Bush, Harken and Harvard
By Matt Bivens
The Nation
10/22/2002 @ 12:31am
Harken Energy Corp., the oil company behind much of George W. Bush's wealth, blew briefly back into the news this summer as the president was lecturing Wall Street about good corporate conduct.
Those sermons provided an excuse to revisit the 12-year-old tale of how Bush cashed out $849,000 in Harken stock a couple of months before it announced a major loss and the share price tanked (as a company director, a member of the audit committee and a $120,000-a-year Harken consultant, Bush must have known of Harken's woes). Bush said he sold the stock not to jump ship, but because he needed cash to close a deal to buy the Texas Rangers baseball team.
These days, Bush is no longer lecturing on corporate citizenship, and the summer of Enron and Harken has segued into the autumn of Iraq.
But, now comes a new report that alleges Bush and other Harken insiders papered over their oil company's problems with money from, of all places, Harvard University.
That America's leading university had invested in Harken was no secret. Less widely known was its role in setting up an off-book partnership to help hide Harken's money problems -- and ultimately to assume them entirely.
First a few words about Harvard. With an endowment of $18 billion, the university is the wealthiest non-profit in the world this side of the Catholic Church. The school's seven-person board is self-perpetuating - it selects its own members -- and is beholden to no one, in an arrangement dating back to Harvard's Charter of 1650. Harvard's board, sitting on tax-free billions, refuses to meet with members of the university community, does not explain its decision-making process, does not allow appeals of its decisions, and does not release meeting times, places, agendas or notes.
Students and alumni who find this an unacceptable level of unaccountability have organized HarvardWatch , a group that follows the Harvard money. It's no easy task: the endowment's activities are opaque, and the money sprinkled around the world by some of finance's savviest minds - men whose multi-million-dollar compensation dwarfs that of the university's leading scholars. Now HarvardWatch brings us the story of Harvard's odd fascination with Bush Jr.'s oil patch.
In 1986, within a month of Bush joining Harken, the Harvard Management Corporation - which invests the university's endowment - spent $30 million to buy about a third of Harken's stock. This unusually aggressive investment has never been secret, but neither has the reasoning behind it ever been laid out for the public-- though the Wall Street Journal reports that "the person with the most influence over the endowment for decades has been Robert Stone Jr., an oil man on Harvard Management's board whom former Harvard executives described as the driving force behind its energy investments." Stone had been a financial and political supporter of the first President Bush.
In 1990 - as the nation focused on a looming Iraq crisis -- Harken's creditors were calling in loans, and Harken's board was told the company was on the verge of collapse. Enter, again, Harvard. It and another unnamed major shareholder loaned the oil company $46 million that May. It's not clear how many of those millions came from Harvard; nor is it clear why the endowment was dabbling in the dubious business of extending emergency bailouts to ailing companies it owned stock in.
By December, Harvard had gone still further: Acting on a motion made by Harken board-member Bush, the university's money-managers and the oil company co-founded the Harken Anadarko Partnership (or HAP).
Harken put in some mostly dry or disappointing oil wells, many of them in Oklahoma's Anadarko basin, which it valued at $26.1 million; and it also put in debts totaling $20 million, in return for a net contribution of $6 million. (And that's assuming dry wells in Oklahoma could be worth so much: William Black, a visiting scholar at Santa Clara University's Markkula Center for Applied Ethics, suggested $26.1 million was a wild over-estimation.)
Against Harken's contribution of (at most) $6.1 million, Harvard contributed $64.5 million of its own energy properties. Having contributed 91 percent of HAP's assets, Harvard then accepted an 84 percent stake. A mistake?
"Nah. This is math. You put up 91 percent of the money and get 84 percent of the company? I didn't go to Harvard, but I doubt they're that incompetent," says Black -- who was a top banking regulator in the Reagan and first Bush administrations, and an investigator of the failed savings & loan that was made notorious by the "Keating Five," five Senators who tried to protect it from federal scrutiny.
Thanks to Harvard's odd generosity, Harken's debts were gone - transferred to HAP. Over the next three years, Harvard would contribute money for HAP's operating expenses; Harken was kicking in IOUs, which HarvardWatch says the university eventually forgave.
Moreover: Harvard had brought cash and good properties, Harken dry wells and debt - yet their formal partnership paid Harken fees for management and drilling and servicing wells of more than $3 million in that first year.
With its debts and interest payments transformed, and money coming in from Harvard/ HAP, Harken had turned itself around on paper . (This tactic of hiding problems in "partnerships" also worked for Enron - for a while). Investors bid up the stock, and Harken insiders, including Bush, cashed out.
Off-book, HAP continued to lose money. Harvard's response was to buy out Harken's share - paying a few last millions more for a dog of a company, to a partner who had largely been a drag on it. Once Harken was out of HAP, and no longer collecting its fees, Harken's earnings and stock price fell again. By 1993 it was headed toward its current status as a penny stock.
That same year, Harvard also got out of HAP - selling it to the Cabot Oil & Gas Corporation, a spin-off of the Cabot family conglomerate. (More old school ties: Walter Cabot headed the Harvard Management Company from its 1974 founding to 1991.) In exchange for the HAP properties, Harvard took Cabot Oil & Gas stock worth $34.6 million.
So, Harvard had spent $30 million on stock; extended unspecified additional multi-million-dollar emergency loans; put another $64.5 million into an oddly uneven partnership that assumed Harken's debts, shrugged at its IOUs, and paid millions more in various fees - and then cashed out for a mere $34.6 million plus a few million more realized from selling off depressed Harken stock. This is not how the Harvard endowment reached $18 billion.
HarvardWatch is calling on Harvey Pitt, the Bush-selected SEC chairman, to re-open the investigation on the Bush-Harken era. Pitt has been evasive, while Harvard and the White House offer curt statements to the effect that all was done properly.
But really, how does this story square with the fiduciary responsibility of those paid handsomely to manage Harvard's money?
More importantly, how does it square with George Bush's expressed sympathy for people who lost their savings to unscrupulous accounting schemes? Does he have any apologies for those who believed Harken was a good company because the president's son worked there - people who invested in Harken and then lost their shirts?
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