Merging Finance and Health Care Leadership - Robert Rubin Proteges Running DHHS, Spouse of Hedge Fund Magnate Running the FDA

Hidden between the lines of some not very prominent news stories were reminders of how close health care and financial leadership have become in these times of continuing economic unrest after the global financial collapse/ great recession.

After the events of 2008, it became more apparent that the dysfunction in academics and health care  paralleled that seen in finance.  One reason may have been the overlapping leadership of finance and health care.  For example, in 2008 we first posted about how Robert Rubin, who was then a Fellow of the Harvard Corporation, the top group responsible for the governance of that great academic and medical institution, bore responsibility for the global financial collapse/ great recession.  Mr Rubin as Treasury Secretary was a proponent of financial deregulation in the Clinton administration.  Later, he became a top leader of Citigroup, whose near collapse helped usher in the crisis of 2008 (look at our 2008 post here and our 2010 post here.  Rubin just stepped down from his Harvard position this year,)  Since 2008 we found many other links among the leadership of Wall Street and of academic medicine and of big health care corporations.  These links, if anything, seem to be getting stronger. 

From the Department of Health and Human Services to Citigroup and then back to the Department of HHS

A tiny, four sentence Reuters story noted an apparently routine appointment to upper management at the US Department of Health and Human Services.  The first three sentences were:

U.S. Health Secretary Sylvia Burwell named Citigroup Inc executive Kevin Thurm as senior counselor of the U.S. Department of Health and Human Services (HHS), which is implementing the controversial U.S. Affordable Care Act.

Thurm has served in a number of roles at Citi since joining the bank in 2001, including senior adviser for compliance and regulatory affairs and deputy general counsel.

Before joining Citi, Thurm, a former Rhodes scholar, was the deputy secretary of the U.S. Department of Health and Human Services.

Why is that significant?  First, the near bankruptcy of the huge, badly led Citigroup was widely acknowledged to be a cause of the global financial collapse.  A 2011 New Yorker article on the role of the revolving door between Washington and Wall Street ("Revolver," by Gabriel Sherman) summarized the plight of Citigroup and the role of Robert Rubin in it,

Citigroup was the most high-profile of Wall Street’s basket cases, the definitionally too-big-to-fail institution. With massive exposure to the housing crash and abysmal risk management, the firm cratered, surviving as a virtual ward of the state after the government injected billions and took a 36 percent ownership position. Along with AIG and Fannie and Freddie, Citi came to be seen as a pariah institution, felled by management dysfunction and heedless greed in pursuit of profits. Complicating matters for Citi, the wounded bank found itself tangled in the populist vortex that swirled in the crash’s wake. On the left, there were calls that Citi should be outright nationalized, stripped down, and sold off for parts. Pandit was called before irate congressional-committee members to answer for Citi’s sins, an ignominious inquisition captured on live television. In January 2009, under pressure, Citi canceled an order for a new $50 million corporate jet.

There was plenty of blame to go around at Citi. Chuck Prince, a lawyer by training who succeeded Citi’s outsize former CEO Sandy Weill, had little grasp of the complex mortgage securities Citi’s traders were gambling on. As late as the summer of 2007, when the housing market was in free fall, Prince infamously told the Financial Times that 'as long as the music is playing, you’ve got to get up and dance.'

Bob Rubin himself pushed the bank to take on more risk in order to increase its profitability, a move that Citi’s dismal risk management was ill-equipped to handle. Pandit, whom Rubin had helped to recruit in 2007 just as the economy began to unravel, was tasked with cleaning up the mess when he became CEO in December of that year, and his early tenure had a deer-in-headlights character. Eventually, he realized that the asset class Citi lacked most was human capital, of the blue-chip variety.  

The article also summarized Rubin's role in the fervor of deregulation in service of market triumphalism that lead to the financial collapse,

In tapping Rubin to run Treasury, Clinton was sanctioning a revolution in the Democratic Party, one that fundamentally redefined the party’s relationship with Wall Street. Rubin, along with Alan Greenspan and Larry Summers, believed in an enlightened capitalism, which would spread prosperity widely. This enchantment with the beneficence of markets became the dominant view in Democratic Washington, hard to argue with when the economy was booming, as it was in the second half of the nineties. Rubin recognized that derivatives posed a risk but effectively blocked efforts to regulate them and pushed for the repeal of the Glass-Steagall Act, the Depression-era legislation that prevented commercial banks from merging with investment and insurance firms (the new law essentially legalized the $70 billion merger in 1998 of Citicorp and Travelers Group that created Citigroup).

Circling back to recent events, Once he got to Citigroup, Rubin assembled a team, partially from his old associates in the Clinton administration,

He also recruited several former Clinton aides to Citi, including former Health and Human Services deputy secretary Kevin Thurm....

So Kevin Thurm became something of a Robert Rubin protege at Citigroup. In fact, he rose to an important leadership position at the same time Citigroup was getting ready to become a "basket case," in part apparently because of the advice of Robert Rubin.  According to a 2013 version of Mr Thurm's official Citigroup bio,

Kevin L. Thurm is Senior Advisor for Compliance and Regulatory Affairs at Citigroup.

Previously, Thurm served as the Chief Compliance Officer of Citi. In that role, Thurm led Global Compliance which protects Citi by helping the Firm comply with applicable laws, regulations, and other standards of conduct, and is responsible for identifying, evaluating, mitigating and reporting on compliance and reputational risks and driving a strong culture of compliance and control. Since joining Citi in 2001, Thurm has also served as Deputy General Counsel of Citi, where he led the Corporate Legal group, overseeing a number of Company-wide Legal functions and providing support on day to day matters, including issues involving the Board, senior executives, and regulators; Chief  Administrative Officer of Consumer Banking North America, where he helped lead the business group and was responsible for a variety of functions including Community Relations, Compliance, Legal and Public Affairs; Director for Administration in the Corporate Center; Chief of Staff to the President and Chief Operating Officer of Citigroup; and as the Director of Consumer Planning in the Global  Consumer Group.

To recap, Mr Kevin Thurm was a top compliance executive of Citigroup while the company was imploding, and being a protege of Robert Rubin, an architect of the financial deregulation that led to the global financial collapse, and a leader of Citigroup responsible for the risky behavior of that company that led to its near collapse, which was another precipitant of the global financial collapse or great recession.  It is not obvious that these are great qualifications to be Senior Counselor at DHHS.

Moreover, Mr Thurm's responsibilities at DHHS would not be limited to compliance or financial leadership.  According to the official DHHS press release announcing his appointment,

As a Senior Counselor, Thurm will work closely with the Department’s senior staff on a wide range of cross-cutting strategic initiatives, key policy challenges, and engagement with external partners.

Yet, there is nothing in Mr Thurm's public record to indicate that he has any actual experience in health care, medicine, public health, or biologic science.  So it is not obvious why he should be entrusted with leading "cross-cutting strategic initiatives, [and] key policy challenges."

On the other hand, Mr Thurm might be simpatico with the new Secretary of DHHS, Ms Sylvia Burwell.  According to a Washington Post article at the time of the hearings about her nomination,

despite her Washington experience, ... is not well known in health-policy circles, and, during her confirmation hearings, she gave little concrete sense of the direction in which she will take the complex department she will inherit.

This seems to be a polite way to see she also has no actual experience in health care, medicine, public health, or biologic science.   Her official biography lists no such experience.  However, she was also a Robert Rubin associate, and perhaps protege, during the Clinton administration,

During the Clinton administration, Burwell held several economic roles — as staff director of the White House National Economic Council, as chief of staff under then-Treasury Secretary Robert Rubin,...

To summarize so far, the new Secretary of the Department of Health and Human Services, and now her new Senior Counselor, were both closely associated with Robert Rubin, who seems to bear major responsibility for the global financial collapse, and the new Senior Counselor worked with Rubin at Citigroup, whose near bankruptcy helped accelerate that collapse.  On the other hand, neither of these leaders has any experience in health care, public health, medicine, or biological science. 

Hedge Funds, Tax Avoidance, and the US Food and Drug Administration

This story is even less obvious.  A July, 2014, report in Bloomberg recounted plans for a Senate hearing on tax avoidance by huge, lucrative hedge funds.  The basics were,

A Renaissance Technologies LLC hedge fund’s investors probably avoided more than $6 billion in U.S. income taxes over 14 years through transactions with Barclays Plc and Deutsche Bank AG, a Senate committee said.

The hedge fund used contracts with the banks to establish the 'fiction' that it wasn’t the owner of thousands of stocks traded each day, said Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations. The maneuver sought to transform profits from rapid trading into long-term capital gains taxed at a lower rate, he said.

An accompanying Bloomberg/ Businessweek story described testimony at a Senate hearing by the Renaissance co-Chief Executive Officer Peter F Brown,

Renaissance was founded by the mathematician James H. Simons, whose fortune is now estimated by Bloomberg Billionaires Index at about $15.5 billion.

Brown became co-CEO with Robert L. Mercer in 2010 after Simons retired and became non-executive chairman. Before joining the firm in 1993, he was a language-recognition specialist at International Business Machines Corp.

Mr Brown testified that the company was not so much trying to avoid taxes by the complex strategy but simply to make even more money.    But, per the New York Times, Senator Levin

focused on the lucrative nature of the transactions, most of which took place using Renaissance employees’ money. Between 1999 and 2010, the fund used basket options to produce profits of more than $30 billion, Mr. Levin said. Barclays and Deutsche Bank together made more than $1 billion in revenue.

Mr Brown's firm seems, unlike Citigroup, to have a record of financial success, and no one is accusing Mr Brown or his firm of being responsible for the global financial collapse.  However, Mr Brown is certainly a very rich Wall Street insider.  Also, as we noted in 2009, his firm clearly has had major involvement in health care investments.   And the current hearings emphasize concerns that his firm has been executing questionable tax avoidance strategies.

Mr Brown has one other very major tie to health care.  As  noted in 2009 on Health Care Renewal, but apparently only parenthetically by one recent news article, (again from Bloomberg, written before the Senate hearing),

Brown lives in Washington with his wife, Margaret Hamburg, the commissioner of the U.S. Food and Drug Administration. She was appointed by President Barack Obama in 2009.

In 2009, we noted that as a condition of Dr Hamburg's leadership of the US FDA, her husband, Mr Brown, would have to divest his shares of four Renaissance funds.  However, it is obvious that he remained at and became the co-CEO of Renaissance since. 

While the current leader of the FDA clearly has medical and health care experience, she is also steeped in the culture of finance and Wall Street.

Summary

Thus we have two recent stories of how top health care leadership positions in the US government are held by people with strong ties to the world of finance, but not always with any direct health care or public health experience.  Why was the wife of a hedge fund magnate the best person to run the FDA?  Why was a person not known in "health policy [or health care] circles" the best person to run the Department of Health and Human Services?  Why was a Robert Rubin protege from Citigroup the best person to be a Senior Counselor at DHHS?  Presumably there were many plausible candidates for these government positions.  Why was it not possible to find people to fill them who were not tied to Wall Street?  Why was it not possible to find people with profound understanding of and sympathy for the values of health care and public health to fill all of them?   

The leadership of health care and finance continue to merge.  This seems to be one broad explanation for why both fields continue to be notably dysfunctional.  While Wall Street has spread around plenty of money to influence public opinion and political leaders, many still remember how its foolish and greedy leadership nearly caused another great depression.  It is likely that the influence of Wall Street culture on the leadership of health care organizations, be they governmental, academic, other non-profit, or commercial, has fostered the continuing financialization of health care, with its focus on "shareholder value," that is, putting short-term revenue ahead of patients' and the public's health.

I strongly believe health care would be better served by leadership that puts patients' and the public's health first.  Occasionally people with such values may come from a finance or economics background.  However, in an era where many people continue to believe "greed is good," we at least ought to confirm that health care leaders really are about health care first, and money a distant second.

ADDENDUM (20 August, 2014) - This was re-posted on the Naked Capitalism blog.

8:27 AM

Hedge Fund U, Version 2

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 repuations got this way has been unclear.

In 2007, we reported on one famous institution which had a more representative, transparent, and accountable form of governance. Let me provide a summary of the background from FIRE, the Foundation for Individual Rights in Education,

For over a century, Dartmouth College provided alumni with an avenue for direct participation in selecting leadership, with eight of the 18 members of Dartmouth's Board of Trustees coming from popular vote (the other ten were appointed by the Board). Starting in 2004, petition candidates—those who had to gather alumni signatures to be nominated—challenged those selected by the Association of Alumni in the annual trustee elections. Alumni responded in kind: over the next four years, four petition candidates were elected to the Board of Trustees.

These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's "red-light" rating and became a 'green-light' institution.

These developments did not please everyone, however. Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.'

>> If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule. <<

As the petition candidates grew in numbers (including George Mason Law Professor Todd Zywicki), so too did the official criticism. After Zywicki expressed disagreement with Dartmouth's leadership, the Board's chairman responded.

Haldeman and his cohorts wrote in a statement on the board's Web site that Zywicki 'violated his responsibilities as a trustee of Dartmouth College, which includes acting in the best overall interests of Dartmouth and representing Dartmouth positively in words and deeds.'

It was clear that a frank discussion of the issues at Dartmouth was not welcome on the governing board. The Trustees thus moved to alter the playing field. In September 2008, the Board declared that it would add five new positions—all hand-picked by current Trustees. The century-long tradition of parity between alumni-elected Trustees and the self-perpetuating Board members was erased. It came as no surprise when the Association of Alumni announced in January that the 2009 election would feature no petition candidates.

In 2007, what really got our attention was the stated rationale for this push towards less representative and accountable governance. Mr Haldeman, the chairman of the board of trustees, announced a smaller proportion of elected trustees would ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds." Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. In 2007, they seemed not very diverse, but why the majority should be in the financial sector, and what implications that had, was then obscure.

Things have changed. In the fall of 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector.

This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. Furthermore, when we had other occasions to look, we found that Dartmouth College was not an isolated case.

We noted that half of the Fellows of Harvard, the university's equivalent of a board of trustees, were from finance, and two were affiliated with corporations at the center of the global financial collapse. We recently found that almost 40% of the board of Yeshiva University were from finance as of the end of 2008. One former board member was Bernie Madoff, now in jail for running a giant Ponzi scheme disguised as an unregistered hedge fund. Yeshiva lost $110 million of its investments with Madoff. Another former member was indicted, accused of fraudulently abetting Madoff's operations. One current member runs a hedge fund that had to pay $180 million to settle other fraud allegations.

So we raised the hypothesis 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. Simultaneously, a commentary in the Chronicle of Higher Education put it this way,

Most college and university boards are composed largely of wealthy people, usually from the worlds of finance, law, and private enterprise. They are sometimes alumni but are often selected for their personal capacity to give, their links to other people who might give, or their historical record of having given.

Many trustees today have in fact been part of the elite sectors of finance, law, and enterprise that have proven improvident, shortsighted, and badly governed. Can they be seen as the wisest of our wise who will bring both generosity and wisdom to the academy?

News items from last week, some generated by release of financial disclosure forms from new members of the current US administration, add insight into what now appears to be a pervasive web of entanglements among academia and the finance sector.

One set of stories was about Lawrence Summers, now chief economic advisor to the US President, but president of Harvard University from 2001-2006. Just after resigning as president, and while still a professor at the university's Kennedy School of Government, Mr Summers suddenly began lucrative relationships with multiple players in the financial sector. Per the New York Times, Mr Summers assumed an amazingly well-paid part-time position at a hedge fund,

Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House.

Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week.

Much is known about Mr. Summers’s days in Washington and Cambridge, but little attention has been paid to his two years in New York, from late 2006 to late 2008, advising an elite corps of math wizards and scientists devising investment strategies for D. E. Shaw & Company.

Mr Summers also collected prodigious speaking fees from many financial corporations, some of which subsequently failed or had to be bailed, out, as per the Washington Post, he

was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations.

Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form. Summers reported donating two fees totaling $70,000, including the payment from Merrill Lynch, to charity.

Summers received all this money why he was still a faculty member at Harvard. As noted by the Washington Post, he did not leave his faculty position there until 2009.

Although there is no evidence that Summers had financial relationships with corporations in the finance sector while president of Harvard, his sudden and very lucrative jump into that sector after leaving the presidency, and while nominally a full-time faculty member, suggests at least a major alignment of interests. Some commentators have made this point more forcefully, for example, Robert Scheer in the Nation,

Not surprisingly, Lawrence Summers is convinced that he deserved every penny of the $8 million that Wall Street firms paid him last year. And why shouldn't he be cut in on the loot from the loopholes in the toxic derivatives market that he pushed into law when he was Bill Clinton's treasury secretary? No one has been more persistently effective in paving the way for the financial swindles that enriched the titans of finance while impoverishing the rest of the world than the man who is now the top economic adviser to President Obama.

Perhaps this alignment was related to charges that while president of Harvard, Summers helped stifle someone who tried to blow the whistle on excessively risky investment practices involving financial derivatives at the Harvard Management Company. Per the Harvard Crimson,

After a year-long stint at a European investment bank and another at Enron, Iris M. Mack signed on to be a quantitative analyst for Harvard Management Company in early 2002, hoping, she says, to find job security and distance from the risky trading and accounting practices that forced her last employer into bankruptcy in the company charged with managing Harvard’s endowment.

But only a few months later, Mack says she was fired after she raised concerns to University officials about managers’ qualifications and possibly irresponsible usage of financial instruments that could have contributed to the recent and sudden decline in Harvard’s endowment.

In an e-mail sent May 30, 2002 to Marne Levine, chief of staff for then-Harvard President Lawrence H. Summers, Mack detailed her concerns regarding what she deemed HMC’s 'frightening' usage of derivatives and statistical modeling techniques, as well as the Company’s lack of a timely and portfolio-wide risk management system, high employee turnover rate, and low level of productivity in the workplace, specifically among managers.

According to documents and e-mail records, all provided by Mack, Levine had initially assured Mack that their correspondence would remain confidential. But on July 1, HMC chief Jack R. Meyer called Mack into a meeting, in which she was presented with copies of her e-mails, according to a letter sent to Levine and Summers by Mack’s attorney.

The next day, Meyer dismissed Mack, pointing to 'these baseless allegations against HMC [that you sent] to individuals outside of HMC,' the letter says.

Ultimately, Mack says she reached an out-of-court settlement with Harvard over her firing because her lawyers felt that the University did not want to attract media attention from the dismissal....

Now, with the economy in an unprecedented slump in part due to the widespread and unregulated use of derivative contracts, Mack says she feels 'vindicated' but also sad.

'I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,' Mack says. 'I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.'

So now we wonder whether the poor governance practices, and resultant poor leadership of many academic health care institutions may have resulted from the increasing dominance of the governance of these organizations by people from the "improvident, shortsighted, and badly governed" finance sector?

11:18 AM

Hedge Fund U

We previously posted about how the Bernie Madoff scandal shed light on problems in the governance and leadership of one major university (which includes a well-known medical school). Yeshiva University, which includes the Albert Einstein College of Medicine, reportedly lost more than $11o million of its investments with Madoff. Not only was Madoff on the university's board of trustees, but also the chairman of the board's investment committee was hedge fund leader Ezra Merkin. Merkin invested the university's money in his own hedge funds, which, in turn, turned over the money to Madoff.

This week, Merkin, who like Madoff has left the Yeshiva board, was charged with civil fraud. As reported by the Wall Street Journal,

J. Ezra Merkin, a money manager who funneled $2.4 billion from universities and nonprofit organizations into Bernard Madoff's firm, was charged Monday on allegations he "betrayed hundreds of investors" by repeatedly lying to them about how he invested their money.

Mr. Merkin, a New York philanthropic leader and the former chairman of finance company GMAC, raised billions of dollars for his three hedge funds, telling clients he was managing the money himself. But instead, according to a civil fraud complaint filed by New York state's attorney general, Andrew Cuomo, Mr. Merkin collected hundreds of millions of dollars in fees over more than a decade while weaving a 'panoply of lies' to conceal that he was channeling much of his clients' funds to Mr. Madoff.

'Merkin held himself out to investors as an investing guru...In reality, Merkin was but a master marketer,' Mr. Cuomo said in the complaint.

Mr. Merkin, who met Mr. Madoff in 'the very late 1980s, maybe 1990,' according to his testimony, has emerged as a prominent figure in the Madoff scandal because of his stature among charities, universities, funds and even sophisticated value investors. Many of his clients were entities he courted through his social ties among monied New Yorkers. Mr. Merkin sat on the boards of some charities whose money he managed.

The sales pitches for Mr. Merkin's three funds -- Ascot Partners LP, Gabriel Capital Corp. and Ariel Fund Ltd. -- included promises that he actively managed their funds, according to the complaint.

Mr. Cuomo said the Ascot fund was formed by Mr. Merkin in 1992 as a 'feeder' fund for Mr. Madoff. It grew to hold $1.8 billion from 300 investors by the end of December 2008. Mr. Madoff pleaded guilty last month to using the money in a Ponzi scheme, where funds from new investors were used to pay existing ones.

About 85% of investors in the Ascot fund didn't know their money was flowing largely to Mr. Madoff, Mr. Cuomo's complaint said. In two meetings with Ascot investors in his offices at 450 Park Ave. in Manhattan, it says, Mr. Merkin pointed through a glass partition to a trading area and said his staff 'right here' was doing the work of managing their money.

Mr. Merkin collected an annual fee from Ascot's investors amounting to 1% to 1.5% of the fund's total assets, which included the fictitious Madoff returns, Mr. Cuomo's complaint said. By 2008, Mr. Merkin was collecting about $25.5 million a year from managing Ascot -- generating management fees of about $169 million from Ascot from 1995 to 2007, the complaint says.

Mr. Merkin told investors that 60% of his Ascot fund was comprised of money that came from his personal family trusts, the complaint alleges. But all told, Mr. Merkin invested personally and through family trusts and foundations $7 million in Ascot through 1998, and less than $2 million over the following 10 years.

Seeing how readily Madoff's institutional investors, in particular, the leadership of Yeshiva University were bamboozled, I thought maybe it was time to see who that leadership actually was.

Yeshiva's current Board of Trustees is listed here on the University web-site, but without any detail about the people whose names appear there. A bit of Google searching revealed that the group included, besides Merkin and Madoff,

- Morry J Weiss (chairman), who is on the advisory board of Primus Venture Partners, a private equity firm
- Sy Syms (vice chairman), who is on the board of the Israel Discount Bank of New York
- Alan E Goldberg (treasurer), who is co-managing partner and co-founder of Lindsay Goldberg, a private equity firm
- Israel A Englander, who is co-founder if I A Englander & Co, a financial derivatives trading firm, and founder of Millennium Partners, a hedge fund (also note that Millennium Partners and Mr Englander personally settled lawsuits in 2005 that charged they used an elaborate scheme using market timing, as per this NY Times story)
- Ruth L Gottesman, the spouse of David Gottesman, the founder and senior managing director of First Manhattan Company, an investment adviser, (and also a former chairman of the Yeshiva University board)
- Lance L Hirt, another partner at Lindsay Goldberg, a private equity firm (see above)
- Michael Jesselson, the president of Jesselson Capital, an investment company
- Henry Kressel, a partner and senior managing director of Warburg Pincus, a venture capital company

So, before the resignation of Madoff and Merkin, nine of the 40 officers and trustees of Yeshiva University were in finance, all in leadership positions (and the board also included the spouse of another financial leader). Most were not in retail banking or retail stock brokerages, but in the more exotic areas of finance that are most associated with the global economic collapse, including derivative trading, hedge funds, private equity, etc.

On one hand, it would appear that a board so heavily stocked with finance leaders ought to have been sophisticated enough to do the due diligence their role required in evaluating the university's investments. On the other hand, perhaps the enrichment with finance people created a clubby atmosphere that discouraged questioning their fellow financiers too closely.

That almost 25% of Yeshiva University's board was composed of finance leaders is striking, given that the US Bureau of Labor Statistics estimates that less than 6% of employed people work in finance. But note that we previously found that 50% of the Harvard Fellows (the equivalent of their board of trustees' executive committee), and 69% of Dartmouth College's charter (self-appointed, as opposed to elected by alumni) trustees were leaders in the financial sector. This is somewhat anecdotal evidence, but it suggests that leaders of finance are much more prevalent among the top leadership of elite US institutions of higher education than would be explained by their prevalence in the population.

This raises the question of why financial leaders seem to have become so prevalent in academic leadership. This question is important, since this prevalence seems to have increased in a time when the culture of the leadership of the financial sector seemed to become more and more alien to the values that academic leaders ought to support, culminating in a global financial collapse that many blame on the sector leaders' arrogance, greed, and sometimes outright corruption.

At least it seems a reasonable hypothesis 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.

We hope that there will be more interest in who now leads academia, especially medical academia, how they got there, and what they have wrought.

11:59 AM

Hedging the Future of the FDA?

A little while ago, we discussed the Obama administration's nomination for Commissioner of the US Food and Drug Administration (FDA), Dr Margaret Hamburg, focused on her current position as a director of Henry Schein Inc, a large distributor of medical products, including drugs and devices. There is another aspect of her nomination worthy of discussion, but which has not been publicly discussed. It has appeared almost as a footnote in a few reports of her nomination. For example, at the end of an article in the Chicago Tribune,

Hamburg is married to Peter Fitzhugh Brown, an artificial intelligence expert who is executive vice president and director of Renaissance Technologies, a privately owned hedge fund.

In this time of financial meltdown, hedge funds are more frequently mentioned in the press. Hedge funds are a relatively new, and generally opaque presence in the financial world. Hedge funds apparently buy and sell stocks, bonds, commodities, financial instruments, and use a variety of investment strategies. Since health care accounts for over $2 trillion of the US economy, it seems possible that hedge funds might be involved in stocks, bonds, and the finances in general of health care corporations. We therefore wondered Mr Brown's position at the hedge fund management company Renaissance Technologies might have something to do with health care, particularly with health care corporations that make products regulated by the FDA. It turns out that this question has no simple answer.

Hedge funds are often described as secretive and lightly regulated. This seems accurate, as it is not easy to find out much about their operations, strategy, holdings, or leadership. My usual Google searching tricks did not turn up much useful about Renaissance Technologies.

Most helpful was a 2008 article in Bloomberg News, which labeled the company as "the world's largest hedge fund manager." It was managing $35.4 billion in assets in September, 2007.

The Bloomberg reporter's attempt to find out something about the company's strategies was a failure, summarized by his conclusion, "nobody knows precisely how the firm makes its millions." When the funds founder, Jim Simons, was asked what he can say about his trading strategy, he answered, "not much." The instruments he trades? - "everything." The strategies he uses? - "a lot."

The only publicly available information about the company's holdings is in its 13F filings with the US Securities and Exchange Commission (SEC). The 2009 filing, covering 2008, is here. The filing only covers long stock holdings at the end of the year. Lacking a research staff, I have not been able to go through the voluminous report in detail, but do note that the company at times invested in health care corporations from A ([Abbott Laboratories, valued at $88,909,000) to Z (Zimmer Holdings, $7,858,000).

I had little luck finding out the role of Mr Brown within the company, and whether he has any personal responsibility for making decisions about investments in any health care corporations. But I did find that a prominent Renaissance Technologies fund, the Medallion Fund, worth $6 billion in July, 2007, is owned mostly by Renaissance Technologies employees, presumably including Mr Brown, not outside investors, "Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of the Renaissance staff." Furthermore, most of Renaissance Technologies is now owned by its founder and a few top officers, including in particular, Peter Fitzhugh Brown, who the Bloomberg article reported as owning "5-10 percent."

So, does Mr Brown's position in and partial ownership of Renaissance Technologies amount to a conflict of interest with respect to his wife's proposed position as Commissioner of the FDA? It is not clear. Mr Brown works for a company that manages billions of dollars, and likely a good chunk of that money is invested in instruments related to health care corporations. Mr Brown now presumably a goodly number of shares of the company's premier fund, and owns a substantial minority interest in the company as a whole. Hence he indirectly probably owns a substantial amount of such instruments. Whether he has any direct decision making responsibility for the buying and selling of such instruments is unclear.

Therefore, it seems that Dr Hamburg actually has a "potential conflict of interest" arising out of her husband's role in Renaissance Technologies. In academic conflict of interest policies, that phrase often appears without a definition, perhaps to soften the words so often applied now to medical academics. But this seems to be a real instance in which it should be used.

The shadows cast by the increasing opacity of the world of finance, now dominated as never before by organizations such as hedge funds that control large pools of investment about which regulations compel little disclosure, now seem to be darkening health care.

In my humble opinion, the Senate hearings on Dr Hamburg's confirmation ought to determine whether this potential conflict is more than that. Furthermore, we need a broader dialogue about how to dispel the shadows and secrecy that the dark arts of finance have spread to health care.

12:07 PM