales agreement in September 2008, the Florida partners formed Success [Healthcare LLC] to purchase the two hospitals for $39.5 million.

The Promise of a Turn Around

To the public and the struggling hospitals, the purchase by Success Healthcare LLC seemed a promise of deliverance:

Eighteen months ago, the new buyers of Forest Park Hospital vowed to revive the beleaguered institution.


They voiced optimism that the once-thriving, 450-bed medical center could be saved by fresh capital and determined leadership. They seemed equally enthusiastic about their other acquisition — St. Alexius Hospital in south St. Louis. Even the name of their company — Success Healthcare LLC — evoked the sense that better days were ahead.

Also,

When Success Healthcare bought Forest Park Hospital in December 2008, company officials spoke of transitions, not cutbacks.

In a statement, the company called Forest Park and St. Alexius hospitals important community assets, saying that it planned to enact a 'turnaround plan and financial strategy' in the next six months “that will support the immediate and long-term objectives for the hospitals.'

The Actual Results

Better days were not ahead.  Instead, as summarized by the Post-Dispatch article,

But the three partners from South Florida were ill-prepared to make good on their words. In reality, they were already deep in a financial scandal that involved the potential loss of more than $500 million in investor funds, the suicide of an investment manager in Bermuda, and allegations of fraud and self-dealing.

The mess resulted from the involvement of what became Success Healthcare LLC and an off-shore financier. First, here is some information on the history of the ironically named Success Healthcare LLC:

In recent years, [Peter] Baronoff, [Howard] Koslow and [Lawrence] Leder had built a small empire of health-related companies, whose holdings include at least 18 hospitals, and two finance firms. The firms share an office building at 999 Yamato Road in Boca Raton, Fla.

Baronoff, a former deputy mayor of Boca Raton, had worked as a wine and spirits importer. Koslow had experience in financial services and real estate. Leder, an accountant, was a former supervisory auditor for the U.S. General Accounting Office.

The partners marketed themselves as 'rescuing health care clients in financial emergencies,' including providers that file for bankruptcy protection or are considering such a filing.

Then enter the off-shore financier:

Court records indicate that the Florida partners approached [William] Gunlicks in 1999 to invest in the health care receivables business. Two of the partners — Koslow and Baronoff — formed a Bermuda-based venture with Gunlicks in December 2009 called Stewards & Partners Ltd. to attract offshore investors.

But between 1999 and December, 2009, things had had gone bad,

The first sign of serious problems appeared in April 2009, when the Securities and Exchange Commission filed a case against money manager William Gunlicks, a former Chicago banker whose investment funds provided hundreds of millions of dollars to the Florida partners to help finance their ventures. The SEC accused Gunlicks of placing at risk about $550 million in investor funds, including $5 million invested by the archdiocese of New Orleans.

Soon after, Gunlicks’ fund manager in Bermuda killed himself with an overdose of pills, upset that he had lured investors to the troubled fund, according to media reports. Gunlicks, who declined to comment, settled the SEC case — agreeing not to operate another investment fund.

In July 2009, a receiver appointed by a federal judge — whose mission is to recover Gunlicks’ investor’s money — sued the Florida partners’ finance companies for allegedly defaulting on loan payments to Gunlicks. The receiver accused the partners of fraudulently transferring hundreds of millions of dollars to purchase or prop up distressed hospitals that they owned. Investors also have sued the Florida partners.

The troubles afflicting Success Healthcare LLC quickly affected the hospitals they had promised to save:

There are conflicting accounts about the financial strength of the Florida partners, but this is clear: They do not appear to have the wherewithal to operate Forest Park as a full-service hospital, and their financial troubles could also negatively affect St. Alexius, which reported in 2008 a bare-bones profit margin of 1.38 percent.

Daniel Newman, the court-appointed receiver, has asserted that the Florida partners’ finance firms 'had long been insolvent ... and had been losing money.' He has accused them of overstating their revenues and assets to conceal at least $50 million in losses in recent years.

The results on local health care were not good:

By April of this year, Forest Park Hospital had laid off about three-quarters of its staff and reduced its operations to a small emergency department, 20-bed psychiatric ward, laboratory and pharmacy.

'It’s a very dire situation,' said Dr. James Buford, president of the Urban League and a former member of the Forest Park Hospital’s board. 'It wouldn’t surprise me if the hospital went under. There hasn’t been a necessary infusion of capital to make it work.'

Today, Forest Park Hospital is an almost empty landmark that overlooks the renovated Highway 40 (Interstate 64). The hospital is trying to use only one of its six floors and staffs a few dozen patient beds. Meanwhile, St. Alexius Hospital continues to offer a range of patient services, though it staffs only about one-third of its 456 licensed beds.

Summary

First, I must admit that it is possible that the two St Louis hospitals could not have been maintained in their original configurations by even the most knowledgeable, dedicated, and visionary leadership. It may be that there location was untenable, given the growth of powerful competitors.

However, it is hard to believe that the complex financial maneuvers in which they were caught up provided any benefits to patients, health care, or health professionals. Instead, it is likely that these maneuvers provided considerable personal gains to the people behind them (although these were not investigated in the St Louis Post Dispatch story).

The big lesson: be very skeptical of glorious promises, especially those that come from new health care leaders who turn out to have no knowledge or background in health care. (Note that the leaders of Success Healthcare had no apparent background in actually providing health care, and no apparent commitment to the values health care professionals ought to support.) When you meet the new boss, assume at best he or she will be "same as the old boss," (to the lyrics of "Won't Get Fooled Again.")  We seem to be caught up in a business culture in which every new leader and fashionable management strategy is hyped and spun, and somehow people believe it all, forgetting how badly the previously hyped leaders and strategies crashed.

How many times have we health professionals been told the new CEO, the new corporation taking over, the new business strategy will make everything better? How often has that been true?

Health care desperately needs leadership that understand the context, and believes in the values.  The quick buck artists have been making themselves rich, while health care on the ground becomes poor.  How much money goes into the pocket of the clever leaders for their fancy financial maneuvers, rather than to provide patient care?  The answer might explain why US health care is the most expensive in the world, while primary care, and in this case, basic hospital acute care becomes less available.

Fundamental Corporate Failures

In the last few years, there seems to have been an epidemic of once revered companies suddenly unable to perform the most basic functions necessary for their businesses. Finance firms ran out of money and ended up bailed out or bankrupt. An automobile firm produced cars that seemed to accelerate out of control. Another automobile company, once the world's biggest, went bankrupt and had to be bailed out by the government. An oil company took months to cap a blown out well.

In the health care world, drug companies which could no longer manufacture pure and unadulterated drugs. Baxter International sold deadly contaminated heparin (post here). Johnson and Johnson sold contaminated or wrongly dosed over-the counter childrens' medicines (post here).

Another Troubled Johnson and Johnson Factory

Now yet more problems have surfaced at a Johnson and Johnson factory. As reported by the AP:

A dozen recent federal inspections of a Johnson & Johnson factory for heartburn and other nonprescription medicines show a host of violations that could affect the quality and makeup of the drugs.

A new report on inspections at the Lancaster, Pa., factory in the past month indicates a pattern of ignoring rules for manufacturing and quality, failure to investigate problems that could affect the composition of products, carelessness in cleaning and maintaining equipment, and shoddy record-keeping.

In some cases, medicine batches made during equipment failures were not checked for quality.

Food and Drug Administration investigators had to ask for information many times in some cases, and then wait days to get it.

The scope of the problems was large:

The inspection report, released Wednesday, lists 12 different types of violations, from not determining the impact of equipment failures 'on the manufacturing process and products' to incomplete records of investigations into 'unexplained discrepancies' in manufacturing. The latter problem occurs 'whether or not the batch has already been distributed,' the report states.

Some examples were:

_'Laboratory controls do not include the establishment of scientifically sound and appropriate test procedures to assure that drug products conform to appropriate standards of identity, strength, quality and purity.'

_Procedures to prevent 'objectionable microorganisms' from getting into medicines appear not to have been followed.

_'Deviations from written test procedures are not justified.'

_Staff were not following up 'to determine the causes for repeated mix-up of tablets.'

_Written procedures for cleaning and maintenance did not have enough detail about the methods, equipment and materials to be used.

_The plant did not have recent drug production and quality control records readily available to the inspectors, as is required.

_Samples of drug products taken to determine if they met written specifications were not properly identified.

_There was no preventive maintenance program for at least five types of complex manufacturing or testing equipment.

Previous Problems at Johnson and Johnson Factories
Note that just a few days before this hit the news, the Philadelphia Inquirer reported this follow-up from the problems at the plant in Fort Washington, PA run by Johnson and Johnson's subsidiary McNeil Consumer Healthcare

A federal grand jury is investigating problems at the now-shuttered McNeil Consumer Healthcare plant in Fort Washington that triggered the recall of children's Tylenol and other popular pediatric medicines, according to the company.

The existence of the investigation was made public Tuesday by Louise Mehrotra, vice president for investor relations for Johnson & Johnson, McNeil's parent company.

That report reminded us that there have been problems at a third Johnson and Johnson plant:

[Johnson and Johnson subsidiary] McNeil is now dealing with FDA issues at three drug-making facilities, including one in Las Piedras, Puerto Rico.

Problems at the Las Piedras plant last year set in motion the investigation at Fort Washington.

At Las Piedras, FDA inspectors were chiefly concerned about why it took McNeil more than a year to respond to consumer complaints of a musty smell associated with Tylenol caplets produced at the plant. The smell was traced to a chemical used to treat wooden pallets at the plant.

So three Johnson and Johnson manufacturing plants have recently allegedly failed to uphold basic quality standards, and thus have made medicines that ranged from musty smelling to contaminated. Clearly, the most basic responsibility of a drug manufacturer is to supply fresh, pure, unadulterated drugs, and now Johnson and Johnson, a once iconic American drug and device company, seems to be having trouble fulfilling this responsibility.

Caused by Leadership Shortcomings?
It seems that health care firms, like so many others, have been distracted by financing fantasies and marketing marvels from the most fundamental parts of their business. One wonders how responsible are leaders with little understanding of the fundamentals of the fields in which their firms operate, and who seem to just get richer no badly how their firms perform.

Note that the current Johnson and Johnson CEO William C Weldon's background is in "sales,marketing and international management," not manufacturing, engineering, chemistry, or the biological sciences, per the company's 2010 proxy statement. In 2009, with one factory already under investigation, his total compensation was over $30,000,000.

The Johnson and Johnson board of directors all get more than $200,000 per year in compensation. The board does include two biologists and two physicians (Prof Mary Sue Coleman, is "professor of biological chemistry" at the University of Michigan; Michael M E Johns, MD, a physician; Susan L Lindquist, Professor of Biology at Massachusetts Institute of Technology; and David Satcher, MD a physician.) However, while it also contains the retired CEOs of a telecommunications company, an electronics company, an airline, a food company, and an bank/ finance company, it does not seem to contain anyone with experience in manufacturing, much less pharmaceutical manufacturing.

On the other hand, it includes several people with leadership positions in non-profit health care institutions with whose primary responsibilities their Johnson and Johnson board membership may conflict. (Mary Sue Coleman is President of the University of Michigan; Michael M E Johns, Chancellor of Emory University, member of the Institute of Medicine, member of the editorial board of JAMA, and chair of the publications committee of Academic Medicine; Susan L Lindquist, member of the Institute of Medicine; Leo F Mullin, Chairman of the Board of the Juvenile Diabetes Research Foundation; William D Perez, Trustee of Cornell University, and Trustee of Northwestern Memorial Hospital; and David Satcher, board member for the Kaiser Family Foundation.)

Note that leaders of non-profit academic health care institutions who also serve on boards of for-profit health care corporations often justify the apparent conflict by the need to "have a voice and interact with the business world," as explained (see post here) by a spokesperson for Mary Sue Coleman. A university president who sits on a corporate board to "understand what the commercial world is doing," may have not learned enough about that world to make sure it is doing it well.

Finally, several Johnson and Johnson board members are former or current leaders of some of the financial firms whose problems lead to the global financial meltdown, or "great recession," (Anne M Mulcahy has been a member of the Citigroup board since 2004, and was on the FNMA board from 2000 to 2004, both nearly failed, and required government bailouts to survive; Leo F Mullin, currently Senior Advisor to Goldman Sachs Capital Partners, a subsidiary of Goldman Sachs, which just settled charges by the SEC that it misled investors; and Charles Prince, CEO of Citigroup from 2003 to 2007.) Are these the sort of people we should trust to uphold the fundamental quality of drug manufacturing?

Health care organizations are increasingly saddled with leaders who do not understand the fundamentals of the health care environment, are not pledged to support their missions, and may be distracted by conflicts of interest. Such leaders may be increasingly responsible for the dysfunction of modern health care. True health care reform requires leadership that understands the context, and supports the mission without conflict.

We have posted frequently on the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently summarized here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. When we first addressed the dispute, we noted that the self-elected, or "charter" members of the board were mostly leaders in finance, and when they succeeded increasing the proportion of self-elected members, the additions were again, mainly from finance.

The latest development at Dartmouth is that the board, whose majority is now self-elected, is going to boot off one of the few members who was elected by the alumni at large after being nominated by petition of alumni. As described in an editorial in the college newspaper, The Dartmouth,

We were dismayed to learn of the Board of Trustees’ decision not to reelect Trustee Todd Zywicki ‘88 for a second term ('Board votes not to reelect Zywicki ‘88,' April 7). Even in the wake of Zywicki’s open letter to the Dartmouth community on Tuesday ('Zywicki ‘88 criticizes Board in open letter,' April 15), the Board has yet to provide the Dartmouth community with a sufficient explanation for the removal.

Since 1990, when the power to reelect alumni trustees was transferred from alumni to the Board itself, reappointment to the Board for a second term has generally been routine; Zywicki is the first trustee in recent history to be denied reelection.

Zywicki said in his letter that comments he made during an address at the John William Pope Center in October 2007 'might have been' one of the reasons behind the Board’s decision. In the address, Zywicki made a series of controversial and inflammatory statements, including calling former College President James Freedman 'truly evil.'

Assuming that no egregious act remains undisclosed (and there has been no indication that this is the case), Zywicki’s removal disregards the will of the alumni who put him on the Board, and contradicts the democratic manner in which alumni elect trustees.

Dissenting opinions are essential to the operation of any governing body. While Zywicki may have behaved unprofessionally, the public reprimand issued by the Board was sufficient punishment. It is one thing to reprimand a trustee for making statements against the College in a public forum, but to remove dissenting opinions from the boardroom is to undermine the will of the alumni who voted in support of those very views.

Further news coverage in The Dartmouth suggested a flawed process was used to get rid of Zywicki,

Trustee T.J. Rodgers '70, who like Zywicki was nominated to be a candidate for the Board via petition and was successfully reelected at the April meeting, compared the reelection process to a 'witch-hunt trial' and said it was 'an affront to due process' in an e-mail to The Dartmouth.

'[Zywicki] was ejected by a secret vote — he was not allowed to know the vote count or even the reasons behind his ejection,' Rodgers said in the e-mail.

Rodgers added that he believes the decision not to reelect Zywicki was 'an embarrassment for the Board.'

'The effect of Todd’s ejection has been to warn me and any other trustee likely to speak his or her own mind to watch our step,' he said in the e-mail.

Finally, Mr Rogers wrote his own commentary in The Dartmouth,

'Hang one, warn a thousand' says the ancient Chinese proverb. In its April meeting, the Dartmouth Board of Trustees hanged Todd Zywicki '88, thus warning the petition trustees — and any others tempted to express independent views — not to cross the party line. The Board’s action was coldly deliberate. The legal machinery by which it was achieved took two years to construct.

Every 20 years or so, when a majority of the alumni body decides that the College is ignoring a critical problem, it elects petition trustees to promote change. That tradition, a healthy method of governance that sets Dartmouth apart, goes back to 1891, when alumni were formally granted one-half of Dartmouth’s Board seats in return for financing the College.

[After Rogers' election,] Subsequently, the alumni elected three more petition trustees with views similar to mine: Peter Robinson ‘79, Todd Zywicki ‘88 and Stephen Smith ‘88. It was no accident that each of them was a university professor or scholar. The Board Majority, predominantly composed of investment bankers, could have benefitted greatly from the new trustees’ education-first viewpoint, but instead, we were treated as if we were attacking the College. We were actually called a 'radical cabal' trying to 'hijack' the College by the Board member whose seat I had taken. The petition trustees had successfully overcome the penny-ante counterattacks, such as denying us the ability to mail our petitions to alumni to request signatures, and raising the required number of petition signatures, so it came time for the Board Majority to fix the petition trustee 'problem' permanently.

First, the Majority Board members simply declared the right to double their number from eight to 16 without adding an equivalent number of alumni trustees, despite an Association of Alumni poll of 4,000 alumni, who responded in favor of alumni trustee parity, 92 percent to eight percent. Then, the Majority threw its weight and College funds into a campaign to remove the Association leaders who had sued the College for breaking the 1891 Agreement.

In the boardroom, the Majority rewrote the 50 year-old Trustee Oath into an oath of loyalty, which was designed, in part, to limit trustees’ ability to express dissenting viewpoints without the direct threat of being ejected from the Board. And finally — fatally for Todd Zywicki — the Majority installed a formal review process that judged trustees against the new oath on a line-by-line basis.

On the day of his trial, Zywicki was asked if he wanted to make a statement. He apologized again for his Pope Center speech and exited. In order to maintain the confidentiality of board proceedings, I cannot give details. However, I can say from personal knowledge that many of the statements made in that meeting about Todd Zywicki were factually incorrect, but Todd was not there to respond. In my opinion, all of the issues, including his speech, did not rise to the level of negating the votes of the alumni who elected Todd. Despite my objection, the vote — for the only time in my five years on the Board — was secret.

Todd Zywicki’s greatest achievement as a Dartmouth trustee may well be having the personal courage to force the Board Majority to take responsibility for a political lynching.

Since I started writing about the governance of health care organizations, I used the example of Dartmouth (again, really a university with a medical school as a major component) as an example of governance that was more representative and accountable than that of many other health care organizations. Most universities that contain medical schools, for example, do not allow alumni to vote on the membership of more than a few board seats, and most only allow them to vote for alumni candidates hand-picked by the administration, not nominated by alumni petitions. However, since I started writing about Dartmouth, it seems that the self-elected majority of its board has done its best to make the board less representative and less accountable. Furthermore, it seems that some of the board's self-elected members regard anyone who disagrees with them as an enemy of the institution. Thus, their attitude seems to be: "l'universite c'est moi."

However, the duties of boards of trustees include the duty to uphold the institution's mission, not the board members' personal whims.

When I first started writing about these issues, I was surprised to find that the majority of the Dartmouth's boards self-elected, that is, "charter" trustees were from the finance sector. Now, having seen poor, sometimes arrogant, greedy, or even corrupt leadership of that sector bring down the world economy, I ask again whether people brought up in that culture ought to be dominant among the leadership of higher education?

As we get closer to graduation season for most institutions of higher education, another story about the leadership and governance of higher education, involving an institution housing a prominent medical school, has come into view, albeit indirectly. Let me try to explain this complex story, which on its surface has something to do with the ongoing financial crisis, but nothing to to with academia, by quoting, as usual, from media coverage.

We start with an article from the New York Times last week:

The man leading the Obama administration’s efforts to restructure the auto industry has been described in Securities and Exchange Commission documents as having arranged for his investment firm to pay more than $1 million to obtain New York State pension business.

Although he is not named in the documents, a person with knowledge of the inquiry said the investment executive is Steven Rattner, co-founder of the Quadrangle Group, the prominent private equity firm.

The S.E.C. complaint, filed as part of an expansive state and federal investigation into corruption at the state pension fund, details the efforts of Quadrangle to gain business from the pension fund beginning in 2004.

The person who received most of the $1 million-plus payment has been indicted, accused of selling access to the fund.

Here are the details of allegations of how Mr Rattner interacted with intermediaries to get NY state pension fund investments into his company.

Investigators are scrutinizing the fees paid by investment firms to intermediaries who arranged deals with the $122 billion pension fund. While such payments are legal, they often raise questions about conflicts of interest and would be illegal if used to bribe public officials.

In a 123-count indictment issued last month, two aides to Mr. Hevesi were accused of selling access to the fund. The aides, Hank Morris, who was Mr. Hevesi’s top political consultant, and David Loglisci, the fund’s chief investment officer, have denied any wrongdoing.

The S.E.C. complaint, which was released Wednesday, describes steps undertaken by the Quadrangle executive to win $100 million worth of business from the pension fund in 2005. That amount accounted for nearly 5 percent of a Quadrangle private equity fund and helped the company raise money from other investment funds.

In October 2004, the executive met with Mr. Loglisci to seek the pension fund investment and Mr. Loglisci 'reacted favorably' and 'began taking the necessary steps to secure approval' for the investment, the complaint said.

Two months later, in December, the same executive met with Mr. Morris, who, according to prosecutors, was working in tandem with Mr. Loglisci to generate millions of dollars in fees from the investment firms, and within weeks had agreed to a deal to pay an obscure securities firm that employed Mr. Morris 1.1 percent of any money that the retirement fund invested with Quadrangle, as a placement agent fee. That worked out to $1.1 million, of which Mr. Morris received 95 percent.

The timing of the meeting with Mr. Morris was significant, the complaint indicated, because the Quadrangle executive had already met with Mr. Loglisci and would presumably not need a placement agent. In addition, Quadrangle had previously retained a separate placement agent.

The executive also met with Mr. Loglisci about a low-budget movie Mr. Loglisci was producing, 'Chooch.' Soon afterward, GT Brands Holdings, a company owned by one of Quadrangle’s private equity funds, made a deal to acquire the DVD distribution rights to 'Chooch,' an agreement that made the film’s producers nearly $90,000.

The Quadrangle executive called Mr. Morris after the distribution deal was closed, and told him of the deal’s 'connection to Loglisci.' Three weeks later, Mr. Loglisci 'personally informed the Quadrangle executive that the retirement fund would be making a $100 million investment' in Quadrangle, the complaint said.

Later, the Washington Post published an article which alleges possible conflicts of interest affecting Mr Rattner in his current position as "automobile czar,"

The questions around Quadrangle and Rattner follow others that came to light soon after he emerged as a candidate to lead the Obama administration's efforts to prop up Chrysler and General Motors.

Quadrangle was, at least indirectly, previously involved in a deal involving Chrysler's majority owner, Cerberus Capital Management, a private equity firm.

That connection has led some Chrysler investors to doubt whether Rattner can decide without bias how the government should aid Chrysler.

In the summer of 2007, Quadrangle purchased Dennis Publishing, the owner of magazines including Maxim and Blender. The estimated price was $250 million.

Quadrangle's new magazine company was renamed Alpha Media and it took a loan of $125 million, much of it coming from Cerberus.

A year after Quadrangle's purchase, the publishing company's profits began to plummet.

The company announced last month that it would cease publication of its Blender magazine. Quadrangle has written the Alpha Media investment down to zero on its books, and Cerberus, the company's major creditor, is now effectively in control of Alpha, a person familiar with the matter said.

This week, a NY Times article revealed that Mr Rattner and Quadrangle are facing a wider investigation, and may be a target of investor lawsuits:

Two months after Steven Rattner left Wall Street for Washington, his private investment company is facing a widening investigation into corruption in public pension funds — and fighting for its future.

As state and federal authorities examine Mr. Rattner’s dealings with the New York State retirement fund, questions are emerging about his efforts to gain business from several other public funds, including ones in New Mexico and New York City. His private investment firm, the Quadrangle Group, is moving to calm anxious pension managers, who have entrusted the firm with hundreds of millions of dollars.

Mr. Rattner, who is leading the Obama administration’s efforts to revamp the auto industry, has left his small but prominent firm in a bind. Because he was integral to Quadrangle, investors can try to withhold additional money that they have pledged to the firm now that he has left.

No charges have been filed against Mr. Rattner, who did not respond to e-mail messages on Tuesday, or against Quadrangle, whose executives declined to comment.

While Quadrangle’s funds have not suffered as much as some other private equity funds, its investors have suffered losses in other parts of their portfolios. Some of them might try to capitalize on the inquiry to avoid making good on their pledges.

Another crucial question, however, is whether money from one Quadrangle fund was used to lure investors to a second fund. That possibility that might expose Quadrangle to investor lawsuits.

Furthermore, a Washington Post article raised the question of a failure of honest disclosure:

Government officials are expanding their investigation of Quadrangle, the private-equity firm founded by the Obama administration's lead auto negotiator, as new details emerge about an alleged kickback scheme involving the New York state pension fund.

On Wednesday, the New York City Comptroller William C. Thompson Jr. said he is working with the state's attorney general, Andrew M. Cuomo, to determine whether the city's pension funds were 'intentionally misled or deceived' by Quadrangle's failure to disclose the use of a middleman who has since been indicted, Hank Morris.

New York City's comptroller on Wednesday said Quadrangle never disclosed that it had paid Morris fees in connection with the city pension funds' investment in Quadrangle. The city invested $85 million in 2005 and $40 million in 2006.

The city has a rule that use of placement agents must be disclosed, but that rule was implemented in 2008 and does not apply to the Quadrangle investments.

But as part of the due diligence for receiving the investment, Quadrangle said in writing at the time that it used only two placement agents, Monument Group and London-based Helix Associates, the comptroller's office said.

'We take any ethical lapses by our managers seriously and will consider any remedies available to investors,' Thompson, the city's comptroller, said in a statement.

In response to all this, New York state government officials decided to ban middle-men from influence over pension fund investment decisions, according to the Wall Street Journal:

New York state said its public pension fund, one of the nation's largest, would ban the use of middlemen to help private-equity funds and other investors secure its business.

The move marked a pivotal development in a burgeoning controversy that has grown from a local corruption probe to a broader examination of the tactics that investment firms used to win lucrative business from vast public pension pools.

In most states, charging placement fees is legal if they are disclosed as required. But potential conflicts of interest are rife, especially for officials with a legal obligation to make informed, well-intended decisions about how pension-fund money is spent. Lawyers say a gray area emerges when finder's fees are paid to individuals or firms that do little more than trade on their access to public-pension-fund executives.

Such alleged behavior is at the heart of the scandal unfolding in New York. The state attorney general and the SEC have accused a former top fund official and a political adviser of giving investment funds access to billions of dollars of state pension money, in exchange for kickbacks and other payments for personal and political gain. One such middleman already has pleaded guilty to securities-fraud charges.

Some officials across the country have expressed concern about so-called pay-to-play practices -- that is, paying to influence people who direct the investments of public-employee retirement funds. Pay-to-play can range from illegal kickbacks, which in some instances have led to jail time, to legal activities such as campaign contributions to elected officials on the boards of pension funds. Pension funds are especially vulnerable to such accusations because their boards are often populated by elected officials or people with limited financial experience who need to rely heavily on outside advisers.

New York state's comptroller, Thomas DiNapoli, said that in light of the allegations contained in the case brought by the state's attorney general and the SEC, 'the best way to restore the pension fund's reputation is to say we won't be involved with any transactions that involved placement agents.'

Meanwhile, several commentators raised questions about Mr Rattner's suitability to be "automobile czar."

David Rothkopf, the author of Superclass, dubbed Mr Rattner the "kickback czar" on the Foreign Policy blog,

Are you joking? The Obama Administration somehow thought that it was okay to give a pass to Steve Rattner? They thought it was okay to appoint a guy to a key job after he apparently acknowledged to them that he was under investigation for providing a million dollar payment to pension consultant in exchange for receiving an assignment to manage a big chunk of pension fund money for New York State?

They thought it was okay in the middle of a justified surge of global disgust with Wall Street to embrace a big time Wall Street player who is smart enough to be arguing the legal technicalities of the transaction but not smart enough to recognize that it might just seem to be sleazy, dubious and a gross disservice to the people who were depending on the State to use appropriate methods and metrics to find stewards for their retirement money?

They even thought it was okay when part of the deal involved payments to support a movie called 'Chooch.' (What’s worse than bad ethics and bad taste all wrapped up into one sordid exchange? The New York Post called 'Chooch' which scored an amazing 00 rating from Rotten Tomatoes “the kind of vanity project that gives amateurs a bad name.”) What's more they did all this while giving Rattner the job of auto czar for which he had no material auto industry experience? I thought the way high ethical standards worked was that you didn't just bar people convicted of crimes, you tried to weed out people who had done things that were wrong or contrary to the public interest.

On BlackStarNews, Edward Manfredonia wrote:

I believed Rattner’s efforts to take the Times private should have disqualified him from an appointment with the Obama Administration; especially the key post of trying to stabilize the collapsing auto industry.

The White House still insists that the Administration fully supports Rattner; that reminds me of Bush proclaiming backing for Don Rumsfeld when it was clear he should have been shown the door as defense secretary.

Here's why Rattner deserves the boot.

An even more egregious form of activity that what I previously covered has become public. Rattner, who has extensive ties to Bill and Hillary Clinton, has been identified in several published news reports as the Quadrangle Fund executive who paid $1.1 million to receive more than $100 million from New York State’s multi-billion dollar pension fund to manage. The manner in which the payments were made leaves no doubt that they were meant for 'pay to play', which is illegal in my opinion.

Not surprisingly, a NY Times editorial was milder, but did allow,

Mr. Rattner showed some bad judgment in the 'Chooch' deal, and the public has a right to expect more of him in his new, highly sensitive position.

It's an interesting story, with implications in many areas, and it has hardly played out. Anyone reading this far is probably wondering, however, what this has to do with leadership, governance, and ethics in health care. None of the articles quoted above mentioned anything related to health care, or academics for that matter.

Here is where I pull the rabbit out of the hat.

Steven Rattner, in fact, has an important leadership position relevant to academics, and to academic health care. He is a member of Brown University's Board of Fellows, the "upper house" in the university's bicameral board of trustees, called the Brown Corporation. Brown University includes the Alpert Medical School, and the Division of Biology and Medicine. (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.)

And thus the issue here is really about the anechoic effect. Even though this convoluted case raises issues about Mr Rattner's role at Brown analogous to the issues it raises about his role as "automobile czar," there has been to date not even any media mention of his role at Brown, much less discussion of its implications for the university, academic leadership and governance, etc.

To survey the local coverage, the Providence Journal has not published any relevant news stories so far. It did print an op-ed questioning Mr Rattner's suitability for the "automobile czar" position, which had to do with the lack of sympathy an "investment banker" might have for the United Auto Workers. The Boston Globe ran a story from the Washington Post about the case, but one that had nothing on the local, or the academic angle. The Brown Daily Herald published a two news stories (here and here) about Mr Rattner's appointment as "automobile czar," which did note he is a "corporation member," but has not covered the current controversy. I am aware of no recent open discussion, or any discussion at all of Mr Rattner as a member of the Board of Fellows, in light of the recent unpleasantness.

Thus, our local angle on the New York pension/ placement agents/ Quadrangle/ "Chooch" affair mainly demonstrates how at many academic institutions, it is simply not done to bring up issues that question leadership and governance, especially at the highest levels.

Parenthetically, we have posted many times, most recently here, about the leadership and governance of Dartmouth College. Some might have interpreted these posts as hostile to that institution. They were anything but. In fact, it has only been possible to discuss leadership and governance at Dartmouth so thoroughly because that institution is much more open about its leadership and governance than is the typical US academic institution. Half of the he Dartmouth Board of Trustees, as we noted, used to be elected by vote of the alumni. The alumni could nominate their own candidates for the Board, through a petition process. The successful attempt to decrease the overall proportion of elected Trustees sparked a tremendous amount of open discussion and debate. Issues of leadership and governance at Dartmouth seem to be frequently discussed in local publications, on blogs, and sometimes even in the national media. I suspect that a governance system at Dartmouth marked by more than average representativeness and accountability has lead to much more vigorous debate and discussion of academic governance and leadership than occurs at more typical universities. (Note that even after the "board packing," Dartmouth still has a larger proportion of alumni-elected trustees than does the typical university, and it is still possible for alumni to put people on the ballot via petition.)

Brown University, on the other hand, is lead by a Corporation most of whose members are appointed by the Corporation itself. While a minority (14 of 42) of the Board of Trustees (the lower house) of the Corporation are elected by alumni, to my knowledge, all the election candidates are hand-picked by the Brown Alumni Association, and there is no provision for petition candidates. Although a few fiesty students occasionally call for more light to shine on the Brown Corporation, (e.g., see here), for the most part, questioning the leadership and governance of the university is simply not done. Thus, Brown seems to be typical of most major US academic organizations.

However, more transparent, accountable, governance, clearly guided by ethical principles and the organization's mission might allow US academia, and academic medicine to address some of the problems that we too often have opportunities to discuss on Health Care Renewal.

A long time ago, in 2006, we first blogged about a "new species of conflict of interest" which we thought might prove to be even more important than those afflicting health care that were then starting to be discussed. This involved health care organizational leaders who were simultaneously members of the boards of directors of for-profit health care corporations. We posited these conflicts would be particularly important because being on the board of directors entails not just a financial incentive. It ostensibly requires board members to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.] Thus, for example, the conflict posed by the president of a university, to whom a medical school and academic medical center report, who also is the director of a pharmaceutical company, would be extreme.

Since then, we noted yet another variant on this theme, university presidents who were supposedly the top leaders of failed financial firms, and then who did various dances to try to avoid accountability for these firms' fates. That theme recently made it to the big time, a front page article on the Sunday Business section of the New York Times.

The most extreme version was the case of that of Eugene Trani, the former President of Virginia Commonwealth University ( full disclosure: I spent 7 years on the faculty of its medical school, and am still an adjunct faculty member). Trani turned out to be on the board of a tobacco company, and soon after this was revealed, retired from the presidency (see most recent blog post here).

Now a Washington Post blogger has yet another twist on this case:

Eugene P. Trani left the presidency of Virginia Commonwealth University in 2009 after improving the school and expanding its presence in downtown Richmond. But Trani was also a director of LandAmerica Financial Group, a Richmond-area title insurer that went belly-up in 2008, taking with it millions in investors' money.

Today, Trani is on the board of Richmond-based Universal Corporation, a global tobacco marketer. Universal's subsidiaries have just agreed to pay $8.98 million in a tobacco bribery scandal that stretches from Brazil to Thailand to Africa. The firm has issued a public apology. Trani received $159,032 in total compensation for his board service.

So Trani was not only on the board of directors of a tobacco company, he was on the board of directors of a tobacco company that was forced to settle charges of international bribery and issue apologies for same, and just to ice the cake, was on the board of a failed financial company whose failure affected residents of the locality which his university served.

As the saying goes, "the fish rots from the head down." How can academic leaders expect integrity from their faculty when they willingly take on such grotesque conflicts? Leaders who thus try to serve two, or many masters are likely to run health care organizations that do not serve their primary constituents, patients who expect good care, learners who expect honest, competent teaching, and the public who expects important, unbiased research, well. If we really want to reform health care, we need leaders who put the mission, not their own pocketbooks, prestige, and cronies, first.

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/ device companies, then went on to the intense conflicts generated by academic medical and other health care non-profit leader who also sit on boards of directors 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 finance 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 an article 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 here about Summers' poor fit for the role of an academic medical leader, and here and here about the dominance of Harvard leadership by leaders of (sometimes failed) financial institutions. Ferguson summarized (bad pun, sorry) the problem thus:

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.

The problem is essentially one of huge conflicts of interest:

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.

Summers bear huge responsibility for the current economic mess:

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.

Also,

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.

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.

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.)

Amazingly, rather than ending up an economic pariah after that, Summers regained power over the economy in the last few years.

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.

Summers was tightly aligned with the finance world, and benefited from the dominance of financial leaders on Harvard's board (see post here):

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.

Yet in between his government and academic leadership roles, Summers got rich from finance firms' money.

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.)

Ferguson went on to list several other conflicted academic economists:

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.

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 Naked Capitalism blog. See additional comments on the University Diaries blog and on Felix Salmon's blog.

And speaking of the costs of financial maneuvering by hospitals, the Wall Street Journal just reported on "Hospitals' Wall Street Wounds,"

Hospitals nationwide are tangling with Wall Street to get out of disastrous wagers that have complicated their financial problems.


Some hospitals are paying millions of dollars in penalties to get out of derivatives contracts, after betting incorrectly that interest rates would rise. Other hospitals are paying higher interest rates. At many, these ill-fated financial bets have contributed to layoffs and scuttled projects.


More than 500 nonprofit hospitals—at least one in six—bought interest-rate "swaps" in a bid to lower their borrowing costs, estimates Municipal Market Advisors, a Concord, Mass., consulting firm. The swaps allowed hospitals to act much like homeowners switching from a floating-rate mortgage to fixed-rate one, betting on rising interest rates.

For a fee, the hospitals received a fixed rate to sell bonds, lower than the municipal-bond market at the time. These bets backfired when the Federal Reserve cut interest rates to nearly zero from more than 5% in 2007.

Hospitals also issued auction-rate securities—which reset bond prices weekly or monthly through auctions—that represented about a third of the $330 billion market for these derivatives. Hospitals paid Wall Street firms more than $120 million in fees for the securities between 2005 and 2007, said data firm Thomson Reuters. That market dried in the 2008 financial panic, leaving hospitals with higher interest rates.

The article included a few pointed examples, e.g.,

In April 2007, Smith Barney brokers pitched Tri-City Medical Center in Oceanside, Calif., on ways to save money on interest rates. In a presentation, the brokers argued that the hospital could save tens of millions of dollars by refinancing its debt with derivatives from parent Citigroup, according to a lawsuit filed in April 2010 against Citigroup and Smith Barney, now co-owned by Morgan Stanley.

'Historically low' interest rates created an 'optimal environment,' according to Citigroup documents reviewed by The Wall Street Journal. 'Citigroup can mitigate the primary risks,' according to a slide presentation.

Persuaded that it could cut its interest rate—5.7% at the time—on $67 million in outstanding bonds, the hospital issued auction-rate securities and added interest-rate swaps, according to the lawsuit and Daniel Callahan, an attorney for the hospital.

Soon, the auction-rate market collapsed. Investors stopped bidding on these securities and the banks that sold them stopped acting as a buyer of last resort as they had in the past. This forced many hospitals and other issuers to pay a maximum penalty rate—sometimes up to 20%—that kicks in if there aren't buyers.

As a result, rates shot up to 17%, costing Tri-City some $16 million more than it would have paid under its old rates, according to the lawsuit, filed in California Superior Court in Orange County.

The hospital board replaced many top officials and paid Citigroup more than $6 million to get out of the auction-rate securities and the interest-rate swaps, Mr. Callahan said.

The loss 'continues to impact Tri-City's ability to meet the needs of the entire community,' Mr. Callahan said, delaying the expansion of services and capital improvements.

Auction-rate securities 'were an engineered, artificial market supported by the activities of the investment bankers designed to postpone a collapse,' the hospital alleges in the lawsuit.

At least one financial expert agreed:

'Financial engineering by Wall Street has been a huge part of hospital's financial problems and has even translated into a lack of hospital beds,' said Brian McGough, a managing director of health-care investments at Bank of Montreal Capital Markets in Chicago.

This is another example of how health care organizations, including respected not-for-profit institutions, jumped headlong into the transactions first economy of the last 20 plus years. The were lured by the prospect of making easy money from financial transactions. However, it looked like those who really made money were the middle men who sold everyone on the magic of derivatives.

You would have thought that the highly compensated financial wizards that hospitals and other health care not-for-profits chose for their leaders in the last 20 plus years would have been able to see through such nonsense. Why were they paid so much, if not for expertise in this area? But I would suspect that they too became distracted by all the money floating their way to think about how it might end.

We have often decried the problems of ill-informed health care leaders who do not have direct experience in actually providing health care, or much sympathy for the values of health care professionals. Breaking the medical "guild," and putting professional managers in charge of health care was once touted as a way to control costs. It is ironic that after health care organizations became sold on the uncanny abilities of managers with business, usually finance or marketing training, these geniuses turned out to be as gullible about the wonders of Wall Street as everyone else.