Harvard Was Unlikely Savior Of Bush Energy Firm Harken
University's Endowment Arm Injected Cash Into Off-Balance-Sheet Deals to Save Harken
By GLENN R. SIMPSON Staff Reporter of THE WALL STREET JOURNAL
When the small company that helped make George W. Bush a multimillionaire verged on bankruptcy in 1990, newly unearthed documents show an unlikely financial archangel came to the rescue: Harvard University.
It long has been known that the school's endowment arm, Harvard Management Co., was a major investor in Harken Energy Corp. But the documents reveal two heretofore little-noticed deals, both endorsed by Mr. Bush, to allow the Texas firm to stave off creditors. One, critical to the company's survival, involved a partnership used to move troubled assets and large debts off the company's balance sheet -- much like the controversial investments that Enron Corp. set up before it filed for bankruptcy-court protection.
At the time, one of the Harvard endowment's most influential board members was a political supporter of then-President George H.W. Bush, the current president's father. One result of the deal: The current president avoided damaging his credibility as a businessman.
Unlike many of Enron's deals, Harken disclosed its transactions to investors and the Securities and Exchange Commission and complied with accounting rules. Mr. Bush didn't profit personally from the subsequent boost in Harken's stock because he already had sold most of his shares to fund a lucrative investment in the Texas Rangers baseball team.
The partnership deal is notable in the context of President Bush's drive to reform corporate standards in response to a string of accounting scandals. The Harken deal was designed to raise money without incurring new debt or selling stock. It did so by exploiting "a fundamental weakness in accounting rules" by moving the deal off its balance sheet, said Rice University accounting expert Dala Bharan, who reviewed the transactions for The Wall Street Journal.
Mr. Bush was then a $100,000-a-year consultant to Harken and the board member who made the motion to approve a partnership that seemed to benefit Harken far more than Harvard. Harvard has said it made a small profit from the association.
White House spokesman Dan Bartlett says the partnership was Harvard's idea and the school "basically dictated the terms of the investment." He said Harvard began talks with Harken in April 1986, well before Mr. Bush joined Harken. "The original relationship had nothing to do with President Bush," he said. He referred questions about the matter to Harken and Harvard. Neither responded to letters and phone calls.
Mr. Bush ended up at Harken as a result of a series of sales of the oil company he founded after earning a master's degree from Harvard Business School. Just after Mr. Bush joined Harken's board, Harvard Management became one of its biggest backers, ultimately buying 30% of its stock, loaning it millions of dollars and transferring oil properties to it.
Harken's good fortune after Mr. Bush joined often has been questioned by political opponents. The firm bested bigger rivals to obtain drilling rights from the Bahrain government in early 1990. But the Bahrain deal did little to improve its short-term finances, which were in a perilous state. The board meeting minutes from that July said the company's primary objective was to "avoid default."
The company's response to the crisis is detailed in records recently gathered from the Securities and Exchange Commission and elsewhere by HarvardWatch, a student and alumni group, and the nonpartisan Center for Public Integrity.
Harken was already technically in default at that point, according to other company records, because it had failed to abide by equity requirements in loan agreements with its two primary banks. One, Bank of Boston, was demanding immediate payment, but the other, First City Bancorp, agreed to take over Bank of Boston loans. At the time, First City was controlled by Robert Abboud, another supporter of the senior Mr. Bush who attended a White House event 10 days before that bailout's approval. In an interview, Mr. Abboud said Harvard's backing was a key factor in First City's decision to approve the Harken bailout and that it wasn't influenced by his relationship with the then-president.
But that deal still left Harken with crushing debt. At the July 1990 board meeting, Mr. Bush and the other directors decided to "establish a 'joint venture'" with Harvard Management's venture-capital arm, Aeneas Venture Corp., the minutes say. At the next month's meeting, Harken President Mikel Faulkner laid out a proposal to form a partnership with Aeneas that would take on much of Harken's debt, moving it off the balance sheet. The proposal also provided Harken with desperately needed cash, in the form of fees to manage the new entity. "After discussion, upon motion being made by Mr. Bush," the minutes say, the board unanimously agreed to open negotiations with Harvard.
A partnership deal was struck shortly thereafter. Harken contributed $20 million in debt and liabilities, plus a group of poorly performing oil-drilling assets valued at $26 million -- many of them in Oklahoma's Anadarko basin -- for a net of $6 million. Harvard's Aeneas contributed $64.5 million of its drilling assets, 91% of the investment, but agreed to accept just 84% of the so-called Harken Anadarko Partnership's earnings.
The deal immediately helped Harken's cash flow, bringing in $100,000 a month in management fees, and drilling and servicing fees of more than $3 million in the first year. Harken also retained cash from a $7.5 million bank loan that the partnership was required to repay.
"It seems to be a simple case of Aeneas bailing out Harken," said Mr. Dharan, an accounting professor at Rice University's Jones Graduate School of Management. Because Harken owned less than 20% of the partnership, it no longer was required under accounting rules to include the debts and assets on its balance sheet. Mr. Dharan argues that a true reflection of Harken's financial health would have included them. In effect, the partnership raised money without taking on new debt.
Still more help from Harvard came in an almost simultaneous deal to extinguish another $16.2 million that Harken owed its Aeneas arm from a previous venture. The company allowed Harken to pay off the note with assets valued at just $14.5 million.
The moves led to a gradual recovery in Harken's stock price, which was $1.25 a share at the end of 1990. In 1991, thanks to the prospect of a Bahrain strike and Harken's much-improved balance sheet, the price topped $8, prompting Harvard to begin selling its Harken shares. It sold 1.63 million shares valued at $7.47 million over the next year.
Current and former Harvard officials declined to comment publicly on the Harken transactions for this story or said they remember little about the matter.
Harken had several connections to Harvard, including business-school diplomas held by Mr. Bush and another Harken board member, Alan Quasha. 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.
It is unclear whether the Bush and Stone families were personally acquainted, but they were politically aligned. A sometime resident -- like the Bush family -- of Greenwich, Conn., and Houston, Mr. Stone was a financial supporter of the senior Mr. Bush when he ran for president in 1979, as was his father, siblings and executives at his oil and gas company. Mr. Stone and his wife, Marion, also contributed to the senior Mr. Bush's successful 1988 run. Over a two-month period, Mr. Stone didn't respond to numerous messages left with the receptionist in his New York office.
-- Scot J. Paltrow and Daniel Golden contributed to this article.
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IVY LEAGUE CONNECTIONS
Harvard University's endowment helped Harken Energy when the firm, of which George W. Bush was a director, needed it. Key events in Harken's relationship with Harvard and Bush, along with Harken's stock price.
1. Sept. 19, 1986: Harken agrees to acquire Spectrum 7 Energy Corp., where George W. Bush is chairman. Bush becomes a Harken board member and $100,00-a-year consultant.
2. Oct. 15, 1986: Harvard agrees to buy 1.35 million shares of Harken for $2 million and invest another $20 million in Harken projects.
3. June 15, 1989: Citing the "positive image" Bush helped create for Harken, chairman Mikel Faulker extends Bush's consulting agreement.
4. May 20, 1990: Harken officials warn board the company is about to runout of cash.
5. Aug. 17, 1990: First City agrees to refinance Harken's debts.
6. Aug. 20, 1990: Harken discloses loss of $23 million.
7. Nov. 30, 1990: Harken transfers $20 million in debts to Harvard partnership, eliminates another $16 million in debt by transferring assets to Harvard.
8. September 1991: Harvard begins selling Harken stock at more than $6 a share, receiving $7.4 million over the next 12 months.
Source: Thomson Datastream