Did Summers Fire His Risk Analyst?

Not long ago:

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.

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6 Responses to Did Summers Fire His Risk Analyst?

  1. trouble says:

    this is amazing.

    Summers – what a schmuck.

    and the racial & gender politics that parallel the simple intelligence/appliedmathrox issues are simply stunning. Even though she says if more people spoke up it mighta made a difference, what does it mean that SHE would have been the one to speak up (more than she already did) in the face of all those entitled, powerful, established white dudes.. many economists are condescending enough to non-economists already, adding in the privilege issues to the equation makes it pretty freaking stark.

  2. Larisa says:

    wow my last comment showed up as an old, old webID. how weird. reposting under my name..

    this is amazing.

    Summers – what a schmuck.

    and the racial & gender politics that parallel the simple intelligence/appliedmathrox issues are simply stunning. Even though she says if more people spoke up it mighta made a difference, what does it mean that SHE would have been the one to speak up (more than she already did) in the face of all those entitled, powerful, established white dudes.. many economists are condescending enough to non-economists already, adding in the privilege issues to the equation makes it pretty freaking stark.

  3. Mike says:

    Larisa, hey!

    It’s messed up on every level. From what I’ve read, the Harvard endowment had massive layover, and senior members used it to either take it easy from Wall Street or get cozier to it (the ‘crimson puppies’, milking the financial-educational apparatus). In that environment, internal whistleblowers and risk managers are doubly-important.

    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 committing fraud against the Russian government in Harvard’s name. I should have put that point in the main post.

    I hope stuff like this puts some breaks on University’s fantastical ride in financial wizardy. The conservative writer Jim Manzi called Harvard a “$40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund’s preferential tax treatment”; a conceptualization of the university’s mission like that has to be toxic to the public function.

    Thanks for reading!

  4. Larisa says:

    Oh I’m so glad glad glad glad you spoke up about Russia!

    As the daughter of a russian historian who was a constant voices against the Harvard Institute of Int’l Development’s murderous and idiotic policies in Russia…policies which in the case of Shleifer were deeply corrupt in an obvious way and in the case of Sachs (talk about being an economist meaning never have to say you’re sorry!) were so ideologically blinkered to reality that they carried on eviscerating the economy while remarking on how badly reality was fouling up their plans.. anyway I’m sure it CANNOT be an accident and it is not.

    That history is deeply connected to the problems now, in terms of ideology and social power in embarassingly literal ways. Shleifer is such a good reminder of that pattern!

  5. ratherbefishing says:

    Here is the details of the Harvard-Russia debacle in all its glory – incredible story (II 2006)! I have taken out some of the Summers-specific bits below…

    …Summers said conflict-of-interest “issues,” in his Washington experience, were “left to the lawyers.” He said he was sensitive to “ethics rules,” but testified that “in Washington I wasn’t ever smart enough to predict them . . . things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to me were thought of as perfectly fine. . . .”

    …Shleifer’s legal position changed on June 28, 2004, when Judge Woodlock ruled that he and Hay had conspired to defraud the U.S. government and had violated conflict-of-interest regulations. Still, there was no indication that the Summers administration had initiated disciplinary proceedings. To the contrary, efforts were seemingly made to divert attention from the growing scandal. The message from the top at Harvard was, “No problem — Andrei Shleifer is a star,” says one senior Harvard figure…

    …Although Lewis does not declare Summers unfit to be president of Harvard, hecomes close. The faculty vote of no confidence in Summers last spring indicatesthey believe he does not “meet the Harvard standard,” Lewis writes. Summers doesn’t offer “leadership they could respect. The Harvard faculty would rather mind its own business than vote down the president; they did not do so forsport.” Summers, the computer scientist says, has “failed to bring honor to theinstitution.”

  6. ratherbefishing says:

    sorry – here is the link

    http://jboy.chaosnet.org/misc/docs/articles/shleifer.pdf

    and a couple of other bits from the article… From this its easy to see why the stance of the current Russian administration toward US is far from friendly…

    The Harvard advisers “had access to the highest levels of government,” she said.
    “What should have happened . . . as Russians become acquainted with the way
    American institutions work, [was] that they [would] learn the transparency and
    the conflict of interest values that we also expect of our own officials. I think that
    the damage to the United States’ relations with Russia was very great.”

    “This scandal hobbled the development of the Russian capital market
    infrastructure for a substantial period of time,” says Bruce Lawrence, a Credit
    Suisse First Boston executive in Moscow at the time. In A Normal Country:
    Russia after Communism, his 2005 book on Russia, even Shleifer acknowledged
    that “[i]nvestor protection and corporate governance in Russia remain weak.”

    “It was the start of what we call the dark times,” says Igor Moryakov, president of
    the Depository Clearing Co. “People who really understood . . . how to operate the
    market were dismissed. New people, without any experience, without any
    understanding of how markets work, came to power. It was an absolutely huge
    disappointment.”

    “The scandal caused an extreme decline in the Russian SEC’s influence as a
    regulator,” says economist Alexander Abramov, head of development at the
    Moscow-based Russian Trading System, the country’s principal stock exchange,
    and the author of a new book on Russia’s securities markets. “It made the
    financial crisis of 1998 more likely. And I think it destroyed the trust and
    relationships between Russian authorities and American advisers.”

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