Did Larry Summers fire derivatives whistleblower at Harvard

I am sure you realize by now that I believe Larry Summers is soft on derivatives, soft on regulation and soft on banking executives.  He exemplifies the self-regulatory zeal of the previous boom.  Given his indifference to responsible regulatory oversight of derivatives and other markets, the following account, now public does seem to fit a pattern.

A former quantitative analyst at Harvard Management Company, the university’s once-vaunted endowment manager, tells the Harvard Crimson she was fired for voicing concern to then-university president Larry Summers’ chief of staff about the money manager’s risky use of derivatives the traders didn’t understand.

The episode dates back to 2002, when analyst Iris Mack, whose website identifies her as the second African American woman to earn a Harvard PhD. in applied math (and someone who likes primary colors) joined the much-venerated Harvard Management Company, which invests the university’s then $18 billion endowment, to find what she termed a “frightening” state of affairs.

“The group I was working for had no background whatsoever to be working on [derivatives],” Mack says, adding that, to her knowledge, several of her colleagues were not licensed securities traders. “Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling.”So Mack took inventory of the abuses — high employee turnover, lax risk management practices and a “low level of productivity in the workplace” were among others, and detailed them in an email to Marne Levine, Summers’ chief of staff and a Treasury staffer on the Obama Transition Team. (Summers was the only person to whom Meyers reported, and according to a recent Forbes story he personally ordered the university’s biggest derivatives trade, a purchase of interest rate swaps that cost the university billions this year.)

A month after sending her email, Mack was fired after a meeting in which the endowment fund’s then-chief furnished her the emails and castigated her for making “baseless accusations.” She later sued for wrongful termination and settled out-of-court with the university. But she claims the practices “shocked” her, and — the punchline is — she had joined the company from Enron.

Which is also to say, lest you dismiss Mack as an opportunistic snitch capitalizing on Summers fateful opposition to regulating the derivatives that wreaked havoc on the financial system, she had a pretty valid reason to believe in the importance of whistleblowing.

“I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,” Mack says. “I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.”Mack is doing her part to affect change: she’s a vociferous advocate of better math education for minorities and like FDIC chairman Sheila Bair, the writer of a children’s book. It’s called Mama Says Money Don’t Grow On Trees (sequel idea: *…Unless You Are A Monstrously Overleveraged Bank With Access To The Federal Reserve Discount Window!).

If Mack’s allegations are true Harvard certainly paid the price for its recklessness: Summers’ swaps sowed the seeds for a financial disaster at HMC:

It doesn’t feel good to be borrowing at 6% while holding assets with negative returns. Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. The one category that has done well since last June is conventional Treasury bonds, and Harvard appears to have owned little of these. As of its last public disclosure on this score, it had a modest 16% allocation to fixed income, consisting of 7% in inflation-indexed bonds, 4% in corporates and the rest in high-yield and foreign debt.For a long while Harvard’s daring investment style was the envy of the endowment world. It made light bets in plain old stocks and bonds and went hell-for-leather into exotic and illiquid holdings: commodities, timberland, hedge funds, emerging market equities and private equity partnerships. The risky strategy paid off with market-beating results as long as the market was going up. But risk brings pain in a market crash. Although the full extent of the damage won’t be known until Harvard releases the endowment numbers for June 30, 2009, the university is already working on the assumption that the portfolio will be down 30%, or $11 billion.

Mack’s boss at HMC, Jack Meyer, parted ways with the university in 2005. His bets were still paying off but his relationship with Summers had reportedly cooled — among other things, over alumni outcry led by the university’s Class of 1969 over the hedge fund-sized bonuses being awarded to employees of a supposed nonprofit. But if there’s anything we’ve learned from the past year, gratuitous compensation and gratuitous risk go hand-in-hand.

“The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed,” says a spokesman for the [Class of 1969], which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. “Even now we don’t really know how well it has done in the last ten years.”

Tim Geithner has taken a lot of heat for the Obama Administration because the new Administration seems to be just as fawning over the financial services industry as the old Bush administration. But, Larry Summers, as the White House’s Chief economic counsel, has a lot to say about the direction of economic policy.

If the allegations here are true, clearly Summers violated the law. More to the point for today, one should have little doubt that Obama and his team have a much cozier relationship with Wall Street than Main Street as reflected in the kid’s glove approach to banks and the hardball approach with the automakers.

It seems that some in the White House want to party like it’s 1999 and not in a good way.

Harvard Derivatives Whiz Fired For Emailing Larry Summers About “Frightening” Trades? – TPM

  1. fsteele says

    HMC fired her for writing TO Summers.

    Criticize Summers for not heeding her advice, but don’t blow it up into something more.

  2. Edward Harrison says

    I do intend to blow it up into something more. Implicit in the coverage of this event is a recognition that Summers promoted this kind of reckless derivatives activity without the necessary controls.

    This was certainly part of the problem and Summers is as blameworthy as any.

    “Bring back Clinton’s Treasury Secretary Larry Summers — and the Clinton economy of the 90s?”

    The Clinton years were a false prosperity built on leverage and debt.

  3. fsteele says

    Summers’ disregard of such warnings may be fair game. But please do not blow this up into a personal level accusation — such as suggesting he ‘fired’ Mack. That is a whole different level of discourse, which is not worthy of your blog.

  4. Kung Fu Panda says

    Appreciate bringing this to public attention. This is the kind of thing that would have been kept quiet from the general public before the availability of information dissemination tools like blogs. Few would have had access to the Crimson, and fewer would have taken an interest in bringing it to public attention.

  5. Terry says

    I am simply amazed that Pres. Obama can’t (or won’t) see through the way Summers and Geithner are handling American taxpayer money to the benefit of Wall Street insiders. At least at a political level, he should understand that the “Geithner Plan” is likely to cost him dearly in next year’s Congressional elections–even in a battle with a totally discombobulated Republican Party. As the late Tip O’Neil used to say: “All politics are local.” In the end, Americans will pick their next Congress (especially the House) based on the performance of the economy in their district–not how well Wall Street fat cats are doing. And the prospects for the American economy through next year are dim at best. Obama could be in for a much larger than normal off-year Congressional party shift.

  6. Edward Harrison says


    I addressed your concerns in the links this morning by making clear that there is NO evidence that Larry Summers was involved in the firing of this employee. I may change the post title to suit as it is misleading.

    Nevertheless, I do have questions here about lack of oversight and how this represents an ideological bent for Summers which is now causing President Obama problems.

    As Terry points out, American voters do not understand the need to continue in that direction. While Tim Geithner has already made a first salvo toward regulation-heavy to fix things, other aspects of Obama’s economic policies call the regulatory bona fides of the Administration into question because they seem to favour Wall Street over Main Street.

    I is still early days and the mid-term election is not for a while but I see things playing out like this:

    problems with the bailouts (autos and banks) make clear the difference in treatment of the two sectors. reporters start harping on the deregulatory zeal of Summers and others from Clinton days. Obama is unable to distance himself from this association given the differential treatment and the sweetheart deal for hedge funds in Geithner’s plan. This taints Obama and the Democrats generally.

    Simultaneously, economic weakness continues. Democrats lose their change lustre and get a beating in the mid-term elections.

    Now, purely from a political perspective, what Obama SHOULD be doing is showing he means business regarding Wall Street with, at a minimum ceremonial public moves (prosecutions, firing of executives, perp walks). Jawboning won’t work.

    People are beginning to become suspicious as to whether Obama, Summers, and Geithner want to change anything in financial services. I don’t think they do. And, if the American people don’t as well, you are going to see trouble in 2010.

  7. Worried in Texas says

    Summers role in the financial debacle is the great untold story. Considering he scripted out a financial panic in an NBER volume you wonder what he was thinking in 2000. Or at least I do. This is one of Obama’s really poor appointments. I wonder if this guy isn’t going to run out of lives just when Obama needs a convincing voice for patience and integrity in reregulating the financial markets?

  8. Dr. N says

    Sounds like President Obama would be well served by hiring Iris Mack and Brooksley Born to his economic team to balance Timothy Geithner and Larry Summers (Team of Rivals anyone?)…. he’s getting the wallstreet line currently.

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