President Obama likes to tease Larry Summers as a "propeller head" and a "numbers guy," shorthand for a policy wonk who relishes the kind of esoteric arguments that everyday people might find boring and incomprehensible. But Summers doesn't seem to mind. In fact, the former Harvard president takes the joking with good cheer, his White House associates say, because he is so pleased to be back in power at a historic time.
With a rumpled appearance and a tendency to ramble to the far corners of any debate, the 54-year-old Summers has emerged as Obama's designated thinker. Despite the occasional ribbing, the president is actually quite deferential to the man he mostly calls "Professor Summers." He relies on Summers for advice on a huge portfolio of issues, including the budget, energy policy, healthcare reform, education, and international trade. "Larry coordinates all of the economic activity," says White House Press Secretary Robert Gibbs. "He's the in-house White House economic adviser. And one of his most important roles is he is the keeper of the president's daily economic briefing, where a number of decisions get made and the president gets updates on what's going on." (Emphasis mine.)
Of course, others of us remember Summers for his tenure as the president of Harvard University. Perhaps this will refresh your memory:
Within months of becoming president, Summers had a confrontation with African-American studies professor Cornel West over his work; West later left for Princeton.
Last year, Summers sparked international outrage by speculating at an economics conference that innate differences between men and women might be one of the reasons women lag behind in science and math careers.
This led to an apology and a no-confidence vote in the faculty of arts and sciences in March of last year. (Click the link above for the rest of the story.)
Uh, yeah. The bottom line was, he was asked to leave his position, but stayed on as a university professor.
Unfortunately, Summers did not leave his position soon enough for Iris Mack.
Who is Iris Mack, you ask? Well, this is Ms. Mack:
But more than that:
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.
Oh, dear. Well, that doesn't sound good. Neither does this:
"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.
You know it's bad when someone who has worked at ENRON is acting as a whistleblower for the Harvard Management Company. I'm just saying - yikes.
But more than that, for her to be FIRED for blowing the whistle is even more telling, about the company, to be sure, but also about Obama's "Economic Guru." There's more:
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!).
Now, I am not even going to pretend I know the depth and breadth of what Ms. Mack is talking about here. After all, the woman has a freakin' PhD in MATH. But I do know about integrity and honor, two important characteristics for someone in her position. And characteristics on which she relied to try and highlight some major issues that had a tremendous impact:
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.
Is now when I remind you - again - that Larry Summers is playing a HUGE roll in this Administration's Economic policies?? He is the one who has Obama's ear, the one to whom Obama is "deferential." That's just jake, especially considering:
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."
Well, NO KIDDING. I don't think we need PhD's in Mathematics to understand that - people should be rewarded for a job well done, not work that runs the company into the ground. Seems to me, anyway.
I would be remiss to not include this:
Late update: Harvard spokesman John Longbrake called to emphasize that the university had conducted thorough investigations of all allegations about Harvard Management Company and point out the 13.8% annualized returns HMC delivered in the ten years that ended June 2008. In a separate development, we learned that Mack was scheduled to be the subject of a February 23 Newsweek story by Michael Hirsh that had been subsequently shelved. Hirsh declined to comment.
Interesting. I wonder who put the lid on THAT pot...Ahem.
Summers is quite something, isn't he? Gets Cornel West, considered to be one of the foremost philosophers of our time (and I should add, West was one of my former professors) to leave Harvard for Princeton; essentially claimed that women are innately unable to compete on the same level in math and science; and got a whistleblower fired. But of COURSE he is one of Obama's closest economic advisers! He fits right on in with faux outrage over compensation, the big plans to save the economy - heck, even Paul Krugman has something to say about him:
...Larry is a first-rate economist with a job to do, and I wish him luck in it. He understands what I’m saying, of course, but he’s doing his best to support the official line.
That line now goes like this: first, the Geithner put is just “one component of the plan” — although the other components are invisible to the rest of us, now that the stress test seems to have been downgraded to irrelevance. Second, rather than defending the large subsidy the plan creates for anyone who buys troubled assets, administration officials tout the virtues of markets in general, and say, hey, this creates a market, so it must be good.
It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess.
I don't know about you, but the majority of Obama's picks seem just a tad questionable. And how is it that Obama thinks he can claim to be supportive of women's issues when he surrounds himself with men like Summers, Favreau, and Kaine? He can't. Actions speak louder than words, and Obama keeps showing us the same thing from the primary on - his support for women is "words, just words."