Skip to comments.Harvard Derivatives Whiz Fired For Emailing Larry Summers About "Frightening" Trades?
Posted on 04/02/2009 7:33:05 AM PDT by E. Pluribus Unum
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 whistle-blowing.
"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."
So the children running Harvard KNEW they were driving drunk, and they refused to take away the money managers’ keys. Wonder if Summers’ shot at running the Fed come January just went down in flames.
Another looting opportunity taken by the “Friends of Larry.”
That'll help turn this economy around!
Don't be silly.
This enhances his resume.
The plan isn't to fix the economy.
The plan is to annihilate it, then say "See? We told you capitalism doesn't work!"
And Summer’s is now head of BO’s economic advisors. Doesn’t that make you feel financially secure?
If he has a tax issue then I’d say L.S. is in the running. I agree the plan is to “break’ capitalism.
We have a winner!
There have been many whistleblowers on record about the financial mess.
I am increasingly forming the opinion that this collapse was a ‘man made disaster’ (Napolitano referrence)
Common story these days. So it goes.
Oh, I didn’t mean capital destruction would be a reason to keep Summers out of the Fed. Note he presided over the firing of a woman-of-color. ;)
Done and done. The socialists on the dem side (ever growing number) have been chomping at the bit for decades on this, and getting rich from the capitalism they wish to 'change'. And the dangers of deriative trading have been exploited for a while, many are unaware that brokers are arrested from time to time for exploiting and ponzi schemes.
"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.
For some, it's not that they don't know the math, many do. I guess we shouldn't be surprised that Madoffs' abound, they have the math skills to spot the weaknesses and pounce.
Here’s the funny part: Larry Summers got into trouble at Harvard for his statements that women “might not have the same innate abilities in math and science” that men possess. As a woman, I say “Thank God!”
Jokes on you, Larry!
LOL!! Yeah, and get back 0.2% of the estimated $11b lost due to their malfeasance. Perhaps the Class of '69 ought to read Mack's kiddy math book.
I see obama left his foot print at Harvard,the guy stinks up every joint he enters.
You'd be surprised. Furthermore, at least she is doing something ...no matter how small. Most people would either be sitting still, asking for handouts, day-dreaming, or criticizing.
As for the main issue, there were a number of people who made a case (or at least TRIED to make a case), but were either ignored or shot down due to the fact that for a period of time excess returns could be accrued from the same stratagems that are now apparent to all to be amorphous constructs built on shadow and belief. There was a time trying to tell a Fund to give up what appeared to be easy and rich alpha (out performance) so that it could be conservative would be met with derision, and not only that, but the trustees of the Fund would probably fire the manager if he/she did not perform as well as others who were employing such strategies.
Now it's easy to be an 'I told you so,' but there was a time when it took real guts to stand up. A time when the pressure to push alpha via several ways (e.g. massive leverage as one) was immense, and a time when risk was assumed to be some arcane aspect that had somehow become some obsolete and terribly dated concept like the Philosopher's Stone, the Isle of Avalon, or trolls living under a bridge.
At that time in point, there was no way this lady would have been listened to. Goodness, even if the blessed Virgin had hovered down an a hysop cloud, with cherubs playing musak melodies on golden trumpets, no one would have listened. They were too busy getting returns of 2 Dollars out of 5 Dollars (after using that 5 Dollars of real equity to get 95 Dollars of leverage)!
This is why certain people were able to greatly profit by simply seeing what the lesser 'intelligent people' were doing, and making the appropriate moves. This incident has basically sifted the real money-managers from the amateurs who just happened to have a nice decade long run that made them buy some expensive Patek Philippes, a smattering of expensive oil paintings, and some bespoke saville row suits ....thinking that they had somehow come upon foolproof strategies, even as more and more and more (to the tune of thousands) of them started using the same 'super strategies.' All the while, the REAL money managers like john Paulson and George Soros and Ray Dalio watched over them like Leopards staring at a bunch of jackals dancing around a carcas, and when the time was right they pounced.
And made billions in personal income in the process, while all these other hedge funds started rolling up and imploding and all sorts of circus-like convolutions.
Anyways, there was a time when reason was tantamount to a boiled mug of tar in the Sahara. Now that tar has been poured down the throat of the global economy, and some people are still wondering whether it is merely warm toffee that they are being lied to is hazardous, others are wondering if they should simply replace their digestive system with the left toe of a salamander (those oafs who think they should switch to socialism/communism/obamaism), and others, instead of rushing to hospital and trying to get some doctor to save them, simply use their last moments to dig for themselves a shallow grave, and lie on it since 'it is too late.'
I would bet dollars to doughnut holes that the group she was working for was staffed primarily of affirmative-actioned Eric Holder's people.
When affirmative-actioned Eric Holder's people took over the US Patent Office they decided that anything was patentable. That's the reason we have software patents and patents on DNA.
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