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September 5, 2004
David Warsh, Proprietor


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A Walk on the Beach

It was another summer together on Cape Cod. Two old friends were walking on the beach, deep in conversation, their wives and children momentarily left behind. One was Andrei Shleifer, Harvard professor and chief outside economic adviser to the Russian government in the mid-1990s.  The other was Lawrence Summers, former Harvard professor, second in command at the U.S. Treasury Department.

As nearly as one can tell from Summers’ testimony, it was the summer of 1996.

Shleifer didn’t work for Summers, at least not in the conventional sense. The large team of economists, lawyers and other professionals he led was under contract to the State Department’s Agency for International Development. On the other hand, Summers, under Treasury Secretary Robert Rubin, had responsibility for oversight of US economic policy abroad; he had served as Undersecretary for International Affairs for more than two years.

Thus what the world saw, at least that part of the world that paid attention in Moscow to what passed for the Social Register, was something rather different than the strict reporting lines of an official organization chart. Russia then was in the throes of privatizing its mind-boggling array of state-owned assets, everything from giant factories to mineral rights. It was at once an attempt to destroy the planning system by parceling out ownership to — well, it wasn’t yet clear to whom — and a looting spree. Naturally these economic reforms were a matter of great interest to Washington.

Boris Yeltsin had just been reelected president in a run-off election after a campaign of epic scandal and intrigue.  His chief adviser, Anatoly Chubais, a bright young enthusiast of the form of all-at-once shock therapy known as “the Big Bang,” who had begun his public career selling off half of Moscow’s venerable Bolshevik Biscuit Co. for $654,000, was jubilant:  “Irrevocable,” crowed Chubais. “Russian democracy is irrevocable; private ownership is irrevocable; market reforms in the Russian state are irrevocable.”  Seven men were said to control something like 50 percent of the Russian economy

Summers and Shleifer were among each other’s best friends. The future Treasury Secretary had been a 28-year-old assistant Harvard professor when he first met the young Russian émigré. He had taught Shleifer as an undergraduate, sent him on to MIT for his PhD, took him along on an advisory mission to Lithuania in 1990, and in 1991, sheparded his return to Harvard as full professor, where he was regarded, after Martin Feldstein and Summers, as the leader of the next generation. Shleifer, in turn, had hired his own protégé as deputy in the mission to Moscow: Jonathan Hay, a Rhodes Scholar, first in his class at Harvard Law.

The Harvard Team in Moscow thus was seen by many to be speaking with unusually high fidelity for the Clinton administration in Washington.

But what could be seen only by insiders in Moscow, Americans and Russians alike, was that the protégés and their wives were apparently loading up on Russian securities for their own portfolios an starting a business seemingly in blatant violation of the conflict-of — -interest rules. They were actually running trading operations out of their Harvard offices.  No one could possibly tell how extensive were their deals.

About this, however, Summers did not ask and Shleifer did not tell, in the course of their walk on the beach that day. Both men have since testified extensively under oath. Summers’ tone in the deposition that he gave at his home in 2002 is by turns hazy and precise, cheerful and combatative. At least twice in the four-and-a-half hours of testimony, he couldn’t remember the year that the particular walk in question took place; at another point, moments later, he said. “You know, we’re trying to parse what was for me a very casual conversation on a beach six years ago.”

Summers acknowledged having known at the time that Mrs. Shleifer — Nancy Zimmerman — was doing well in business in Russia as a hedge fund operator. He knew, too, that Hay’s girlfriend (now wife) was involved in Russian capital markets as well.

He advised his friend to make certain that he was operating within the rules; to be careful in his relationship with Harvard. It did not occur to him, he said, that Shleifer might have any obligation under the contract to the United States. They were just two friends enjoying their customary annual summer visit on Cape Cod. “It wasn’t my habit to do U.S. Government business on beaches,” Summers told the assistant U.S. attorney who was prosecuting the case.

Despite his advice, the investment activity of the leaders of the Harvard Russian Project continued in the coming months, as the Yeltsin government prepared for another round of privatization. And the next spring, a series of whistles was blown.

Investigations were mounted. USAID promptly suspended Harvard, mere hours after its first visit to the project offices, and later cancelled the contract. The Russians, angry about losing their advisers and the link to the US government they represented, fired the State Department in turn. Eventually the US government brought suit against Harvard and the leading members of its team.

(For a good glimpse of what was known at the time, you can purchase for $2.95 a copy of an authoritative article which appeared on August 13, 1997, in The Wall Street Journal — “Aborted Mission: How an Aid Program Vital to New Economy of Russia Collapsed,” by Carla Anne Robbins and Steve Liesman.  Robbins is working on an update.)

Last July, Federal District Court Judge Douglas Woodlock in Boston found against Harvard, Shleifer and Hay in a summary judgement. One doesn’t say guilty or convicted, for it is not a criminal case (though the US attorney, Donald Stern, said at the time he had mulled possible criminal charges, presumably for perjury, before dropping them for of lack of resources). Nevertheless, the judge held Shleifer and Hay liable for treble damages. Harvard was held liable for simple breach of contract instead of fraud.

Last week, the parties filed a joint memo summarizing where matters stood, preparing for their scheduled September 9 conference before Judge Woodlock. The two-page memo was mainly an agenda of the problems remaining to be discussed.

The memo did contain the news that various settlement talks were underway. Those with Jonathan Hay had made “significant progress,” while the likelihood of success of talks with Harvard was still unclear. There had been no settlement discussions with Shleifer, the memo noted. The possibility remained that his case might go to a jury.

The world can only hope that Harvard University’s lawyers have the opportunity to fully argue out their case (and that both sides will bring expert testimony to bear on their argument), that no very substantial damage was done, and that the university earned a substantial part of its $34 million contract, because its mission to Moscow did more good than harm.

For the spectacle of Shleifer and Hay and their wives loading up on Russian investment while working out of a Harvard office in one of Moscow’s glitziest office buildings, at a time when the company that managed Harvard’s then-$11 billion endowment had nearly 2 percent of it actively invested in Russian securities, would be one of the more memorable scenes of the ’90s — if only it had been more widely noted at the time.

It is all the more interesting in view of what has happened to the principals since then.

Shleifer has become a leading expert on corruption, on government pathologies and their cures. His 1998 book with University of Chicago professor Robert Vishny, The Grabbing Hand, is published by Harvard University Press.

Hay works in London for the law firm of Cleary Gottlieb.

Summers has become president of Harvard University.

No one has accused Summers himself of breaking any law.  For example, the Treasury Department never for a moment intervened with State after USAID fired the Harvard team. And while Summers acknowledges having done a certain amount of grumbling about the Justice Department while in office, for having permitted the complaint against Harvard to be brought in the first place, the issue went forward to trial.

Summers’ judgment, however, is another matter.  He was inarguably present at the creation of the mess.

There is something really haunting about that walk on the beach. It would be a fitting topic for a play by Michael Frayn. (Copenhagen, Democracy). It is indisputable that the situation in Russia was just short of desperate in those days — the country was tottering on the brink of chaos in the mid-1990s. Nevertheless, surely somebody or something was being betrayed that day.  

Was it Shleifer? Did the youthful émigré, who left the former Soviet Union when he was 15, not deserve a better woodshedding from his friend?

Was it Summers?  From the standpoint of the Treasury, the brilliant and engaging Shleifer was America’s best possible man on the scene,  an agent with a feeling for the lot of common folk, yet capable of joining any conversation among oligarchs and government officials.  But who could ever tell which side he was on?

Harvard?  The university enjoys a reputation for being ethically sensitive. Some day doctoral students will compare and contrast its relationship with the Russian government in the 1990s to the University of Chicago’s relationship to Chile in the 1960s.

The United States?  The Russia Project was the spearhead of the United States’ most ambitious attempt at enhancing order in the world economy through foreign aid since the Marshall Plan, although the situations were very different. Compare the behavior of plenipotentiaries John McCloy and Lucius Clay to that of (elevated) apparatchiks Andrei Shleifer and Jonathan Hay.

Rule-of-law democracy itself? A commonly-heard argument in Russia in those days was that “corruption in the service of democracy” was sometimes a necessary tactic.  At one point in his deposition, Summers explained the anger of his Russian counterparts at the firing of his friend this way: “I had enough knowledge of Russian mores and Russian practices and Russian views from the conversations that I had with Chubais and [Russian Securities and Exchange chief Dimitri] Vasiliev to be confident that that the set of issues contained in the allegations were not issues that were consequential for them; and indeed that they would have, in part, valued advisers more extensively if they were more involved in actual private sector activities.” So was Shleifer exporting U.S. ways to Russia?  Or importing Russian ways to the U.S.?

Yet there has been no public falling out among the principals, as might have been expected.  Indeed, what has occurred has been just the reverse.

Summers recused himself from the matter of the government suit shortly after taking over at Harvard, though not before conveying to Faculty of Arts and Sciences Dean Jeremy Knowles that his friend has “a morale problem” and that he was “concerned to make sure that professor Shleifer remained at Harvard.” Summers was known to have stayed with the Shleifer family while interviewing for the job of Harvard president.

Harvard’s lawyers thus have been getting their direction from somewhere else — presumably the seven-member Harvard Corporation (of which Summers and his former boss, Bob Rubin, are members).

Thus that walk on the beach continues to haunt. In it are to be found all manner of hints of why the ruling looms so large for the university; for the economics profession; and for the rest of us as well. For the problem that has so handcuffed Summers to this point is an increasingly acute one in the modern age. It has to do with the individual’s capacity to sort through multiple allegiances, to identify the wellsprings of ethical behavior, and perform one’s duty. Somebody was betrayed in the course of that walk on the beach; probably several somebodies: but who

These events transpired at the pinnacle of global capitalism. They are still unfolding. It is important that they be understood. There is much about the Harvard matter that remains unknown. There are many lessons of Russia’s transition to a market economy that are yet to be drawn. The case continues next Thursday in Boston’s Federal District Court.

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