Trading Tweedledee for Tweedledum

Editorial Notebook

If there is one lesson to be learned from the Enron fiasco, it is that all should be wary of a corporation announcing a trade that, upon closer examination, isn’t really a trade at all. By using an accounting gimmick to disguise its enormous debts as derivatives trades—known “prepaid swaps”—Enron’s management conned its shareholders and employees out of millions of dollars. Now it looks like the Harvard Corporation is trying to pull the same “false swap” scam.

Just two days after Herbert S. “Pug” Winokur ’64-’65 resigned from the Harvard Corporation because of his involvement with Enron, the Corporation concluded its secret deliberations for selecting a member to fill another Corporation vacancy. They chose to appoint one of Enron’s bankers, the Chair of the Executive Committee of Citigroup, Robert E. Rubin ’60, to join their ranks. Although Winokur’s resignation was meant to reduce the Harvard Corporation’s connection to Enron, no one should be misled by this virtually meaningless swap.

Far from seizing the opportunity to purge itself of Enron’s taint, the Harvard Corporation, in choosing Rubin, is adding to its Enron infection. Winokur, acting as the chair of the Enron Finance Committee, oversaw the suspension of the company’s ethical standards and the creation of a number of partnerships that Enron used to defraud its investors. Meanwhile, Citigroup, according to the complaint filed against it by Enron shareholders, allegedly “hid loans, set up false investments and facilitated phantom Enron sales” for the energy giant.

In addition to the now-infamous call that Rubin placed on Enron’s behalf to the undersecretary for domestic finance—his old colleague in the Treasury Department, Peter Fisher—Rubin also reportedly called an official at the key credit ratings agency Moody’s. Rubin allegedly asked the agency to keep Enron’s investment grade credit rating in place until JP Morgan and Citigroup could complete the sale of Enron to Dynegy, though Citigroup denies that Rubin made a call.

Dynegy ended up passing on the Enron sale, but only because of the diligence of Dynegy’s own investment bankers in discovering the sad state of Enron’s finances. Enron declared bankruptcy soon after. Had Rubin’s alleged call to Moody’s been successful and led to the sale of Enron to Dynegy, Citigroup (together with J.P. Morgan, the other investment bank involved) would have made $90 million and Dynegy’s shareholders would have been stuck with Enron’s debts. If these allegations are proved true, Rubin will be morally obliged to follow Winokur’s lead and resign from the Corporation—perhaps only days after joining it. This is hardly the fresh start that the Corporation needs.