Sunday, December 20, 2009

Is a Big Problem Brewing for Larry Summers?


When Larry Summers was president of Harvard, a woman by the name of Iris Mack was fired from Harvard Capital Management. The problem with this?

A month before she was fired she sent Summers an email warning him about the quality of the portfolio managers at HMC and also about the dangerous derivatives positions that HMC was taking on that ultimately resulted in huge losses for Harvard. Here's Vanity Fair reporting on the warning and firing of Mack:

There were also charges of betrayal from Iris Mack, a former derivatives specialist at the Harvard Management Company (responsible for investing Harvard’s endowment) and the second black woman to receive a doctorate in applied mathematics at Harvard. Mack claims that soon after she started working at Harvard Management, in early 2002—after a stint at Enron—she became uncomfortable with the lack of understanding she thought her colleagues had with the risky derivatives they were investing in. (She was proved correct in the past fiscal year, when the endowment dropped 27.3 percent.) On May 12, 2002, she wrote an e-mail to Summers, alerting him to her concerns: “As a proud Harvard alum I am deeply troubled and surprised by what I have been exposed to thus far at HMC, and the potential consequences for my alma mater’s endowment. In addition, I strongly believe that if my fellow alum[s] knew how the endowment is being managed and the caliber of some of the portfolio managers, they probably would not give another dime to our endowment.”

She asked Summers for a meeting and that he keep the correspondence between them confidential, “especially due to th[e] fact that several individuals have been terminated from HMC when they raised concerns about such issues.” Nine days later, Mack got an e-mail from Marne Levine, Summers’s chief of staff at Harvard (and now his chief of staff at the National Economic Council), asking Mack to contact her and assuring her that the initial e-mail “remains confidential.”

But not for long. A month later, she was confronted by Jack Meyer, then head of H.M.C., who had copies of her correspondence with Summers and Levine. Meyer fired her the next day. She has since reached a confidential settlement with Harvard that she won’t discuss. But she is unequivocal about one thing. “I would say that there is 99.9999999999999999 percent probability that Summers had a hand in my departure,” she wrote me in an e-mail.
Here is The Harvard Crimson reporting on the story:
..Mack, a derivatives researcher for Enron before coming to HMC, says she was “shocked” by the mishandling and ignorance of derivatives at the HMC international equities division where she worked, led by Jeffrey B. Larson. At the time, Mack says, Larson’s group had only recently begun exploring more sophisticated financial instruments such as credit default swaps and capital structure arbitrage.

And while she says her concerns were dismissed at the time, recent market turbulence has called into question the use of some of these financial instruments, lending more credibility to Mack’s criticisms.

After years of soaring returns, the University's endowment plunged at least 22 percent in the four months starting July 1, and Harvard officials are projecting a decline of 30 percent for the full year.

“The group I was working for had no background whatsoever to be working on those,” Mack says, adding that...“Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling.”...

Ultimately, Mack says she reached an out-of-court settlement with Harvard over her firing... it was Philip Hilder—the lawyer who had represented the Enron whistleblower Sherron Watkins in Congressional hearings following the company’s collapse—who secured the settlement from Harvard. Hilder says that he remembered Mack’s case and that while he could not discuss the specifics of the settlement, it is notable that “she had the foresight to see derivatives as a problem as early as she did.”...

“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.
The story of Summers' mismanagement of Harvard's finances appears to be a story that won't seem to die. Most recently showcased by Bloomberg.

Now focus appears to be picking up on Mack, an African-American female, fired by Summers or his staff. The same Summers who had to leave Harvard as president after he commented in a speech on what he called women’s lower innate aptitude for math and science.

So what is going on now? To me it looks like the start of an anti-Summers campaign. Letters on the Mack-Summers incident have been sent to a number of members of Congress, and some apparent Mack supporters have emailed me link after link after link on the Mack-Summers story.

It is always tough to determine who is behind these kinds of things, but the timing for Summers could be very bad. With Ben Bernanke's re-nomination as Fed chairman wavering a bit, Summers' name will most certainly surface as a likely candidate to replace Bernanke, but with more details emerging as to his disastrous handling of Harvard's finances, and now increasing interest in the firing of an African-American female who warned about the reckless method derivatives were bought at Harvard, Summers chances for becoming Fed chairman are being marked down faster than the crashing derivatives Harvard Management bought for Harvard. He'll be lucky to survive keeping his current White House position.

-RW