Over lunch not long after [Lawrence] Summers took over the presidency [of Harvard] in 2001, Ellison said, Summers suggested that some funds should be moved from a sociology program to the Kennedy School, home to many economists and political scientists. ‘’President Summers asked me, didn’t I agree that, in general, economists are smarter than political scientists, and political scientists are smarter than sociologists?” Ellison said. ‘’To which I laughed nervously and didn’t reply.”
Sadly, nobody informed him that Economics comes in way behind Applied Math; he had to learn it the hard way. Breaking at TPM:
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…
“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.”…
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.
Go Team Applied Math! I would have loved to see the exchange where an African-American woman pointed out, correctly, to Summers “Your friends here that are selling the equivalent of an out-of-the-money-put on housing markets and giving themselves giant bonuses? They don’t know what they are doing.” What do you imagine – fuming? Condescension? “If only you were an Economist you could see….” Either way she got canned. If Summers was in charged of unlicensed traders trading derivative products, that’s a big no-no. I hope some smart reporters who aren’t concerned about whether or not their kids get into Harvard make a go of it.
I think I get a sense of how bad it must have been if even basic Black-Scholes treatments were “puzzling” in a way that scared a mathematician. That’s incredibly bad. (my guess: flat vol curve. Yours?)
The racial/gender political element does double it up – one would suspect someone closer to Summers, professionally or race/gender would simply be given a larger bonus to shut up. Or protected: I think it is important to be reminded how , while President of Harvard, Summers protected an economics protégé of his, Shleifer, while he was found to be committing fraud against the Russian government in Harvard’s name.