Rubin interests conflict in ties to Hawaii trust

0 Comments | Insight on the News, June 12, 1995 | by Margaret Hemenway

Labor Secretary Robert Reich and some congressional Democrats, reacting to Republican demands for welfare and Medicare reform, call for more scrutiny of "corporate welfare." Their sincerity will be tested in the next few weeks with a classic case of corporate shenanigans - if not out-and-out malfeasance - in the business world. Ironically, it involves the largest charity in the country and a growing scandal that could involve Treasury Secretary Robert Rubin and cost the Democratic Party its 50-year hold on the 50th state, Hawaii.

Rubin already is besieged by lawmakers who want to know more about his role in the Mexico bailout, a $20 billion deal that royally benefited his former investment bank, Goldman, Sachs & Co. Rubin was a principal partner at the time Goldman, Sachs invested in Mexico, underwriting billions of dollars worth of bonds and other financial instruments. Of the $5.2 billion already expended to bolster the Mexican economy, a reputed $4 billion was used to pay New York-based firms for their losses.

Recently, however, another intriguing facet of the Mexico deal surfaced. Upon joining the Clinton administration, Rubin sought to protect both his investments and his ethics by establishing a blind trust with Hawaii's Bishop Estate, an asset-rich charitable organization. Under the agreement, Rubin pays the Bishop Estate an estimated several hundred thousand dollars, whereupon the Estate promises to cover any losses to Rubin's multimillion-dollar interest in Goldman, Sachs. While Rubin was cochairman of the Bishop Estate invested $250 million in Goldman, Sachs, about half of its total investment in the firm.

The Honolulu Advertiser values the Bishop Estate assets at a whopping $10 billion, 337,000 acres of land in Hawaii, the premier property under the Royal Hawaiian and Sheraton hotels in Waikiki, and part of the Robert Trent Jones Golf Club outside Washington, where President Clinton plays. The Bishop Estate, the wealthiest charitable organization in the country, enjoys close connections to the Democratic power elite in Hawaii and long has been a source of public controversy. Estate trustees are appointed by the Democratic-controlled state Supreme Court and are paid as much as $925,000 a year in commissions, testing an IRS prohibition against excessive personal benefit for nonprofit executives.

While the estate was set up for the sole benefit of Hawaiian schoolchildren and now enjoys an endowment larger than Harvard and Yale's combined, it often is faulted for educating only 3,000 full-time students. According to the April 25 Wall Street Journal, only one-third of the Estate's $244 million fiscal 1993 earnings went toward education, while the trust, thanks to its Democratic friends in Congress, has drawn $30 million in federal subsidies for native Hawaiians since 1987.

Hawaii attorney Ronald Peters demands that the IRS investigate whether the Bishop Estate should lose its tax-exempt status, allegedly for improper business deals by the trustees. Peters' demand has prompted the state's deputy attorney general to query the IRS - which answers to Rubin - as well. The Advertiser reported that four Estate trustees made personal investments of $4 million in a Houston-based energy project in which the Estate had invested some $85 million, despite having told state-appointed trust overseers that they had not undertaken any transactions with family members, business associates or employees of the Estate except as disclosed to the state.

Rep. Spencer Bachus, an Alabama Republican and chairman of the House Banking subcommittee on General Oversight and Investigations, has said that if necessary, he would subpoena Rubin about his ties to the Bishop Estate and Goldman, Sachs. Fueling congressional suspicion is the estate's withholding of a financial statement on the specious claim that its dissemination could lead to "competitive disadvantage and loss to the estate." The statement in question covers July 1, 1992 to June 30, 1993, the same period during which the estate was invest" hundreds of millions in Goldman, Sachs. The estate, by law, must disclose its financial records annually with the state Probate Court. Why should a tax-exempt charity arrogantly refuse to divulge information to the public, information that is critical to the state's certification that the estate is being run properly as a charitable trust?

Rubin has a serious conflict of interest. As Treasury secretary, he oversees the IRS. But given his financial stake in the Bishop Estate, he is in no position to decide about a revocation of its tax-exempt status.

The Journal quoted a former IRS official describing the Bishop Estate as a "group that has so much clout no one stops them." The proper disclosure of the estate's financial records to state authorities and the outcome of the inquiry to the IRS will challenge the Republican Congress' powerful oversight capacity. At the very least, the House Banking Committee should compel the release of the requisite financial records of America's richest nonprofit and examine the propriety of the Treasury secretary's insurance deal with the estate and his involvement in protecting Goldman, Sachs against heavy losses in Mexico.