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Lawrence Summers: Bubble Boy Larry

This is a really fascinating story of a guy who is almost everybody hated for his personality flaws and who profess neoliberalism ideology and who played a role of  a hired gun in killing Glass-Steagall  managed to land in "the change we can believe in" Administration.

Larry Summers is a nephew to both Ken Arrow and late Paul Samuelson. 

• Ken Arrow is a friend of Abt Associates and a founding member of the Pontifical Academy of Social Sciences. Abt Associates looks like society’s best friend, especially if it coincide with helping banksers to rape those societies  ;-) 

  “The Company applies its expertise in research, consulting, technical assistance, data collection and medical and life sciences to a wide variety of problems in the public and private sectors. In the United States, Abt Associates has helped shape many important and complex public programs, including Medicaid, welfare reform, Head Start, crime reporting, and housing experiments. The Company is also a recognized leader in providing technical assistance to facilitate policy reforms in countries moving to market oriented economies.”

• Paul Samuelson is a spiritual father of Stanley Fisher, Lawrence Klein, and Robert Merton (who helped Black and Scholes break the world… and who sat on the board of LTCM and who subsequently went into business with some interesting people).

In a mandarinate that sure is US economic profession that's a tremendous help for any person in climbing to the top. Being a protégée of Robert Rubin helps in obtaining lucrative government positions.

Both men are proteges of Robert Rubin, a former Clinton Treasury secretary who served on Citigroup Inc.’s board from 1999 until this year and has been criticized for allowing the bank to pile up $544 billion of derivatives and securities before it became the recipient of more government assistance than any other bank. Rubin declined to comment.”

Or if one wants to be more sharp critic, he/she can view Summers to be a typical academic servant of banking oligarchy. The popular joke that "the relationship between government and banking is the closest thing to organized crime taken over society" sounds very alarmingly true, when applied to Summers activity... Among key "mis-achievements" of  Bubble Boy Larry:

• A prominent role in repealing of  Glass-Steagall

  The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by Republican majorities on party lines by a 54-44 vote in the Senate^[12] and by a 343-86 vote in the House of Representatives^[13]. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90-8 (1 not voting) and in the House: 362-57 (15 not voting). [These margins of passage, if repeated, would have been well over the two-thirds needed to overcome any veto, had the President returned the bill to Congress without his signature.] The legislation was signed into law by President Bill Clinton on November 12, 1999. ^[14]

  The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.^[7]

• A prominent role in killing attempt of derivatives regulation by Brooksley Born. Summers "led the opposition" against Brooksley Born, a Clinton appointee became the head of the CFTC in 1996 and refused to accept the industry's stance. "In late 1997 and early 1998, she said the emperor has no clothes," says Greenberger. "She said that derivatives are futures contracts and that the CFTC had jurisdiction."   In the 2003 interview, Ms. Born reveals that it was Wendy Gramm who single handedly made OTC derivatives possible by adopting a regulatory exemption as "virtually the last act as CFTC chair." This article from Stanford Magazine details the dirty tricks used by Three Marketers (Summers, Rubin and Greenspan) in blocking her regulatory efforts of the derivatives market whatsoever on a very simple ground that the financial industry and its lobbyists were objecting:

  As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. . . . One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling. . .

  Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. . . . But even the modest proposal got a vituperative response. The dozen or so large banks that wrote most of the OTC derivative contracts saw the move as a threat to a major profit center. Greenspan and his deregulation-minded brain trust saw no need to upset the status quo. The sheer act of contemplating regulation, they maintained, would cause widespread chaos in markets around the world.

  Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal, and mentioning that he was taking heat from industry lobbyists. . . . The debate came to a head April 21, 1998. In a Treasury Department meeting of a presidential working group that included Born and the other top regulators, Greenspan and Rubin took turns attempting to change her mind. Rubin took the lead, she recalls.

  “I was told by the secretary of the treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. . . . “It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”

  She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.

  As Bob C noted in his comment to As Obama Taps Larry Summers, Recalling Summer's Days as a Regulation Foe Mother Jones "One thing to keep in mind about Summers and Rubin's position on regulating derivatives is the timing: in July of 1998 when Summers testified, the hedge fund Long Term Capital Management, had not yet failed. That would happen 3 months later, when it became clear that a substantial part of LTCM's problem was that it had massive side bets in derivative instruments that when it could not cover these bets, caused massive dislocations and threats to the global banking system (which had invested heavily in LTCM, thinking it was run by "geniuses"--see Roger Lowenstein's great book, "When Genius Failed".) I think Summers and Rubin might have had a different view on the regulation of derivatives after the LTCM catastrophe."
   

• Serving as a lobbyist of hedge funds with "former government official" statute.
  • The NY Times claimed that Summers was doing consulting work for Taconic Capital while president of Harvard which does seems problematic
  • He continued cashing in his former government official status in DE Shaw.
  • "Money for Influence"  The Washington Post, April 4, 2009:

    Lawrence H. Summers, one of President Obama's top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . . Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.

     

• Attempt to shield from prosecution his friend  from Harvard Mafia, professor Andrei Shleifer
• Summers also flopped on Enron. As Alex Gibney has recently noted elsewhere he was a "Technocrat surfer boy, thrilled with freedom, getting a good ride."
• Pushing for capital gains tax cuts during is stint in the Clinton administration...
• Using his political influence for revenge:

  Economist's ViewThe Most Misunderstood Man in America, by Michael Hirsh, Newsweek:

  ...Even in the contentious world of economics, [Joe Stiglitz] is considered somewhat prickly. And while he may be a Nobel laureate, in Washington he's seen as just another economic critic—and not always a welcome one. Few Americans recognize his name... Yet Stiglitz's work is cited by more economists than anyone else's in the world... And when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle. ...

  ... ... ...

  ... Stiglitz's defenders say one possible explanation for his outsider status in Washington is his ongoing rivalry with Summers. ... Since the early '90s, when Summers was a senior Treasury official and Stiglitz was on the Council of Economic Advisers, the two have engaged in fierce policy debates. The first fight was over the Clinton administration's efforts to pry open emerging financial markets, such as South Korea's. Stiglitz argued there wasn't good evidence that liberalizing poorly regulated Third World markets would make any one more prosperous; Summers wanted them open to U.S. firms.

  The differences between them grew bitter in the late 1990s, when Stiglitz was chief economist for the World Bank and took issue with the way Treasury Secretary Robert Rubin, and Summers, who was then deputy secretary, were handling the Asian "contagion" financial collapse. After World Bank president James Wolfensohn declined to reappoint him in 1999, Stiglitz became convinced that Summers was behind the slight. Summers denies this...

For biographical notes see Lawrence Summers - Wikipedia, the free encyclopedia

Also during his stint in the Clinton administration, Summers was successful in pushing for capital gains tax cuts.[citation needed] During the California energy crisis of 2000, then-Treasury Secretary Summers teamed with Alan Greenspan and Enron executive Kenneth Lay to lecture California Governor Gray Davis on the causes of the crisis, explaining that the problem was excessive government regulation.[8] Under the advice of Kenneth Lay, Summers urged Davis to relax California's environmental standards in order to reassure the markets.[9]

Summers hailed the Gramm-Leach-Bliley Act in 1999, which lifted more than six decades of restrictions against banks offering commercial banking, insurance, and investment services (by repealing key provisions in the 1933 Glass-Steagall Act): "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," Summers said.[10] "This historic legislation will better enable American companies to compete in the new economy."[10] Many critics, including President Barack Obama, have suggested the 2007 subprime mortgage financial crisis was caused by the partial repeal of the 1933 Glass-Steagall Act.[11]

Support of economist Andrei Shleifer

Harvard and Andrei Shleifer, a close friend and protege of Summers, settled a $26M lawsuit by the U.S. government over the conflict of interest Shleifer had while advising Russia's privatisation program. Summers' continued support for Shleifer strengthened Summers' unpopularity with other professors:

"I’ve been a member of this Faculty for over 45 years, and I am no longer easily shocked," is how Frederick H. Abernathy, the McKay professor of mechanical engineering, began his biting comments about the Shleifer case at Tuesday’s fiery Faculty meeting. But, Abernathy continued, "I was deeply shocked and disappointed by the actions of this University" in the Shleifer affair.

In an 18,000-word article in Institutional Investor (January, 2006), the magazine detailed Shleifer’s alleged efforts to use his inside knowledge of and sway over the Russian economy in order to make lucrative personal investments, all while leading a Harvard group, advising the Russian government, that was under contract with the U.S. The article suggests that Summers shielded his fellow economist from disciplinary action by the University.^[21]

Summers' friendship with Shleifer was well known by the Corporation when it selected him to succeed Rudenstine and Summers recused himself from all proceedings with Shleifer, whose case was actually handled by an independent committee led by Derek Bok.

On October 19, 2006, he became a part-time managing director of the investment and technology development firm D. E. Shaw & Co.

Upon the death of his hero, libertarian economist Milton Friedman, Summers wrote an Op-Ed in The New York Times entitled "The Great Liberator" arguing that "any honest Democrat will admit that we are now all Friedmanites." Summers wrote that while Friedman made real contributions to monetary policy, his real contribution was "in convincing people of the importance of allowing free markets to operate."[25]

Henry Kissinger once said that Larry Summers should "be given a White House post in which he was charged with shooting down or fixing bad ideas." [26]

In 2006 he was a member of the Panel of Eminent Persons which reviewed the work of the United Nations Conference on Trade and Development.

He is currently the director of the White House National Economic Council[1][27].

Paul Samuelson (Swedish Bank Prize)

Summers is Samuelson’s nephew. Is this significant in any way?

The Odyssey of Larry Summers - Megan McArdle

April 7, 2009 12:54 PM

I generally agree with Megan is saying. However, Greg Mankiw did point out today that the NY Times claimed that Summers was doing consulting work for Taconic Capital while president of Harvard which does seems problematic and does weaken the apparent claim that DE Shaw was when Summers started cashing in in finance.

Old News ;-)

[Feb 25, 2010]  Larry Summers, Tim Geithner and Wall Street's ownership of government by Glenn Greenwald

Apr 4, 2009  | Salon.com

White House officials yesterday released their personal financial disclosure forms, and included in the millions of dollars which top Obama economics adviser Larry Summers made from Wall Street in 2008 is this detail:

Lawrence H. Summers, one of President Obama's top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . .

Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.

That's $135,000 paid by Goldman Sachs to Summers -- for a one-day visit.  And the payment was made at a time -- in April, 2008 -- when everyone assumed that the next President would either be Barack Obama or Hillary Clinton and that Larry Summers would therefore become exactly what he now is:  the most influential financial official in the U.S. Government (and the $45,000 Merrill Lynch payment came 8 days after Obama's election). Goldman would not be able to make a one-day $135,000 payment to Summers now that he is Obama's top economics adviser, but doing so a few months beforehand was obviously something about which neither parties felt any compunction.  It's basically an advanced bribe.  And it's paying off in spades.  And none of it seemed to bother Obama in the slightest when he first strongly considered naming Summers as Treasury Secretary and then named him his top economics adviser instead (thereby avoiding the need for Senate confirmation), knowing that Summers would exert great influence in determining who benefited from the government's response to the financial crisis.

Last night, former Reagan-era S&L regulator and current University of Missouri Professor Bill Black was on Bill Moyers' Journal and detailed the magnitude of what he called the on-going massive fraud, the role Tim Geithner played in it before being promoted to Treasury Secretary (where he continues to abet it), and -- most amazingly of all -- the crusade led by Alan Greenspan, former Goldman CEO Robert Rubin (Geithner's mentor) and Larry Summers in the late 1990s to block the efforts of top regulators (especially Brooksley Born, head of the Commodities Futures Trading Commission) to regulate the exact financial derivatives market that became the principal cause of the global financial crisis.  To get a sense for how deep and massive is the on-going fraud and the key role played in it by key Obama officials, I highly recommend watching that Black interview (it can be seen here and the transcript is here).

This article from Stanford Magazine -- an absolutely amazing read -- details how Summers, Rubin and Greenspan led the way in blocking any regulatory efforts of the derivatives market whatsoever on the ground that the financial industry and its lobbyists were objecting:

 

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. . . . One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling. . .

Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. . . . But even the modest proposal got a vituperative response. The dozen or so large banks that wrote most of the OTC derivative contracts saw the move as a threat to a major profit center. Greenspan and his deregulation-minded brain trust saw no need to upset the status quo. The sheer act of contemplating regulation, they maintained, would cause widespread chaos in markets around the world.

Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal, and mentioning that he was taking heat from industry lobbyists. . . . The debate came to a head April 21, 1998. In a Treasury Department meeting of a presidential working group that included Born and the other top regulators, Greenspan and Rubin took turns attempting to change her mind. Rubin took the lead, she recalls.

“I was told by the secretary of the treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. . . . “It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”

She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.

 

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC from regulating these derivative markets.  More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works.  People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting.  When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal.  Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government.  Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced.  This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

All of that leads to things like this, from today's Washington Post:

 

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials. . . .

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials. . . .

In one program, designed to restart small-business lending, President Obama's officials are planning to set up a middleman called a special-purpose vehicle -- a term made notorious during the Enron scandal -- or another type of entity to evade the congressional mandates, sources familiar with the matter said.

 

If that isn't illegal, it is as close to it as one can get.  And it is a blatant attempt by the White House to brush aside -- circumvent and violate -- the spirit if not the letter of Congressional restrictions on executive pay for TARP-receiving firms.  It was Obama, in the wake of various scandals over profligate spending by TARP firms, who pretended to ride the wave of populist anger and to lead the way in demanding limits on compensation.  And ever since his flamboyant announcement, Obama -- adopting the same approach that seems to drive him in most other areas -- has taken one step after the next to gut and render irrelevant the very compensation limits he publicly pretended to champion (thereafter dishonestly blaming Chris Dodd for doing so and virtually destroying Dodd's political career).   And the winners -- as always -- are the same Wall St. firms that caused the crisis in the first place while enriching and otherwise co-opting the very individuals Obama chose to be his top financial officials.

Worse still, what is happening here is an exact analog to what is happening in the realm of Bush war crimes -- the Obama administration's first priority is to protect the wrongdoers and criminals by ensuring that the criminality remains secret.  Here is how Black explained it last night:

 

Black:  Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

Moyers:  What do you mean?

Black: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator. . . .

The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. . . .

Moyers: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

Black: Absolutely.

Moyers: You are.

Black: Absolutely, because they are scared to death. . . . What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

Moyers: Even though Goldman Sachs had a big vested stake.

Black: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

 

This is exactly what former IMF Chief Economist Simon Johnson warned about in his vital Atlantic article:  "that the finance industry has effectively captured our government -- a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises."   This is the key passage where Johnson described the hallmark of how corrupt oligarchies that cause financial crises then attempt to deal with the fallout:

 

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique -- the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

 

As much as he campaigned against anything, Obama railed against precisely this sort of incestuous, profoundly corrupt control by narrow private interests of the Government, yet he has chosen to empower the very individuals who most embody that corruption.  And the results are exactly what one would expect them to be.

* * * * *

I was on the Moyers program last night after the Black interview -- along with Amy Goodman -- discussing the media's role in this establishment corruption (that segment can be viewed here), and yesterday morning I was on C-SPAN's Washington Journal with the primary topic being this blatant, sleazy oligarchical control of both the Executive and legislative branches (which can be seen here).

 

UPDATE:  Just to get a sense for how propagandistic, sycophantic and fact-free are the most extreme Obama worshippers in our "journalist" class, consider this recent article from The New Republic's Noam Scheiber in which he urged the White House to "free its economic oracle" -- Summers -- and defended and praised Summers on the ground that "his exposure to Wall Street over the years has been limited."  As Jonathan Schwarz asks, citing the massive compensation on which Summers engorged himself by feeding at the Wall Street trough last year:  "I wonder what would have constituted 'significant' exposure to Wall Street? Maybe if he'd worked for D.E. Shaw full time? (Amazingly, Summers was paid $5.2 million for a part-time position.)"

[Jan 4, 2010] The Crisis This Time by Simon Johnson

January 4, 2010 | The Baseline Scenario

This morning at the American Economic Association (AEA) meeting in Atlanta, I was on a panel, “Global Financial Crises: Past, Present, and Future,” with Allen Sinai (the organizer), Mike Intriligator, and Joe Stiglitz.

The Wall Street Journal’s RealTime ran a summary of my main points: growth in 2010 may be faster or slower – depending on how lucky we get- but, either way, the most serious problem we face is that 6 banks in the U.S. are now undeniably (in their own minds) Too Big To Fail.

Reckless and mismanaged risk-taking is the sure outcome.  But don’t take my word for it – read Larry Summers’s 2000 Ely Lecture to the AEA.  The best line is on p.13, “[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts” (American Economic Review, vol. 90, no. 2; access through your library).

A number of participants asked for a copy of my slides – please use this version (in addition there was some other material that will appear shortly in 13 Bankers, so we’re not putting it on the web yet).

Nemo

So has Summers changed his mind, or did he never believe his own words?

Serious question.

Russ

He believed in imposing every kind of austerity upon any country small enough to bully who was in the position America is in now.

But now that it’s America in that same position, he advocates doing the exact opposite of every thing he ever demanded for the weak.

He’s just a gutter bully, plain and simple, and a perfect example of how the powerful demand that those less powerful live up to practices and “ethics” they themselves don’t live up to and never intend to live up to.

So he hasn’t changed his mind, it’s just that what he advocates is directly proportionate to the power of the recipient.

If America somehow “recovered” and we got back to business as usual, and a few years down the road a smaller country got into this kind of difficulty, he’d be right back imperiously demanding the harshest structural adjustments.

maynardGkeynes

 Might not the difference be that the US is not similarly situated in this regard?

A country with the world’s largest economy, the reserve currency, and debt instruments that sell at negative interest rates in times of crisis, is not exactly in the same position as say, Mexico.

btraven

Please! There is and was absolutely no reason to bail out any financial institutions. It’s all about grift and graft and the regulators and legislators aiding and abetting the robbery of the citizenry by the banksters.

The government could have become the lender of last resort sooner rather than later, as spared us all the “highway robbery” and moral hazard of pumping insane amounts of money into TBTFs. I mean, come on, the Geithner stealth move on Christmas eve is essentially the last step to the complete nationalization of the mortgage market. Mmm…so tell me why we needed to pump money into the financial sector? Oh yeah, so they could pump the market and give themselves monstrous sized bonuses!

As it has been said, if an organization is too big to fail, it is too big to exist. These “banks” and their shareholders and creditors should have been left alone to crash or wither, and the government should have covered depositors and transitionally provided loans (well underwritten loans). Instead, the public coffers are stacked with massive debt, while the banksters laugh their a##es off as they take off in their Lear jets.

Russ

Might not the difference be that the US is not similarly situated in this regard?

That’s what I said: America will automatically play the vicious, hypocritical bully to whatever extent it retains the power to do so.

But don’t worry, the US is headed Mexico’s way. As Simon’s excellent article said, it’s a banana republic. It’s a zombie still staggering only on inertia by now.

(I only used the example of a “recovered” US for the sake of argument.)

Though perhaps some of the worst could have been averted if they had imposed austerity at the TOP where it belongs. But the reason cancerous oligopolies are doomed is because they cannot do such things. They’re structually maladaptive beyond redemption.

Indeed America might have been better off if there had been someone to play some kind of disciplinarian role. It might have been forced to compromise with reality and, god forbid, morality, at least to some extent.

maynardGkeynes

@Russ, I also think that what they did with those countries was unfair. My only point was that imposing the same type of austerity on the US economy like they did with Korea, etc. would be an even bigger error, as it would cause a lot of harm not only in the US, but in poorer countries that trade with us.

On the other hand, we can’t go on this way for much longer without bankrupting ourselves, and also I think that the system is seriously imbalanced in favor of the corporate state.

Simon Johnson’s slide show alludes to the corporate over-grazing of the commons, which could lead to its own destruction. Can anything stop it before that? Reason to worry, because the political system is completely captured at this point.

[Dec 22, 2009] Guest Post Larry Summers Is Like a Guy Who Yells That the Sun Really DOES Revolve Around the Earth and that the Current Orbit is Just a Temporary Aberration . . . and That If We Just Wait a Little While, “Everything Will Return to Normal”

Two leading White House economic advisors – Larry Summers and Christina Romer – are giving very different views on the economy.

As Fox news summarizes:

“Everybody agrees that the recession is over,” said Larry Summers, director of the National Economic Council.

“Of course not,” countered Council of Economic Advisers Chairwoman Christina Romer in a separate interview when asked if the recession is a thing of the past …

Romer appeared to be more politically sensitive to [the high unemployment rate], reflecting Obama’s recent statement that he won’t rest until all Americans who are looking for work can find jobs again.

Based on the “official definition,” the economy has, “at least in terms of GDP, reached that point” where the recession has ended, she said. But given high unemployment which could go even higher, Romer offered a different response when asked if the recession was over “in your mind.”…

Summers appeared to cite such forecasts in explaining the stages of economic recovery. He referenced the fact that unemployment dropped from 10.2 percent to 10 percent last month and predicted more solid trends toward recovery next year.

“Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be,” he said on ABC’s “This Week.” “These things happen in stages. First, GDP goes up. That has happened. Then, hours that are worked by workers who already have jobs go up. That’s starting to happen. Then employment goes up. We got very close to that this year, this month, with only 11,000 jobs lost. And then unemployment starts to come down. So these problems weren’t made in a month or a year, and they are going to take a substantial time to solve.

At first glance, Summers’ argument sounds convincing … GDP has been growing, and jobs lag the general economy.

However, as Paul Volcker explained to Spiegel this weekend, the growth in GDP is an illusion. Specifically, the economy is actually shrinking, and the only growth is from what the Fed has poured into the economy:

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

Moreover, Romer is right that unemployment might increase. Indeed, Summers has created a rising tide of unemployment in America which threatens to stall any lasting economic recovery for a while.

Indeed, many leading economists believe that America has permanently lost jobs under Summers’ watch.

Summers is out of touch with reality. He lost billions at Harvard due to his blindness about the riskiness of derivatives.

As I wrote in February:

Summers is the guy responsible for:

• Allowing the banks to carry extraordinary levels of debt, thirty-to-one fractional reserve banking margins

• Ensuring that derivatives were not regulated, and that AIG could operate as a giant hedge fund

• Repealing New Deal era legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming “too big to fail”

As a 1999 New York Times article entitled “Congress Passes Wide-Ranging Bill Easing Bank Laws” quotes Summers as saying:

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

As I pointed out in April:

On Friday, Summers basically said we should continue to do the exact same things which got us into this mess because:

All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

Um . . . sorry to break it to you there Larry, but a group of economics professors has recently demolished the “self-equilibrating economy” theory:

If one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. …The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. …

The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena … This tradition, however, has been neglected …

And when economist James Galbraith spoke at a recent panel on the causes of the financial crisis, the first thing he listed as the main cause of the crisis was “The idea that capitalism … is inherently self-stabilizing” …

Summers [is] like a guy swearing that the Sun really does revolve around the Earth and that the current orbit is just a temporary aberration . . . and that if we just wait a little while, “everything will return to normal”.

As I pointed out in September, Summers has totally misunderstood the multiplier effect.

He must be replaced with someone whose allegiance is to America as a whole, and not solely Wall Street.

As Congressman DeFazio put it:

[Obama] is being failed by his ec[onomic team ... We may have to sacrifice just two more jobs [Summers and Geithner] to get millions back for Americans.

Anon says:
December 14, 2009 at 4:21 pm
“”We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago. It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.””

http://baselinescenario.com/2009/04/27/larry-summers-new-model/#more-3466

How does he say something like this without 100,000 people showing up outside his office the next day sharpening a guillotine?

RW :

It’s nice spin that Obama is not being well served by his economic team, but I see little evidence for that. The big banks & wall street firms were his biggest contributors. He appears to anyone not invested in making excuses for him to be merely what his detractors claimed: a corrupt Chicago machine politician who was promoted well above his competence because of his politically useful racial background and skilled use of the teleprompter.

In Chicago those who pay, play. Why is anyone surprised that he’s making his benefactors rich at our expense? What would Daley do? Blago? Jessie Jackson? These are his real role models. He’s acting as expected.

bobh:

We ned a more sophisticated instrument for measuring intelligence that will put an end to the idea that Larry Summers is anything but a self-promoting mediocrity.

jake chase:

You don’t get along without going along. What rises to the top is scum.

Uncle Billy Cunctator :

More about Volcker please. Summers has been cast as the villain and Volcker as a hero. We need to look very carefully at our heroes.

http://clutchmagonline.com/lifeculture/feature/breaking-the-chains-practical-tips-for-brainwashing-free-living/

i on the ball patriot:

You all deserve to be fucked — hard — as long as you keep this two party fantasy theater alive with your votes and attention.

No perception, no balls, no freedom.

Deception is the strongest political force on the planet.

Rickstersherpa:

So everyone here will be overjoyed when Sarah Palin is President, Lynn Cheney is reprising her Dad’s role as co-President/chief operating officer of the Government, Mitch My Heart is as large as pea McConnell is Senate majority leader, and Tan Boy John Boehner is Speaker with Larry Kudlow as Treasury Secretary? Yep, we will see real reform then. Social Security will be turned into a slush fund for Wall Street and Medicare a slush fund for health insurance companies. How soon we forget. As bad and bought and sold as the Democrats are, it can always be worse.

Of course, sometimes I suspect that Larry Summers is a secret plant from Republican National Committee. And for a man who is supposedly so brilliant, he has been around at lot of freaking disasters, starting with that “ship pollution to poor countries memo” (which apparently the Europeans took seriously because that is exactly what they do with their landfill), through the Aisian Financial crisis, Glass-Stegall repeal, and that most blessed bill, Phil Gramm’s (the guy McCain wanted to make Secretary of the Treasury) Commodity Futures Modernization Act that permitted AIG to run its bucket shop.

I am not saying this as an apology for Obama (Summers and Geithner’s appointments remain a terrible disappointment to me) and at some point, he will have to fire them if for no other reason than appease the base. On the otherhand, there have been good things going on. I work in Government and I can tell you that intelligence, belief in pubic service, and pragmatism have replace ideology and people who just hated their agencies they were running.

Comparing him to the FDR’s administration, and the different circumstances he faces (FDR essentially had no opposition for almost 2 years as the Republicans were so reduced and demoralized and the Southern Conservatives were copted then as members of the Democratic Party, and not the heart of the opposition as they are today), he is no weaker than FDR in seeking to avoid direct fights with the powers that be.

There is a learing curve in being President. Let’s see how well he learns.

Rickstersherpa

Maybe Summers could take his own advice here.

“In the US today, as in many other countries in the past, confidence will return the first day an official statement about the economy proves to have been too pessimistic.”

From yves post of two years ago: http://www.nakedcapitalism.com/2007/11/larry-summers-warns-of-deepening-crisis.html

Again, for the “brightest man alive” Summers apparently was oblivious the fact that all that credit had been lent on a housing and commercial real estate bubble and that what he thought was the basement was pretty close to the peak.

But then the people talking housing bubble were not the seers of Wall Street but just folks like Dean Baker, Robert Schiller, and Calculated Risk. Individuals and sources that just don’t appear (or at least not to) on Summers radar screen. Although, to give him credit, the recession was on his screen. I also note how accurate those Fed forecasts turned out to be (NOT!!!). Makes one real confident about the current Fed forecasts.

[Dec 19, 2009]  William D. Cohan on Larry Summers

While article is a hagiography it contains some little known facts...

Dec 19, 2009 | http://www.vanityfair.com/

Summers is part of a generation of gifted Philadelphia-area Jewish boys, which includes private-equity mogul Steve Schwarzman and Revlon C.E.O. Ronald Perelman, who went on to make it big on the national scene. Unlike with Schwarzman and Perelman, who made billions in finance, the tug of Summers’s DNA was to academia and, specifically, to the study of economics. Not only are both his parents economists, but he is also the nephew of two winners of the Nobel Prize in Economics: Paul Samuelson (his father’s brother—Summers’s father changed the family name from Samuelson) and Kenneth Arrow (his mother’s brother). Larry, the oldest of three boys, alone among them chose to study economics. (The middle brother, Rick, is a psychiatrist in Bryn Mawr and a professor of psychiatry at Penn; his youngest brother, John, is a litigator at the law firm of Hangley Aronchick Segal & Pudlin, in Philadelphia.) “My father was an incredibly intellectual deep thinker with no ego,” Rick Summers recalls. “He was about ideas and about his work and about exploring things and about research. My father inspired Larry. They spent a lot of hours together, my father taught him a lot, and I think Larry just got incredibly naturally interested in what my father was interested in and took off from there.”

In 1971, at age 16, Summers applied to Harvard but was rejected. Instead, he matriculated at M.I.T.—a few miles and a world away from Harvard but one of the few elite universities at that time that could contain his prodigious intellect. At rapid-fire speed, he began the construction of a C.V. that is now 13 pages long and counting.

At first, he was a math major, but he realized quickly he was out of his element. He switched to economics and, as a sophomore, started working as a summer assistant to conservative Harvard economics professor Martin Feldstein, who would become one of his lifelong mentors. In 1974, Summers applied again to Harvard, this time for the doctoral program in economics, and this time the university accepted him.

While working on his dissertation Summers met Victoria Perry, who had studied economics at Yale and had moved to Cambridge to get acclimated before beginning Harvard Law School. Perry, who was once described as looking like she’d stepped out of an L. L. Bean catalogue, grew up an only child in Maine, where her mother was a math professor at the University of Maine and her father a stockbroker in a small firm in Bangor. She and Summers had mutual friends and, at first, hung out together as part of that group; then, in 1980, they started dating. “He was really smart and funny, interesting, and just a really good person,” she recalls.

At 28, Summers became one of the youngest tenured professors in Harvard’s history. He was on a superstar’s trajectory.

And then near tragedy struck. For two months, he had been nursing a persistent fever. At first, doctors at the Harvard health service told him it was nothing to worry about. But as his body temperature remained at or above 102 degrees, his parents insisted he get a second opinion. His blood was tested. “My blood counts were all off,” he recalls. He then had a bone-marrow test. “Do not pass go—you’re going from the doctor’s office to the hospital,” he was told. It took a while, but eventually he was diagnosed with late-stage Hodgkin’s disease. He had nine months of chemotherapy. “It was obviously terrifying,” he says.

He grappled with the news by remaining extremely focused on the study, writing, and teaching of economics. “If you looked at the list of publications,” he points out, “and you said, ‘What year was he sick?,’ you would not be able to tell. And that wasn’t because there was anything heroic about me. It was because the only way to kind of keep the stuff at bay was just to focus on my work and to focus on being around people.”

Summers, who remains cancer-free, credits the experience with giving him an ongoing interest in the study of the life sciences (a curriculum he advocated at Harvard) and in the promulgation of health-care-policy reforms, and, above all, a healthy appreciation of the fragility of human life and the special burdens put on the less fortunate. “The weak need you more than the strong do,” he says. “The feeling of extreme vulnerability that I had during that experience caused me to be more attentive to the people who are on the vulnerable side of the ledger.”

Toxic Shock

In 1984, soon after his cancer diagnosis, Summers and Victoria Perry were married at the elegant Harvard Club on Commonwealth Avenue, in Boston. Both a rabbi and a Congregationalist pastor presided at the ceremony, in front of about 150 of their friends and family. By this time, Victoria was a tax lawyer at Hale & Dorr, the old-line Boston law firm, and Larry was teaching at Harvard. Having looked into the abyss, Summers also became—if possible—even more professionally impatient. The economics papers and articles started pouring out of him, around 100 or so during the rest of the 1980s. In 1993 he won the John Bates Clark Medal, as had Samuelson, Arrow, and Feldstein before him. The award, now given every year, recognizes the work of an American economist under 40. Even though some rival economists questioned the depth and breadth of Summers’s insights into economics—some think him best at taking the ideas of others and articulating them with more aplomb—and wondered whether he would ever reach his uncles’ level of achievement, he could easily have soldiered on at Harvard in his capacity as the Nathaniel Ropes Professor of Political Economy.

But somewhere along the way Summers caught the bug of wanting to convert his economic theories into real-world solutions. In early 1988, along with Robert Reich, another Harvard professor, Summers was a regular—but unpaid—economic adviser to the Democratic presidential campaign of Michael Dukakis, the governor of Massachusetts, whom Summers knew from the neighborhood. “[Summers and Reich] were first among equals,” explains Gene Sperling, then one of Dukakis’s chief campaign aides and now counselor to the secretary of the Treasury, “and hungry to be involved.”

Summers was more than a bit wonkish, arguing that Dukakis should make proposals about copyright law or reforming gatt, the General Agreement on Tariffs and Trade. Finally, one day Dukakis blurted out, “Larry, gatt schmatt!” And that was the end of that. (“Larry likes to tell that story,” Sperling says.)

In the rough-and-tumble of the campaign, Summers met a new set of political allies, such as Sperling, George Stephanopoulos, Laura D’Andrea Tyson, and, most important, Robert Rubin, then a vice chairman at Goldman Sachs, all of whom would become lifelong friends. “It’s amazing how much goes back to that Dukakis campaign,” Sperling says. In 1991, Summers decided to leave Harvard to become the chief economist at the World Bank. (In the move to Washington, Perry got a job as a lawyer at the International Monetary Fund.) In December 1991 he signed and circulated a memorandum—written by a young World Bank economist, Lant Pritchett—that caused Summers no small amount of future heartache. In the memo, which was meant to be a satire on the scale of Swift’s “A Modest Proposal,” Pritchett wrote, “Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the LDCs [Least Developed Countries]?” He then gave three reasons for his conclusion, among them: “A given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.” A predictable firestorm accompanied the leak of the memo. Despite Pritchett’s offer to fall on his sword, Summers took the heat himself. World Bank president Lewis Preston called the memo “outrageous,” and Summers had to apologize publicly. “I think the best that can be said is to quote La Guardia and say, ‘When I make a mistake, it’s a whopper,’ ” Summers said at a March 2001 press conference when asked about the memo.

Harvard Swaps Are So Toxic Even Summers Won’t Explain (Update3) - Bloomberg.com By Michael McDonald, John Lauerman and Gillian Wee

Dec. 18, 2009 | Bloomberg

Anne Phillips Ogilby, a bond attorney at one of Boston’s oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away.

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school said last week they will suspend work on the building early next year.

‘Case Study’

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers because of the size of its bet and the length of time before all its bonds would be sold.

In December 2004, Harvard completed agreements that locked in interest rates on $2.3 billion of bonds for future construction in Allston, with plans to borrow $1.8 billion in 2008 after they broke ground and the remaining $500 million through 2020. At the time, the benchmark overnight interest rate set by the U.S. Federal Reserve was 2.25 percent. The agreements backfired last year after central banks slashed lending rates to zero and the value of the contracts plunged, forcing the school to set aside cash.

‘Education Business’

Borrowers use swaps to match the type of interest rates on their debt with the rates on their income, which can help reduce borrowing costs. Lenders and speculators use swaps to profit from changes in the direction of interest rates. A bet on higher rates, for example, means paying fixed rates and receiving variable. At Harvard, nobody anticipated some interest rates going to zero, making the university’s financing a speculative disaster.

Harvard’s woes stemmed from misunderstanding its role, said Leon Botstein, president of Bard College in Annandale-on-Hudson, New York.

“We shouldn’t be in the banking business, we should be in the education business,” Botstein said in a telephone interview.

Making Sense

The financing plan using the swaps was developed by the university’s financial team and discussed with the Debt Asset Management Committee, an oversight group, according to James Rothenberg, a member of the President and Fellows of Harvard College, or Harvard Corp., and the school’s treasurer, a board position.

The swaps plan was then approved by Harvard Corp. and implemented and monitored by the financial team, Rothenberg said in an e-mail.

Summers, who left Harvard in 2006, declined to comment. As president and as a member of the Harvard Corp., the university’s seven-member ruling body, Summers approved the decision to use the swaps.

The strategy made sense in the economic climate of the time, Rothenberg said in another e-mail. Rothenberg is chairman of Capital Research & Management Co., the investment advisory unit of Capital Group Cos. in Los Angeles.

“Rates were at then-historic lows, and the university was contemplating a major, multibillion-dollar campus expansion,” Rothenberg said. “In that context, locking in our financing costs so that we would achieve some budgetary certainty had definite advantages.”

Demanding Cash

Harvard’s failed bet helped plunge the school into a liquidity crisis in late 2008. Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later.

Harvard would have avoided paying the costs of its swap obligations by waiting. Its banks, including JPMorgan Chase & Co., headed by James Dimon, were demanding cash collateral payments -- ultimately totaling almost $1 billion -- that Harvard in 2004 had agreed to pay if the value of the swaps fell. At least $1.8 billion of the swaps the school held were with JPMorgan, said a person familiar with the agreements. Dimon, a 1982 Harvard Business School alumnus, declined to comment on the agreements through a spokeswoman, Jennifer Zuccarelli.

Darkest Days

Drew Faust, Harvard’s president since 2007, said in an interview about the financial crisis she experienced some of her darkest days as she watched the collapse of U.S. markets that deepened the school’s losses.

“Someone would say that this happened, that had happened, they were going to bail out AIG or Lehman is failing,” Faust recalled in an interview, referring to the September 2008 bankruptcy of Lehman Brothers Holdings Inc. in New York and the subsequent government bailout of American International Group Inc. in New York. “We were wondering what was going to happen tomorrow.”

Harvard speculated in the swap market as early as 1994, according to rating companies’ reports. Under Jack Meyer, former chief executive of Harvard Management Co., the school’s endowment used swaps to profit from interest-rate changes. The university also used them to fix borrowing costs for capital projects.

Summers became president in July 2001, after serving as U.S. Treasury Secretary. He earned a Ph.D. in economics from Harvard, and became a tenured professor there at age 28. He served from 1991 to 1993 as chief economist at the World Bank, which initiated the first interest-rate swap with International Business Machines Corp. in 1981.

Feeling Flush

In the 1990s, Harvard began amassing 220 acres (89 hectares) for construction near Harvard Business School and its football stadium, located in Allston. In June 2005, Summers unveiled his vision for a campus expansion replete with new laboratories, dormitories and classrooms, renovated bridges and a pedestrian tunnel beneath the water. The Allston project was to transform an industrial and working-class neighborhood of two-family wood homes and small shops by building two 500,000- square-foot (46,000-square-meter) science complexes and a redrawn street grid.

Harvard was flush at the time, with an endowment of $22.6 billion that had returned an average of 16 percent during the previous 10 fiscal years. Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.

Forward Swaps

“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”

When the plan was made public in 2005, Harvard’s financial team had been busy for more than a year behind the scenes, devising a financing strategy for the project using interest- rate swaps. These derivatives enable borrowers to exchange their periodic interest payments. They typically involve the exchange of variable-rate payments on a set amount of money for another borrower’s fixed-rate payments.

In 2004, Harvard used swaps for $2.3 billion it planned to start borrowing four years later. The AAA-rated school would have paid an annual average rate of 4.72 percent if it had borrowed all the money for 30 years in December 2004, according to data from Municipal Market Advisors. The swaps let it secure a similar rate for bonds it planned to sell as it constructed the campus expansion during the next two decades.

‘Relatively Rare’

The agreements were so-called forward swaps, providing a fixed rate before the bonds were actually sold. Harvard was betting in 2004 that interest rates would rise by the time it needed to borrow. The school was also assuming the expansion would proceed on the schedule set by Summers and his advisers.

While the university could have paid banks for options on the borrowing rates, the swaps required no money up front.

That time frame, along with the size of the position, was unusual, said Peter Shapiro, an adviser at Swap Financial Group Inc. in South Orange, New Jersey.

“There have been lots of forward swaps, but out longer than three years is relatively rare,” Shapiro said in a telephone interview. That duration increases the risk, because the longer the term of the contract, the more volatile the value of the swap, he said.

Columbia, Yale

Columbia University is breaking ground on a $6.5 billion expansion in New York City, and last year used an interest-rate swap for its borrowing of $113 million of bonds sold seven months later. Yale University in New Haven, Connecticut, is also AAA-rated. It had 32 separate swap agreements totaling $975 million as of Oct. 31, hedging the school’s $1.4 billion variable rate debt and commercial paper, according to Moody’s Investors Service Inc.

Corporations might use derivatives to lower their borrowing costs as many as four years before a bond sale, according to bankers who sell derivatives. Anadarko Petroleum Corp. used the swap market in December 2008 and January 2009 to secure rates for $3 billion it plans to refinance in October 2011 and October 2012, according to the Houston, Texas-based company’s third- quarter report from Nov. 3. Matt Carmichael, a company spokesman, declined to comment.

Key Player

Rothenberg, a Harvard College and Harvard Business School graduate, said he was among the key players involved in developing the financing strategy. His Los Angeles-based company, Capital Group, operates American Funds, the second- biggest family of stock and bond mutual funds in the U.S. He had been Harvard’s treasurer for six months when the school arranged the Allston swaps in December 2004.

Ann Berman, Harvard’s chief financial officer at the time, also played a role in developing the plan, Rothenberg said. Berman declined to be interviewed. She stepped down in 2006 when she was named an adviser to the president, according to the school’s Web site. A certified public accountant, Berman got her master’s in business administration at the University of Pennsylvania’s Wharton School of Business in Philadelphia and had earlier served as a financial planner and adviser for Harvard’s dean of the Faculty of Arts & Sciences.

Rubin, Reischauer

Other members of Harvard Corp. in 2004 and 2005, who served with Summers and Rothenberg, were former U.S. Treasury Secretary Robert Rubin, Summers’s previous boss and predecessor at the U.S. Treasury, who was an instrumental supporter of his bid for the Harvard presidency; Robert D. Reischauer, former director of the Congressional Budget Office, who was a colleague of Summers and Rubin’s in Washington; Conrad K. Harper, a lawyer at Simpson Thacher & Bartlett LLP in New York; Hanna Gray, former president of the University of Chicago; and James R. Houghton, chairman of Corning Inc., the world’s biggest maker of glass for flat-panel televisions, in Corning, New York.

All except Rothenberg declined to comment or didn’t return telephone calls.

Harvard University’s finance staff worked with JPMorgan to develop the size and the length of the forward-swap agreements, said a person familiar with the contracts. Final negotiations to set the rates were left to Harvard Management, which oversees the endowment, because it had swap contracts in place with JPMorgan dating back to 1996 that set terms for the agreements, according to a copy of the agreement obtained by Bloomberg News.

The original swap contract between Harvard Management and JPMorgan was approved by Michael Pradko, the endowment’s risk manager, the copy shows. Pradko left Harvard Management in 2005, along with Jack Meyer, the endowment’s head, to join Convexity Capital Management LP in Boston, the hedge fund Meyer started. Pradko declined to comment.

Impeccable Timing?

When Harvard Management completed its swap contracts for the school, the timing was encouraging. U.S. Federal Reserve Chairman Alan Greenspan had just begun raising the overnight target rate as the economy rebounded from the bursting of the technology bubble. In the second half of 2004, he lifted it to 2.25 percent from 1 percent.

For more than 20 years, investment banks such as Goldman Sachs Group Inc., JPMorgan, and Citigroup Inc., all based in New York, have been selling swaps as a way for schools, towns and nonprofits to reduce interest costs and protect against rising interest payments on variable-rate debt. The swap agreements can be terminated if either the bank or the issuer is willing to pay a fee, which varies with interest rates.

Posting Collateral

“Swaps have become widely accepted by the rating agencies as an appropriate financial tool,” according to a slide entitled “Swaps Can Be Beneficial” that was used in a 2007 Citigroup presentation to the Florida Government Finance Officers Association. Debt issuers can “easily unwind the swap for a market-based termination payment/receipt,” the slide said.

Rothenberg said officials throughout Harvard were monitoring the school’s swap position, including members of the financial office, the budget office, the controller’s office and Harvard Management. Although the contracts required Harvard to post collateral, or set aside cash when the values reached certain thresholds, such provisions weren’t unusual, Rothenberg said.

“I think there are lots of swaps with collateral postings,” Rothenberg said in an interview. “From fiscal years 2005 through 2008, these swaps were in place and there were collateral postings. It was not a pressing concern for the University, even though you can look at the financial statements and see that there was at least an unrealized loss in certain years.”

‘Rapid Meltdown’

“I think the unusual nature of these swaps were two things,” Rothenberg said. “One, they were large, but the anticipated capital spending program was large; and two, they were longer-dated than most people are used to thinking about, because the capital spending program was expected to last over a number of years. The problem resulted from the rapid meltdown in the markets, which culminated in November when short-term interest rates and swaps rates collapsed.”

After credit markets seized up in 2007, central banks worldwide pushed some bank lending rates to zero in their effort to rescue the financial system.

While Harvard Corp. is ultimately responsible for the school’s financial decisions, the losses sustained by the school in almost every financial domain -- the endowment, cash account and swaps -- suggest that oversight was lax, said Harry Lewis, a Harvard alumnus, computer science professor and former dean of Harvard College.

‘Structural Problem’

Harvard not only lost money on the swaps last year. The value of its endowment tumbled a record 30 percent to $26 billion from its peak of $36.9 billion in June 2008, and its cash account lost $1.8 billion, according to Harvard’s most recent annual report.

“They have a structural problem,” Lewis said in a telephone interview. “There’s something systemically wrong with Harvard Corp. It’s too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking.”

Summers’s departure as president came in 2006, after he questioned women’s innate aptitude for math and science. Summers apologized formally and repeatedly for the remarks made in a speech, which he said were misconstrued, and the school said it would spend $50 million to help women succeed in science and engineering. He resigned after the faculty passed a no- confidence motion against him.

Successor Faust

That left Faust, the Civil War historian and prize-winning author who succeeded Summers as president in July 2007, to manage the Allston plans. Faust committed to its first phase: beginning construction of a $1 billion science center that would house researchers from the Harvard Stem Cell Institute, the Harvard School of Public Health and the Wyss Institute for Biologically Inspired Engineering.

By June 2005, the value of the swaps tied to Harvard’s debt was negative $460.8 million, meaning that’s how much it would have to pay the banks to terminate the agreements, according to the school’s annual report that year.

By 2008, Harvard had 19 swap contracts on $3.5 billion of debt with JPMorgan, Goldman Sachs, New York-based Morgan Stanley, and Charlotte, North Carolina-based Bank of America Corp., including the swaps for Allston, according to a bond- ratings report by Standard & Poor’s released on Jan. 18, 2008.

Financial Burden

The swaps became a financial burden last year as their value fell and collateral postings rose. In a contract with Goldman Sachs, the school agreed to post cash if the swaps’ value fell below $5 million, according to a copy obtained by Bloomberg News. The collateral postings with the banks approached $1 billion late last year as central banks slashed their target rates, according to people familiar with the situation.

Michael Duvally, a spokesman for Goldman Sachs, Mary Claire Delaney, a spokeswoman for Morgan Stanley and Kerrie McHugh, a spokeswoman for Bank of America, all declined to comment.

Harvard wasn’t alone in being forced to set aside cash last year to meet such margin calls. The difference was the scale.

Cornell University in Ithaca, New York, posted $38 million of collateral on $1.5 billion of swaps, according to a Moody’s report on the Ivy League School. Hanover, New Hampshire-based Dartmouth College, also in the Ivy League, didn’t post collateral on their swaps because their investment banks agreed to waive the requirement to win the business, according to a person familiar with the contracts. The Ivy League is a group of eight elite schools in the northeast U.S., including Harvard.

Markets Unravel

After a year during which central banks provided an unprecedented amount of money to rescue financial institutions, the credit markets unraveled along with the stock market in September 2008. Lehman Brothers filed the largest bankruptcy in history on Sept. 15. Two weeks later, the House of Representatives rejected a $700 billion bailout plan, sending the Dow Jones Industrial Average down 778 points, its biggest point drop ever.

The value of Harvard’s swaps plunged and its need for cash soared. Under contracts signed in 2004, Harvard had to post larger and larger amounts of collateral to cover the negative value of the swaps; the total amount would approach $1 billion.

At the same time, the usual sources the university relied on to generate cash -- the endowment and its operating cash account -- were hemorrhaging. The school’s endowment tumbled, losing 22 percent from July 2008 through October 2008.

Asset Allocation

The Harvard endowment had more than 50 percent of its assets allocated to private equity, hedge funds and other hard- to-sell assets. The university already had borrowed to amplify gains, with leverage targeted at 3 percent of assets as of last year. When Jane Mendillo took over as chief executive officer of Harvard Management on July 1 last year, one of her top priorities was to raise cash. The school couldn’t get acceptable prices from the $1.5 billion of private equity stakes Mendillo tried to sell.

Outside managers investing Harvard’s endowment were either performing poorly or preventing Harvard from withdrawing cash. Citigroup CEO Vikram Pandit shut down Old Lane Partners in June 2008. Ospraie Management, in New York, closed its biggest hedge fund in September and Farallon Capital Management, in San Francisco, put up a so-called gate, prohibiting clients from taking out cash.

Checkbook Fund

Making matters worse, Harvard disclosed Oct. 16 that its checkbook fund, the general operating account, lost $1.8 billion in the year ended June 30. Lumping the cash account with the endowment was risky, said Louis Morrell, who managed the endowment for Radcliffe College, which is part of Harvard, until 1990.

“They put the operating funds in the endowment --it’s like the guy who has his retirement income in company stock,” said Morrell, who is also the former treasurer of Wake Forest University in Winston-Salem, North Carolina.

Rothenberg, Mendillo and Daniel Shore, Harvard’s chief financial officer, decided last year as the credit crisis deepened that the school needed to borrow money. Shore became acting CFO last year after Elizabeth Mora, who was Berman’s successor, stepped down in May 2008. Shore was named to the position permanently in October 2008.

It was at this point, in October, that Harvard officials contacted Ogilby, their bond lawyer at Ropes & Gray LLP in Boston. A 1980 Harvard College graduate, Ogilby is head of the firm’s Public Finance Group. E-mails show that Craig McCurley, the director of Harvard’s treasury management office, and his associate director, Tom Balish, contacted Ogilby, who in turn reached out to the Massachusetts Health & Educational Facilities Authority, which sells bonds for the state’s nonprofits. Ogilby declined to comment.

Needing Cash

Harvard needed cash to pay bills, refinance outstanding debt and break its money-losing swap agreements, according to a series of e-mails beginning on Oct. 31 last year between Ogilby and staff members of the state authority that were obtained by Bloomberg News. School officials asked whether the agency could omit from a public hearing that some of the bonds would finance swap termination payments.

“There is some sensitivity at Harvard about not specifically flagging the swap interest unwind payments,” Ogilby wrote on Nov. 12 to Deborah Boyce, an analyst at the authority. “They still would like the ability to finance them, but would prefer to delete those references if they can do so.”

Timely Information

Benson Caswell, the bond authority’s executive director responded Nov. 13 that the swap agreements would have to be identified and that the authority needed “timely, accurate and unfiltered information, including a balanced presentation,” from issuers. Harvard disclosed the use of the bond proceeds, and only wanted to avoid telegraphing potential activity in the swap market, said Christine Heenan, a school spokeswoman.

“The spirit of our inquiry was whether prematurely disclosing plans for what are inherently market transactions would in any way jeopardize the execution of those transactions,” she said in an e-mail.

At its Nov. 13 monthly meeting in Boston’s financial district, the agency’s seven-member board approved a Harvard bond issue of up to $2.5 billion, about the amount of debt it sells for all schools and borrowers in a typical year. The board usually takes two meetings to approve a bond sale. In Harvard’s case it took just one meeting.

Nothing Special

“I can assure you that Harvard doesn’t get any special treatment,” Caswell said. “Other borrowers have received the same service.”

Caswell said one board member, Marvin Gordon, is a Harvard graduate and that as long as there is no conflict of interest between his business and the use of the bond proceeds, a board member may vote on approval of a bond sale.

Gordon said while he didn’t have a conflict in voting to approve Harvard’s bond issue, “they never should have been in the position where they had to get out” of the swaps.

Harvard unwound the swaps at possibly the worst moment in the history of financial markets, said Shapiro, the municipal swap adviser. Just as Harvard’s request for approval to sell tax-exempt bonds arrived in the state offices, the swap market began sliding, according to Bloomberg data. While the school waited for permission to raise money, the price to break the swap agreements escalated.

Tumbling Index

On Nov. 13, the index used to value the agreements, the U.S. dollar 30-year swap rate, closed at 4.247 percent. By the time Harvard held its bond sale Dec. 8, the swap index had tumbled to 2.7575 percent. Harvard exited three of its swaps tied to $431 million debt on Dec. 9, when the benchmark fell again to 2.6885 percent. The interest-rate swap market reached a record low of 2.363 percent on Dec. 18.

Harvard’s decision to borrow money came at a time when the difference, or spread, between yields on corporate and U.S. Treasury securities was the widest since at least 1990, according to data from Barclays Plc. That meant AAA-rated Harvard was selling bonds when the market was demanding the biggest premium in at least 18 years.

“December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money, said Shapiro.

Harvard sold $1.5 billion of taxable and $1 billion of tax- exempt bonds, using $497.6 million of the proceeds to pay investment banks to extract itself from $1.1 billion of interest-rate swaps, according to its annual report released Oct. 16. Separately, the school agreed to pay another $425 million over 30 years to 40 years to the banks to terminate an additional $764 million of the swaps, Harvard’s Shore said.

Unwinding Swap

The school on Dec. 12 paid JPMorgan $34.5 million from the tax-exempt bond proceeds to unwind a swap tied to $205.9 million of variable-rate bonds it sold for capital projects, according to documents obtained from the Massachusetts financing authority. It also paid Goldman Sachs $41.6 million on Dec. 9 and $23.2 million on Dec. 11 to end agreements on another $226.8 million of existing debt. Harvard didn’t disclose recipients of the other termination payments because it paid them from the taxable bonds.

The timing was “less than ideal, but the surrounding context was less than ideal as well,” said Shore.

Harvard and JPMorgan celebrated the bond issue by hosting a cocktails-and-dinner party at the French restaurant Mistral, in Boston’s South End neighborhood, where appetizers start at $15 and entrees cost about $40, according to e-mails obtained from the state finance agency. JPMorgan invoiced the agency $388.78 for three employees who attended: Caswell, Marietta Joseph and Danielle Manning.

Recovering Values

Since then, some of the values in the swap market have recovered to their levels of December 2004 when Harvard signed the forward contracts.

“If Harvard had waited, the cost of terminating may well have been lower, but they weren’t willing to take that risk,” said Matt Fabian, managing director at Municipal Market Advisors in Westport, Connecticut.

Shore said that he, Mendillo and “a lot of us in senior management” contributed to the decision to break the swap agreements. That group included Ed Forst, the former executive vice president, who returned to Goldman Sachs after less than a year at Harvard, Shore said. Shore also cited Harvard Corp.’s role as bearing the school’s ultimate fiduciary responsibility. Forst didn’t return calls seeking comment.

Waiting didn’t appear to be an option at the time, Shore said.

Stability, Safety

“In evaluating our liquidity position, we wanted to get ourselves some stability and some safety,” he said in an Oct. 16 interview this year at Harvard. “It was to take the losses now rather than run the risk of having further losses if we continued to hold on to the positions.”

No one expected the indexes used for valuing swaps to fall as fast and as much as they did, said Chris Cowen, managing director of Prager, Sealy & Co. in San Francisco.

“What we ended up with was an outlier event,” said Cowen, who advised Harvard as it unwound its position last year. “I was taken by surprise by the falling rates.”

Harvard, in the meantime, has cut its capital spending estimate for the next four years in half to about $2 billion. Before the credit crisis, it planned on spending $10 billion over a decade on capital projects, including Allston. Faust is building a team to study “financially and structurally” how Harvard can expand, she said in an e-mail announcing the planned work stoppage in Allston.

Opposing Regulation

Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures Trading Commission’s attempt in 1998 to regulate so-called over-the-counter derivatives, which included agreements like interest rate swaps. At the time, Summers was Rubin’s deputy secretary.

Now Summers is leading the Obama administration’s effort to write stricter rules for the derivatives market “to protect the American people,” he said in October at a conference in New York sponsored by The Economist magazine.

Universities would have been better served if they had stayed away from the more complicated financial instruments being sold by Wall Street, said David Kaiser, a Harvard class of 1969 alumnus who has been critical of the high salaries paid to managers of the school’s endowment.

“They used many of the investment strategies of the big banks and hedge funds, and when things went badly they could not get a bailout,” said Kaiser, a history professor at the U.S. Naval War College in Newport, Rhode Island. “It would clearly be better for any nonprofit on whom many people depend to pursue safer, more stable strategies.”

Taxpayer Funds

Pennsylvania State Auditor General Jack Wagner said Nov. 18 that the state should ban local governments from entering into derivative contracts tied to bond issues, a practice he termed “gambling” with taxpayer funds.

Harvard might have considered it a conservative step to lock in rates when they were low, said Shapiro, the New Jersey- based swap adviser.

“You can be very big and very rich and very smart and still get things wrong,” Shapiro said.

To contact the reporters on this story: John Lauerman in Boston at jlauerman@bloomberg.net; Michael McDonald in Boston at mmcdonald10@bloomberg.net; Gillian Wee in New York at gwee3@bloomberg.net.

[Dec 11, 2009] Obama's Big Sellout

Rolling Stone

That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar — former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett — the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama's chief advisers during the campaign, didn't make the cut. Neither did Karen Kornbluh, who had served as Obama's policy director and was instrumental in crafting the Democratic Party's platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive "a Nobel Prize — for evil."

But come November 5th, both were banished from Obama's inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president's new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama's biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama's economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin's son. At the time, Jamie's dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments.

Now here's where it gets really interesting. It's three weeks after the election. You have a lame-duck president in George W. Bush — still nominally in charge, but in reality already halfway to the golf-and-O'Doul's portion of his career and more than happy to vacate the scene. Left to deal with the still-reeling economy are lame-duck Treasury Secretary Henry Paulson, a former head of Goldman Sachs, and New York Fed chief Timothy Geithner, who served under Bob Rubin in the Clinton White House. Running Obama's economic team are a still-employed Citigroup executive and the son of another Citigroup executive, who himself joined Obama's transition team that same month.

So on November 23rd, 2008, a deal is announced in which the government will bail out Rubin's messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees. It is a terrible deal for the government, almost universally panned by all serious economists, an outrage to anyone who pays taxes. Under the deal, the bank gets $20 billion in cash, on top of the $25 billion it had already received just weeks before as part of the Troubled Asset Relief Program. But that's just the appetizer. The government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets, many of them those toxic CDOs that Rubin had pushed Citi to invest in. No Citi executives are replaced, and few restrictions are placed on their compensation. It's the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin's fuck-up-rich tenure at Citi. "If you had any doubts at all about the primacy of Wall Street over Main Street," former labor secretary Robert Reich declares when the bailout is announced, "your doubts should be laid to rest."

It is bad enough that one of Bob Rubin's former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama's Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government's bailout generosity would not die with George W. Bush and Hank Paulson. "Geithner assures a smooth transition between the Bush administration and that of Obama, because he's already co-managing what's happening now," observed Stephen Leeb, president of Leeb Capital Management.

[Dec 11, 2009] Harvard Suspends Construction of Larry Summers’ $1 Billion Science Center

Why hasn’t a group of disgruntled Harvard alumni circulated a statement itemizing the damage that Larry Summers wrought as dean of the University? Yeah, I know, it would be divisive, grown-ups are discouraged from raising uncomfortable questions, or worse, demanding accountability of leaders.

But Summers did a great deal of damage to Harvard, and has a less than operational moral compass.. He clearly aspires to have another big job in DC, like the Fed chair, so it is important to shine a harsh light on his abject performance (and that’s before we get to the biggest issue, that he is a long-standing protege of Bob Rubin, who still seems to wield considerable influence).

From the New York Times:

Harvard announced Thursday that it would indefinitely suspend construction on a high-tech science complex in the Allston neighborhood of Boston because of money problems….

As part of a larger long-term expansion into Allston — a pet project of Lawrence H. Summers, Dr. Faust’s predecessor at Harvard and now President Obama’s chief economic adviser — the university also bought a string of buildings there over the last 20 years. But many have remained vacant, to the chagrin of Allston residents who have accused the university of buying land and holding onto it, a practice known as land banking.

The four-building science center, estimated to cost at least $1 billion, was originally scheduled to be finished in 2011. Dr. Faust’s announcement comes 10 months after she announced plans to slow the pace of the project while the university assessed whether it could continue. Harvard has since disclosed that its endowment declined 27 percent from June 2008 to June 2009, to $26 billion, and the university has made several cost-cutting moves.

Selected Comments

DownSouth:

Matt Taibbi, in his new piece in Rolling Stone, “Obama’s big sellout,” certainly doesn’t have many nice things to say about Summers or the other members of the Rubin administration:

Barack Obama, a once-in-a-generation political talent whose graceful conquest of America’s racial dragons en route to the White House inspired the entire world, has for some reason allowed his presidency to be hijacked by sniveling, low-rent shitheads.

http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout/print

Rickstersherpa:

Just one little correction, Larry Summers was President of Harvard, not Dean, for five “interesting” years. For supposedly being the “brightest man alive” and always subjecting ideas brought to him to rigourous questioning, he seems to have accepted without to much questions the group think of the last 30 years. In Harvard, it appears that he did not question the the American university presidents that the way they can tell they are doing a good job it to build lots of fancy new buildings and expand the university’s bureaucracy as to justify those tuition increasaes every year at twice the inflation level. Stiglitz worked with him at the World Bank and Dean Baker at treasury, and both came away with the opinion that there was no there there, that he was essentially Bob Rubin’s doppelganger.

By the way, anyone following the Democratic party the last 8 years realized that Rubin in particular, and Wall Street bankers in general, in part because of the belief thy really were the miracle workers of 1990s prosperity and in part because they were the biggest source of fund raising for Democrats in the 2006 and 2008 elections. As Kos has pointed out, there was little policy differences between Clinton and Obama, and both were committed to listening a lot to Bob Rubin who himself did not become radioactive until late 2008. I would disagree with Tabbai because I don’t think Obama “sold out” as that would mean he changed positions and policy from what he has always believed. After all, he teaches at the heart of Fresh-Water economics, University of Chicago, and shares as his colleagues on the adjunct Law School faculty the two founders of libertarian law and economics theory, Judge Richard Posner and Judge Frank Easterbrook. This association is far stronger than the one he has with Bill Ayers.

Sometimes choices are between bad and worse, and considering the Republican Party is should change its name to the We Are Just Freaking Bat Crazy Party, this is what we have.

 

[Nov 29, 2009]  Harvard ignored warnings about investments

Advisers told Summers, others not to put so much cash in market; losses hit $1.8b

The Boston Globe

It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing - or mismanaging - its basic operating funds.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.

So how did one of the world’s great universities err so badly in something so basic? It is a story with many actors, the story of an institution that grew complacent as its endowment soared ever higher - an institution that, when the crunch hit, was operating on financial auto-pilot, with many key players gone, and those remaining inattentive, in retrospect, to the risks ahead.

“Investing cash alongside the endowment was a long-held strategy that we didn’t decide to change until early 2008,’’ said James F. Rothenberg, Harvard’s treasurer - a part-time, unpaid role. He said the biggest mistake was not to have taken some of the cash off the table, and placed it in safer accounts, as trouble started brewing in the markets and the economy. “We all can look back now and say we wish we did something different,’’ he said.

In the Summers years, from 2001 to 2006, nothing was on auto-pilot. He was the unquestioned commander, a dominating personality with the talent to move a balkanized institution like Harvard, but also a man unafflicted, former colleagues say, with self-doubt in matters of finance.

Certainly, when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say. The cash account grew to $5.1 billion during his tenure, more than the entire endowment of all but a dozen or so colleges and universities.

Summers, now head of President Obama’s economic team, declined to be quoted on his handling of Harvard finances. A friend of his who is familiar with Harvard finances said Summers was warning of growing risks in the global markets by 2007, at the World Economic Forum in Davos, Switzerland. The friend, who spoke on the condition of anonymity because of Summers’s current position, said, “In the years after Summers left, market conditions and Harvard’s liquidity changed dramatically. The university’s financial strategies could have and should have changed with them.’’

Investing cash from the general operating account in the endowment wasn’t new under Summers, nor was it unique to Harvard. It had been done as far back as the 1980s at the university, officials say, but on a smaller scale. The aggressive investment of cash accounts is part of how the university has long run its “central bank,’’ an account that holds funds from its various schools and pays them a modest US Treasury rate of return. The “bank,’’ in turn, has invested the lion’s share of that money with the endowment, generating returns that are used to pay for shared needs, like graduate housing and financial aid.

The strategy paid off handsomely for years, as the endowment reaped big gains, providing Harvard presidents with a checkbook for ambitious efforts. Under Neil Rudenstine, Harvard’s president from 1991 to 2001, cash was heavily invested in the endowment and surged from $290 million to $2 billion. Under Summers, the figure more than doubled again, according to a compilation of the data obtained by the Globe. The big project on Summers’s agenda: Harvard’s expansion across the river, into Allston.

Summers had a huge influence over Harvard money matters during his tenure, according to several people who worked with him. Known for his love of intellectual debate, he would hear out the opinions of others but ultimately was forceful in his own views. He was more financially sophisticated than most other Harvard presidents, and more deeply involved in decisions, from how to maximize returns on Harvard’s cash to using financial instruments called swaps, to hedge against the risk of rising interest rates - a hedge that would ultimately backfire.

In Harvard’s 2001-2002 financial report, Summers’s opening letter states, “During my first year as President, we took the opportunity to look anew at some of Harvard’s financial procedures to make sure we are making the most of our resources.’’ He closes the letter noting the need for “prudent fiscal management.’’

Despite the warnings from Meyer, Harvard Management’s chief for 15 years, Summers felt the cash risk was worth taking at the time, according to people who know him. He was not the sole decision maker on the matter: Members of the financial staff, a broader financial advisory committee, and the university’s elite six-member board all weighed in. But Summers was a powerful advocate, and with the returns so good for so long, there was little support for exercising caution.

And soon, Harvard would enter a period of upheaval. Meyer left in the fall of 2005, after clashing with Summers over the compensation of the endowment staff. And Summers announced his own resignation in February 2006 - as it happened, just days after the arrival of Meyer’s successor, El-Erian. A month later, Harvard’s top in-house financial official, Ann E. Berman, vice president for finance, also resigned.

Summers was gone by July that year, but not before El-Erian issued a new round of warnings about what he saw as an alarming amount of cash being put at risk in the endowment pool, according to several people who were there. El-Erian left Harvard after just two years, at the end of 2007, to return to his old bond firm, PIMCO. Both he and Meyer declined to comment on whether the cash concerns contributed to their decision to leave.

For other university officials, warnings about Harvard’s finances were easy to gloss over. The endowment had been a virtual money machine for more than 15 years, and the markets were still rising in 2006. And after Summers resigned, forced out by an angry faculty after comments about women lagging in the sciences and other controversies, there were more urgent fires to tend to.

Derek Bok, a former Harvard president from the ’70s and ’80s, took over as interim president. He was, by his own admission, unplugged from the complexities of the financial picture.

“I concentrated on academic issues,’’ Bok said in a Globe interview. He said that his strength was not in investments and that Harvard had an experienced treasurer and board to oversee those issues. “I think they would have come to see me if there were really important changes,’’ he said.

Harry Lewis, a Harvard professor and a former dean of the college, attributes the failure to address the university’s financial risks to the ancient structure of the Harvard corporation, which functions as its board. “With only the six fellows plus the president, there is inevitably going be a lot of deference to the people who seem to have the most authority, especially if the president is strong-willed,’’ Lewis said. “Whether or not anyone in particular made a mistake in this situation, it shows a fundamental structural problem. The power is just in the hands of too few people with too little accountability.’’

The cash in the general operating account exceeded $6 billion by the time Bok and El-Erian left. Problems were starting to surface in housing and the credit markets in 2007. But still the cash policy went unchanged. It wasn’t until early 2008 that a chorus of concern was rising from members of the financial staff, professors on advisory committees, and the board. They decided to start pulling some of the cash out of the endowment - in $250 million chunks - quarterly, according to Harvard officials briefed on the plan. But it was too late. They got one slug of money out in March 2008, and then the markets seized up.

The very thing that the former endowment chiefs had worried about and warned of for so long then came to pass. Amid plunging global markets, Harvard would lose not only 27 percent of its $37 billion endowment in 2008, but $1.8 billion of the general operating cash - or 27 percent of some $6 billion invested. Harvard also would pay $500 million to get out of the interest-rate swaps Summers had entered into, which imploded when rates fell instead of rising. The university would have to issue $1.5 billion in bonds to shore up its cash position, on top of another $1 billion debt sale. And there were layoffs, pay freezes, and deep, university-wide budget cuts.

While the global markets were in freefall in September 2008, the nation’s most prominent university, with the largest endowment, had barely enough financial hands on deck.

On campus, Daniel Shore was technically the guy at the controls. He was acting chief financial officer and would formally get the job, and the vice president’s title, in October. He was the third person to hold the job in as many years. The head of the endowment was new. And the Goldman Sachs & Co. veteran whom President Drew Faust had just hired to report to her on the university’s finances, Edward Forst, was summoned to Washington for a month to help with the federal bank bailout.

Rothenberg, the treasurer, was home in Los Angeles, tending to his day job as a mutual fund executive. Since becoming treasurer in 2004, in the Summers era, Rothenberg, 63, has made 65 cross-country flights to Cambridge, slightly more often than monthly, according to a tally by his assistant. He handles other Harvard business by telephone, including early-morning conference calls with overseers. But he earns his living as chairman of Capital Research and Management Co., a $900 billion-asset investment firm that manages the American Funds and is admired for producing steadier returns than many rivals, and losing less in bad times. Rothenberg is also a portfolio manager, personally handling billions of dollars in two giant funds, the Growth Fund of America and the Washington Mutual Investors Fund.

In a March 2007 interview, Rothenberg told the Harvard Gazette, “Most investors invest looking in the rearview mirror. The problem with that is you make the most money by anticipating change. I spend a great deal of my time thinking about how the world will look three or four years from now.’’

Even with the losses, Rothenberg said, the cash strategy has earned Harvard returns averaging 8.9 percent over the past 10 years. He and other university officials say the cash pool is still ahead of where it would have been, if invested more conservatively all along. But no one could be specific about what that net gain has been.

Harvard won’t stop investing the cash entirely, Rothenberg said, but the past year has “taught us a great deal about the critical importance of maintaining an appropriate focus on risk and liquidity,’’ he told the Globe.

No one wants to repeat the black day when university officials had to swallow hard and reveal a $1.8 billion loss. For Harvard’s 30 overseers, that news came as a surprise, a full year after they’d been told to expect losses in the endowment. It came at an Oct. 4 meeting on campus, just days before the university disclosed the news publicly.

Said one overseer, speaking on the condition of anonymity because he wasn’t authorized to talk about Harvard business: “It wasn’t a happy thing.’’

COMMENTS (152)

guardianangel8:

Give some credit to the whistle blowers who had the courage to go to Congress, like Mr. Rose.

HMC Tax Concerns Aided Federal Inquiries--

http://www.thecrimson.com/article.aspx?ref=527831

Former employee expressed concerns over tax reporting, offshore accounts:

He says he was told it was simply a difference in investment policy. But to Steven M. Rose, then a tax director for Harvard Management Company, the deceptive financial reporting and pervasive ethical deficiencies he says he witnessed there were far from benign. And while the University commissioned an investigation into the issues he raised, he says he quickly reached the point where he felt his concerns had been brushed aside.

“The general disregard for the rules, procedures and compliance—it was ridiculous,” Rose said in an interview with The Crimson. “You had to be quiet and do it and put blinders on. If you were doing work in other aspects of the company, you could just do your job. But in [my] part of the job, you couldn’t ignore things.”

Harvard Management Company—which oversees Harvard’s multi-billion dollar endowment—was plagued by a culture of ethical laxity, Rose said. Special relationships with funds run by former employees and the use of offshore investment companies—both used to boost HMC’s once-legendary returns—may not be illegal, but are considered to be ethically questionable by some, particularly in light of Harvard’s non-profit status.

******

"Guys...let us not forget that the Harvard Business School has produced in the last 20 years, the MBA-hitmen who INVENTED globalization, layoffs, arbitrage, sub-prime mortgages, and a host of financial wrong-doings associated with improving the bottom line while DESTROYING the fabric of American (and world) economics".

"Harvard's pitiful faith in the ability of the national economy to recover--that the loss of endowment, endowment income cannot absorb enough to cover the salaries of 275 employees. Their position as the richest educational institution is hardly jeopardized...easy to sacrifice those whose salaries pale in the grand scheme of Harvard finances ...even with the loss of a third of its highest value, an embarrassment of riches which no other university comes close. Then again its Harvard MBAs who dominate Goldman-Sachs and helped engineer the financial disaster and Harvard MBAs who figured out rather quickly how to profit from it. And its Harvard MBAs who are absolutely clueless to the plights of the people who really work to keep the universities and America going, but always get the shaft when things go bad". (bostonglobe.com,comments, "Harvard layoffs 275")

How about a REAL story on the thousands of layoffs by Harvard and MIT? Now they try to hire their employees back as permanent temps! HA! That would be the day!

CrimsonHRGal:

First they destroyed our endowment, now they're driving out top talent and ruining the quality of education and research at Harvard.

With a meager $28 billion in the bank, Harvard is now gutting budgets, eliminating student services, laying off and forcing out employees, freezing salaries, cutting benefits and looking the other way as managers overwork staff. They also told us FY11 will be worse.

KurtLarsen:

Harvard University has given us the Monster and War Criminal Henry Kissinger, the incredibly arrogant Summers, and, among others, Jeffrey Sachs, who played a large part in destroying the incipient Russian Economy as an advisor to Yeltsin.

I was partnered for some years with three Harvard graduates, and my experience has been that for Arrogant Selfishness there are few who equal them. Harvard's influence and that of it's graduates has grown far out of proportion to its scholarship, and by and large, I believe, does more harm than good.

Harvard and many other universities are not spending the 5% of their Endowment that current Massachusetts law (which they are trying to have changed) requires them to spend annually, and by not using these funds to defray costs, Harvard insures it will ever be the bastion of the Wealthiest Students. Harvard by example teaches its sons and daughters of Wealth to treat the Working Classes with disdain and miserly care, and to measure their own success in the size of their starting salaries.

And Harvard is the very font (along with Yale and Princeton) of the Good Old Boy Network, which gave us George Bush and a host of mediocrities over the years who rise not so much from their brilliance, but from their Connections. From McFarlane to Kissinger to Sachs to Summes, this is the University of the Fatuously, and Arrogantly Greedy.

On The Wrong Side Of The Mirror, your best Universities, America, are the acadamies of Oligarchy, the prep schools of the self proclaimed Masters of The Universe.

But Things Could Change.

The Detective In The Mirror

Nelson8a:

Too much emphasis on individual attributes (intelligence) and too little on systemic flaws. Summers is another symptom of the narrative we have chosen for ourselves. Despite his "brilliance," he and many other economists failed to see the limitations of a model that has enriched few and pauperized many. Harvard and the millions of people holding 401k and 403b accounts have been the victims of this delusion. Now, look at the increase of unemployment and food stamp figures to see this malaise is not limited to academic institutions. The little guys gets punished and the "genius" gets rewarded with a presidential appointment. Time to look for other ways of doing business.

1spinky1:

Not a very promising image for Harvard Business School when the University loses $1.8 B to risky investments, huh?

That's why Meyer left over 5 years ago to start up Convexity...guess Harvard ain't all it's cracked up to be.

aprospectus:

Astonishing that the actual current investors working at Harvard Management - whose salaries are in the multi-millions, as has been well-documented - are left unscrutinized by this article. To merely kick the blame to the departed Mr. Summers or Mr. El-Erian seems irresponsible, too easy and too casual. Obviously there are analysts and managers working now at Harvard Management who have become quite wealthy during this debacle and contributed to implausible mistakes. Their lack of a sense of fiduciary responsibility has seriously harmed the university and its students, and their compensation and roles need serious reconsideration.

guardianangel8:

Thank you Mr. KurtLarsen--

"Harvard by example teaches its sons and daughters of Wealth to treat the Working Classes with disdain and miserly care, and to measure their own success in the size of their starting salaries".

Harvard is not the only one, MIT, their cousin, treats its working class employees in the same manner. Both institutions cry about their lost endowments yet they toss out dedicated workers who made far less than those who created this fiscal disaster.

Now their big donors have pulled back significantly. Their short sighted remedy was to eliminate thousands at the bottom. They have an army of attorney's just sitting in the shadows waiting for any backlash by workers who wish to sue them for wrongful termination or age discrimination.

I was laid off in June, by MIT, yet required to remain on until August, as hundreds, possibly thousands, but you won't ever see the ugly details in bold printed headlines, as it should. It was one of the worst experiences of my life. It would have been better to have cleaned out my desk the same day. Depending how long you worked there, you would have to remain anywhere from 2-6 months after receiving notice of job elimination, only to be replaced by a younger worker with a higher degree. They alter a new job description and call it fair business practice. HR promises transfers to fiscally sounder dept's, only to find out it's another ruse. They delay interviews and make excuses until your time is up so they don't have to keep you around at the same pay rate. Months go by, you never hear a word until they are desperate for a seasoned staff assistant who they think will come back as a temporary worker. I was asked to return on a day's notice without discussion of salary or job description. When I pressed on, HR rep said it was less hours, for less pay and no time frame as to when they would hire permanent. The rep called back the next day and I told them I wasn't interested in returning to a place that laid me off months ago, only to hire me back as a temp.

I've written to my senator and congressman about my bad experience and unfair treatment by my former employer, MIT, such a high regarded institution, right. I hope they do tax these universities who kick their employees out the door based on their so called "need to save money", more like an excuse to save their own worthless overpaid jobs and ability to hire their alumni sons and daughters who can't find work elsewhere. We know how they spend it on those in higher positions, taking the all expense trips around the world on the endowments tab. I don't think I could ever work for a university again after the way I have been treated, or how they treated fellow co-workers, some just a few years away from retirement, one a cancer survivor, another recovering from surgery only to be told she was laid off. These are not human beings--they are monsters.

Wrinkles:

It would take a heart of stone not to laugh.

But seriously, isn't the AG or Secretary of State supposed to investigate gross mismanagement of charitable funds? To me, it looks like there should be a state investigation into the malfeasance at Harvard surrounding the endowment. But, I won't hold my breath...

trueendurance:

This is what happens when hubris is making the decisions.

This is also why the economy melted down.

The insiders at Harvard thought they were infalible. They thought they knew everything.

Now millions suffer.... Millions of jobless, millions of homeless, millions of helpless....

Congratulations to the princes at Harvard... I hope they choke on the bonuses they've given themselves. I hope it brings them missery.

guardianangel8:

rsox7002,

"This Globe article is bias as usual. The Globe has decided to be sexist becuase it is popular. No where in this article did i see evidence that Summers was at Harvard when the fall happened".--

In Sept. 2001, Rose resigned after deciding he could no longer subordinate his judgment to others at the company, and he sent a four-page memo to then-University President Lawrence H. Summers outlining his concerns, causing the University to hire an external legal counsel to investigate. But whether the move led to substantive changes in Harvard’s investment policies remains unclear.

THE ROAD TO HELL’

In an Oct. 2001 letter responding to Rose’s concerns, Summers wrote that he took the issues “very seriously” and that Harvard was hiring an independent counsel to ensure that Harvard maintained “the highest level of legal and ethical compliance.”

Jerome Kurtz, the independent attorney retained by Harvard to investigate the HMC practices and a former Internal Revenue Service commissioner, said he does not recall Rose or his concerns, though “that doesn’t mean it didn’t happen.” He added that he only remembers being hired to examine compensation arrangements with some of the investment managers, though he verified that signatures on correspondence with Rose regarding the concerns were indeed his.

Shortly after his resignation, Rose said he became increasingly concerned that Harvard may have had ethically questionable ties to Enron, which went bankrupt in late 2001. Herbert S. Winokur ’65 served both on the secretive Harvard Corporation and on Enron’s board of directors, a dual commitment that Rose said he found disconcerting. He also found ethically troubling Harvard’s 49 percent ownership interest in former Enron affiliate Cook Inlet Energy Supply—which he said made substantial profits from the debilitating California energy crisis of 2000 and 2001.

http://www.thecrimson.com/article/2009/4/23/hmc-tax-concerns-aided-federal-inquiries/

Geithner Is Stalking Horse for Rage at Wall Street Albert Hunt by Albert R. Hunt

Nov. 23, 2009 | Bloomberg.com

...These big New York banks, especially Goldman, claim they owe the taxpayers little, they weren’t the ones rescued, and any money forced upon them was promptly repaid.

Taxpayer Bailout

Rubbish. Federal Reserve Chairman Ben S. Bernanke, former Treasury Secretary Henry Paulson and his successor, Geithner, by tapping the American taxpayer to the tune of trillions, rescued the U.S. economy from the abyss. If we’d gone over the cliff, would Blankfein and Dimon be sitting in their comfortable executive suites today?

The public isn’t confused. Almost two-thirds of Americans, in a recent Time magazine poll, say Wall Street executive pay is completely out of sync, and more than seven in 10 want the government to limit this compensation.

It infuriated people when Blankfein, 55, said this month in an interview with the Sunday Times of London that Goldman Sachs is “doing God’s work.” In March, the usually smoother Dimon, 53, assailed politicians for populist rhetoric, saying government officials have to stop the “vilification of corporate America.”

Actually, the public thinks the government has been too soft on Wall Street. Blankfein and Dimon should test-market their views about God’s work or populist demagoguery on a jobless welder in Steubenville, Ohio. If he’s angry now, when his town has an unemployment rate of more than 13 percent, imagine the rage if Wall Street pays out record bonuses at year’s-end.

‘Marie Antoinette’

“Marie Antoinette would be embarrassed by these guys,” says Nell Minow, the irrepressible shareholder advocate and corporate-compensation watchdog who is co-founder of the Portland, Maine-based Corporate Library. “They have no clue as to how much they’ve devalued the brand of American capitalism with this sense of entitlement, the arrogance; they genuinely feel the world will come to an end if they don’t take everything.”

I’m picking on Goldman and JPMorgan because they are the cr‘eme de la cr‘eme of global corporations. Goldman is the most renowned financial firm of the past half-century, producing a remarkable array of leaders that includes former Treasury Secretaries Robert Rubin (arguably the most successful in that post since Alexander Hamilton) and Paulson.

‘Omaha Beach’

Blankfein, whom I’ve never met, seems like a fellow with good values. In 2008, with the world economy teetering, a group of Goldman executives took a limousine for a crucial meeting at the New York Federal Reserve. One executive said he couldn’t take any more tension. “You’re getting out of a Mercedes to go to the Federal Reserve,” Blankfein replied, as described in an account in the New Yorker magazine. “You’re not getting out of a Higgins Boat on Omaha Beach.”

Dimon may be America’s CEO. He was publicly ousted and humiliated by his mentor, Citigroup Inc. CEO Sanford Weill, a decade ago. He came back at Bank One Corp. and then JPMorgan, fashioning a legacy that far outshines Weill’s, who created a company that was both too big to fail and to succeed.

“I love Jamie Dimon, he’s the best; at Bank One he borrowed money to buy company stock,” Minow says. “But on these bonuses he just doesn’t get it.”

Suppose these two smart men, instead of handing out record payouts, decided to use only one-third of this pot for bonuses, with a disproportionate share going to less-affluent employees. Another third would be invested in small businesses in struggling communities, five- or ten-fold what Goldman announced last week. The final third would be given to charities, like the Local Initiatives Support Corp. or helping kids of the jobless get swine flu shots.

Goldman and JPMorgan would continue to flourish; they aren’t going to lose a lot of talent by cutting still lavish bonuses. And Blankfein and Dimon might join Iacocca in that rarified air of revered chief executives.

Summers Dead Wrong on Cause of Crisis

November 24, 2009 | Economists for Firing Larry Summers

This from Vanity Fair:

Summers has plenty of other things figured out as well, including the origins of the current financial crisis, for which he has crafted a cogent explanation worthy of his reputation as a policy wonk and his days as a college debating champion at M.I.T. “I think crises like this get made by multiple cascading misjudgments,” he explains, and then catalogues them: too much government spending, not enough private-sector saving, too much dependence on foreign debt, too much demand for “riskless” financial instruments that weren’t, in fact, riskless …

The first three of these were, at best, only tangentially related. As much as I think the Bush tax cuts were a mistake, Republican inability to balance the budget really did not have anything to do with the crisis. Ditto for Private-sector saving (even though i think saving is good, generally...) Dependence on foreign debt had nothing to do with the crisis.

Then there is this:

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. (Summers replies he had nothing to do with her firing and could not, because she did not work for or report to him. “[Mack’s] allegations were the subject of thorough internal and external reviews and found to be without merit,” says a Harvard spokesman.)

I'd already heard (and posted) about this, but don't remember posting this part of the story... The rest of the Vanity Fair piece is garbage, as you would expect. 

Posted by Thorstein Veblen at 12:49 AM

 

8 comments:

 

Anonymous said...

Summers is a credentialed stooge stuck in a FIRE economy world-view. Larry, if you’re reading, here are some other things you might want to consider.

1) Introduction of Japanese ZIRP in the mid-90’s starting a massive carry trade; this set a lot of things in motion. Mercantilist currency policies in the Far East - dollar pegs, managed currency rates, etc.

2) The Fed orchestrating a bailing out LTCM and providing monetary conditions supporting the late 90’s stock bubble. Too low interest rates for too long after the 2000 bust driving, among other things, a reach for yield (and risk).

3) A pathological fear of recessions on the part of this country’s leadership. Let’s guarantee further imbalances and deeper hole for the future to avoid some pain now. Recessions are part of a capitalist system – get over it.

4) A government sanctioned push for home ownership. Many new entrants did not know what they were getting into and were not ready. GSE standards were altered (lowered) to facilitate purchases by otherwise unqualified buyers.

5) A failure of effective financial regulation. Too much to elaborate on here.

6) Conflicted ratings from Moody’s, S&P and Fitch.

November 24, 2009 4:39 AM

 

Dug Graves said...

Finally, a site-specific discussion about a key figure, whose footprints can be traced back to the beginning. His handprints were on the back of Brooksley Born when she raised concerns about derivatives, too. Is he a misogynist?

November 24, 2009 10:24 AM

 

That Guy said...

Thank you and Thank you! Don't let up on the chief perpetrators/enablers of this historic theft!

November 24, 2009 11:17 AM

 

Alan said...

The Fed is trying to increase the money supply, they just don't know how it's done. The money multiplier is supposed to mean that capital in the banks splits 8-to-1. Instead capital in the banks has been building up.

I believe it is true that M0 is actually greater than M1 at this time. Absent action on incomes, it's all downhill from here.

 

Alec MacGillis -- Why aren't President Obama's job-creation efforts more direct By Alec MacGillis

What an idiot: "The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work."

November 8, 2009 | Washington Post

Why won't Obama give you a job?
The White House thinks the stimulus is working, and it doesn't want you on its payroll

To hear President Obama tell it, he's been busy creating jobs since taking office. The $787 billion stimulus package, he said last winter, would "save or create 3.5 million jobs." The White House is touting reports from recipients of stimulus funds asserting that they have created or saved 640,000 jobs so far.

Yet the national unemployment rate has now hit 10.2 percent, helping explain why Republicans won the governors' races in Virginia and New Jersey last week, just a year after the party's 2008 drubbing. And Obama declared Friday that more action is needed.

"History tells us that job growth always lags behind economic growth, which is why we have to continue to pursue measures that will create new jobs," he said. "And I can promise you that I won't let up until the Americans who want to find work can find work."

It was a strong vow, but it raises a question: Why has a White House that talks so much about boosting employment steered clear of the most direct strategy that could keep Americans on the job?

Since taking office, the Obama administration has studiously avoided paying people to go to work, which could be accomplished by subsidizing workers' private-sector employment or by creating new government-paid jobs. There are programs in a handful of states that financially compensate employees who cut their hours to prevent broader layoffs at their companies -- an approach that costs relatively little, since it results in lower payouts of unemployment benefits, and that has helped Germany keep unemployment under 8 percent despite the deep slowdown there. But the Obama administration has so far opted not to expand this initiative. And aside from a small summer employment program for young people, it has not sought to create jobs on the public payroll, something the country did in the 1930s and 1970s.

Instead Obama's team has taken a more indirect approach, a prudence that critics on the left say is misplaced. If you're spending hundreds of billions of dollars on stimulus, why not do it with conviction? Engaging in more forthright job creation could invite some political pitfalls (such as those constant accusations of socialism), but is double-digit unemployment any less a political risk?

The administration is "scared of [any plans] seeming like old-fashioned make-work, but that's what it is: You're giving [people] jobs because they have nothing left to do," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning think thank. "Giving people a shot at a job has to be worth a little bad publicity . . . but as in a lot of areas, they proved more cautious."

White House officials express confidence in the steps taken, saying the stimulus is spending money and creating jobs ahead of schedule, and forestalling far higher unemployment. They say they opted against direct jobs programs not for political reasons but because they thought such efforts would not produce long-term value. And they have not pushed the private-sector job-sharing idea -- being promoted by Sen. Jack Reed (D-R.I.) -- because they want to build real demand for workers, not just spread work among more people.

"I think we got the Recovery Act right," Larry Summers, the president's chief economic adviser, said in an interview. "The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work."

Two-thirds of the stimulus went toward tax cuts, fiscal aid to states, and expanded unemployment benefits and food stamps. These efforts helped cushion the recession's blow, saved public jobs and, by injecting demand into the economy, bolstered employment indirectly. On Thursday, Congress buttressed these efforts with an extension of unemployment benefits and an expansion of the tax credit for homebuyers.

The remaining third of the stimulus, however, was expected to be the real jobs generator: $250 billion for infrastructure -- roads, transit, water treatment -- and for investments in energy efficiency, broadband access and other areas. But it is becoming clear that much of that spending is not producing many new jobs. Highway funds have put repaving crews to work, but $6.5 billion flowing to states and cities for energy projects has only just arrived and has created virtually no private-sector jobs yet.

The jobs impact is also paltry so far for the $3 billion in National Science Foundation grants and the $10 billion for the National Institutes of Health. And much of the $19 billion for health information technology will not be spent until 2011.

Administration officials argue that these investments, if done right, will lay the groundwork for growth for years to come. And they say that given the depth of the recession, it's hardly a bad thing for the stimulus to deliver some punch a year or two from now. "We always recognized that America's problems were not created in a week or a month or a year and that they were not going to be solved quickly," Summers said. "We designed the Recovery Act to ramp up over time, through 2010, and to make sure that the investments we made were important for the country's future."

In addition, public-works programs take longer to get started than people realize, officials say. At a recent event at American University, White House economic adviser Jared Bernstein was challenged by economics professor Robert Lerman about direct job creation. Bernstein responded that there weren't enough public works projects ready to be launched: "What [governors] were describing as shovel-ready wasn't really shovel-ready."

None of this persuades the critics, who also argue that the White House, facing a skeptical Senate, settled on too small a stimulus package to begin with. Long as the downturn may be, the need is greatest now, and they have difficulty accepting that a new jobs program would not move faster than the money now percolating through the system. "The administration might have put a higher priority on more labor-intensive spending and spending that had a more immediate employment effect," said former labor secretary Robert Reich. "Basic research into photovoltaic cells is an important public investment, but it doesn't have many jobs attached to it, or certainly not anytime soon."

Others question the claim that more infrastructure spending would have been too slow. U.S. Steel chief executive John Surma noted recently that China is rapidly spending $586 billion on its own stimulus, much of it for big public works projects. The United States has plenty of infrastructure demands and should be able to get such projects going quickly, he said, and the inability to do so is an "indictment" of America's lack of a strategy for public investment.

"It's a defeatist policy to say that we don't know how to spend money on infrastructure," he said. "Stimulus is great, but we have far too little going into projects that actually put people to work."

Still others argue that there is plenty of direct job creation that could be done, short of heavy infrastructure, that could have lasting value. The liberal Economic Policy Institute has drafted a plan that, along with a new business tax credit for hiring that the White House is already considering, includes a pure public jobs proposal: giving money to states and cities to hire people to paint schools, board up vacant homes, staff child-care centers and reopen library branches. Workers would be paid the market wage. It would cost $35 billion for a year, not much more than the combined price tag for the homebuyers' tax credit and the $250 checks that Obama has proposed sending to Social Security recipients.

Lerman offers a variation: Pay people lower-than-market wages, maybe $8 an hour, and reserve the jobs for those who really can't find better work. Instead of extending unemployment benefits over and over, the government would help people develop job skills and would get something in return. He estimates the cost of 1 million jobs (including supervisors) at $30 million, or about $30,000 for each job created, compared with the $92,000 per job that the White House estimates its approach is costing.

And taxpayers would be able to see clearly that the spending was putting people to work -- instead of questioning, as many are now doing, the reliability of the job totals that the White House is attributing to the stimulus.

The country has a history with this sort of thing. Public investment in the New Deal got off to an underwhelming start. But the Works Progress Administration, launched in 1935, had a bigger impact, partly because it spent more freely -- drawing plenty of derision along the way. Less controversial was the Civilian Conservation Corps, which put men to work building trails, fighting forest fires and so on.

President Richard Nixon gave jobs programs another go in the doldrums of 1973-74 with the Comprehensive Employment and Training Act. But critics said states were just using the money to top off their budgets, and there were tales of abuse in some cities. President Jimmy Carter lowered the pay to make the jobs less likely to be doled out to friends and relatives. His assistant labor secretary, Arnie Packer, recalled last week that "we were able to see it in the statistics, the change in the employment rates for black males -- that's the targeting capacity that exists."

The program withered under President Ronald Reagan, who added prohibitions against public service employment (except for summer programs and natural disasters) that endure today. That the Obama administration shows little indication of lifting this taboo is a sign of how free-market tenets persist even when financial turmoil has called them into doubt, said John Russo, co-director of Youngstown State University's Center for Working-Class Studies.

"Neo-liberalism continues apace even though it's been thoroughly discredited," he said. The White House "has held back, and it has hurt. People were looking for a more aggressive approach; they did a political calculation and said, 'This is all we can do.' "

Conservative economists stand steadfast against any movement toward direct job creation. They concur with part of the liberal critique of the stimulus -- that much of the spending is going out too gradually, and in the wrong places, to be of use. But they strongly disagree that the government should have tried more direct efforts to create or retain jobs.

Jobs programs "sound so good in theory, but it just doesn't work that way," said Larry Lindsey, director of the National Economic Council under President George W. Bush. It would be better to stick with safety-net benefits for those most in need and to enact new tax cuts, such as a suspension of the payroll tax to encourage hiring. The New Deal jobs programs were less effective than memory holds, he said, a misperception he attributes to the government-funded writers and artists who depicted the work.

"A lot of what they did was a propaganda campaign," Lindsey said. "They hired the photographers to take the pictures and writers to write the story."

As it happens, an exhibit of New Deal-funded paintings is on display at the Smithsonian's Museum of American Art, with striking images of government-paid men shoveling snow and industrial machinery revving up. But don't expect to see any exhibits portraying the government's response to the Great Recession: The National Endowment for the Arts distributed its $50 million in stimulus funds to hundreds of arts groups and has no plans for direct payments to artists.

"It wasn't for any new programs," said NEA spokeswoman Victoria Hutter. "It's being spent, it's just not as visible" as the New Deal's programs.

But with unemployment into double digits, might not pictures of people heading to work have been a welcome sight?

Alec MacGillis is a reporter on the national staff of The Washington Post. He will be online to chat with readers Monday at 11 a.m. Submit your questions and comments before or during the discussion.

Selected Commants

biggerjake wrote:

bqPhil:

The best quote I have heard about our situation is; we have traded away good wages in this country for easy credit. The deliberate destruction of unions, the exporting of American jobs, outsourcing, H1B visas, immigration policy, illegal immigration, etc. have all put such downward pressure on wages that a normal working class family can no longer join the middle class. Since congress couldn’t do much about wages, they tried to do something to shore up working families.

Acorn is socialist because….? Because they try to help and register to vote the most marginalized people in our society? That sounds more like democracy to me; one person, one vote.

And Barney Frank is socialist because…? Because he supported legislation that made it easier for people to get loans? Come on! No one truly capable of critical thinking is buying that!

‘Living standards not keeping pace with productivity

“The median household income rose just 1.6% between 2001 and 2004 … compared to an 11.7% rise in productivity. Workers aren’t reaping the rewards of their labor: real wages are trailing productivity gains because profits are taking the lion’s share of economic growth Growth in net worth has been equally lackluster, nudging up 1.5%

Even this slight gain has been unevenly distributed because it stems entirely from a run-up in housing prices. The central role played by residential property, which constituted 39% of total assets in 2004 (up from 32% in 2001), means that families are increasingly vulnerable to a downturn in housing prices.’

http://bigpicture.typepad.com/comments/2006/03/economic_dispar.html 

'The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

Prof. Emmanuel Saez, the University of California, Berkeley, economist who analyzed the Internal Revenue Service data with Prof. Thomas Piketty of the Paris School of Economics, said such growing disparities were significant in terms of social and political stability.

“If the economy is growing but only a few are enjoying the benefits, it goes to our sense of fairness,” Professor Saez said. “It can have important political consequences.”'

http://www.nytimes.com/2007/03/29/business/29tax.html

Translation: It will be different after the revolution.

Even if you don’t want to help the disenfranchised, it might be preferable to anarchy…

biggerjake:

The people spouting the socialist, communist blather can be divided into two groups:

1. The Manipulators

These are the people who have a financial stake in keeping the status quo. They don’t want to see taxes increase on people who may over $500,000 per year. They know that if everyone actually knew, understood and accepted the truth, there would be a lot more people pissed off about the growing financial inequality in this country.

2. The Manipulatees

These are the people who have been fed the lies for so long that they believe what they are told. They believe in “trickle down” economics, they believe if something is good for the rich it is good for everyone. These are the people who are so strongly focused on the social issues like abortion and gay rights, that they are willing to vote against their own self interest.

The famous Yale economist Robert Schiller has said that if the economic disparity continues to worsen in this country as it has for the last 30 years, we will soon have a country that even the rich don’t want to live in.

He is on record as saying that this whole bailout/bonuses/Wall Street/banking crisis would spur a national dialogue about stopping this trend and getting back to the idea that “we are all in this together.” To those who call this socialist or communist he says this is what it will take to preserve our capitalist system. Otherwise, there will be a build up of the type of resentment that eventually creates revolutions.

This is from a guy that accurately predicted the recent housing bubble crisis AND the ensuing world financial crisis.

So, which would you rather have; less economic disparity or revolution?

Download GPS Podcast 11/01/09, CNN, Fareed Zakaria and listen to what Schiller and Martin Wolf from the Financial Times have to say.

DrPepper1:

There is no way to fact check the Obama claim of jobs created. The basis of their calculations are suspect and circumstancial. I don't know how the stimulus money counts jobs created in other states, but in Oregon they count a job created if one person works for at least one hour and is paid with stimulus money. The average "job" creation lasts for some 37 hours. So in the calculations for job creation are mostly jobs lasting less that one week. While many of these people are probably glad to get any work, I would not count these as a job created, just part time, one time work is not a real job in my thinking.

Obama is a real political animal. Note that the biggest push for jobs will be near the 2010 elections. Politics first, people last. Compasionate, transparent, change, bull....! This is just thug style politics learned Chicago style. Also notice that the house health care bill won't go into effect until after the 2012 elections. However the taxpayers will begin paying for the health care bill in 2010. What a sweet deal for Obama politics. It's all liberal democratic politics, brutal and uncompassionate for the public, especially the seniors.

Some of Obama's advisiors have written about health care and consider the very young and elderly to be too costly and a poor investment of health care and money. That's why some 400+ billion dollars are being taken from Medicare to pay for the health care bill. Also the Medicare Advantage program will be stopped. But never mind, AARP will sell you a medigap insurance policy. That is their payment for supporting the Obama care. The AMA was given relief from the 21% cut in doctor payments from Medicare that has acculumated over the years but not enforced. Political payoff, political threats, political blackmail. The information about this bill being deficit neutral is a lie.

Pelosi forced the CBO not to count some 1.2 trillion in expenses.

If you have a job try to hang on to it until we can get this oration: http://www.pbs.org/wgbh/pages/frontline/warning/   scheduled to debut next Tuesday, is not likely to provide any assistance in the "reputation rebuilding" effort by former Fed Chairman Alan Greenspan whose comments yesterday regarding "too big to fail" might be seen in a whole new light given new revelations from the late-1990s about regulation of derivatives.

HopeForAmerica:

What!? I thought our government at least for right now, employs the largest number of people. And if you log on to USAJobs.gov; there are plenty of gov't jobs there!! We need more private investment. Banks are afraid to loosen their purse strings, and businesses are not ready to expand means no new jobs.

The stimulus Did save and create jobs. The reprecussions of the Republican party over the past (8) years was So Severe We're STILL reeling from it's jabs, trying to catch our balance, and licking our wounds. And if you recall, initially the Democrats had more measures which would have created more jobs but was ridiculed by the republicans.

 

Pictured above with former Treasury Secretary and Goldman Sachs alum Robert Rubin, this duo constituted two-thirds of the "Committee to Save the World" (along with top Obama administration economic adviser Larry Summers), a call that, in retrospect, may have been a bit premature.

Brooksley Born:

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission (CFTC) -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

In The Warning, airing Tuesday, Oct. 20, 2009, at 9 P.M. ET on PBS (check local listings), veteran FRONTLINE producer Michael Kirk (Inside the Meltdown, Breaking the Bank) unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."

Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."

Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.

"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."

This should be good, particularly in light of the fact that there has been virtually no progress on any financial market reforms, despite continuing calls from the likes of Paul Volcker.

[Oct 12, 2009] Fund My Mutual Fund Bloomberg Volcker Marginalized - Major Push Back on Curbing Excess. Our Life of Financial Oligarchy Does not Change

Friday, June 26, 2009

Posted by TraderMark at 12:10 PM TweetThis

Let me preface this piece by saying (a) it's long but hopefully educational and (b) I am not picking political sides; both major parties are complete poison to the US and really not very different at all once you strip them down to the base. With that....

Some say we romanticize Paul Volcker - the last Federal Reserve Chief who apparently has an idea that money does not grow on trees - and he is not "all that". I don't know - everything I've seen from him the past year, and much of my reading of him in the past comes from a place of common sense, yet in a very capitalistic sense. He cannot be accused of being "one of those Europeans!" (codeword for socialist) yet believes in a firm regulatory stance that is based on common sense. Back in April 2008 in [Apr 9, 2008: Paul Volcker Speaks]

 

In a speech on Tuesday, Paul A. Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben S. Bernanke, for toeing “the very edge” of the bank’s legal authority in orchestrating last month’s bailout of the beleaguered investment bank Bear Stearns.

“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Mr. Volcker told members of the Economic Club of New York.

His remarks came on the same day that Alan Greenspan, Mr. Bernanke’s immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing as “unfair” claims that his policies stoked an untenable housing bubble.

Indeed, Mr. Volcker also implicitly questioned Mr. Greenspan’s cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”

Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry.

But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet.

We quickly found out Summers was freezing out Volcker - heck Volcker was already lost at sea by March!
 

Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.

financial

• (Feb 1995) The Clinton Administration plans to call this week for legislation that would allow commercial banks, securities firms and insurance companies to merge, forming giant financial services companies that would offer everything from checking accounts to mutual funds and life insurance, Federal officials say.
• In a speech prepared for delivery in New York on Monday and in Congressional testimony scheduled for Wednesday, Treasury Secretary Robert E. Rubin will urge Congress to repeal the Depression-era Glass-Steagall Act, the officials said. For more than 60 years, the law has forced financial concerns to choose between owning commercial banks or owning securities companies like brokerage firms and investment banks, but not both.
• Mr. Rubin also plans to call for broad changes in the Bank Holding Company Act of 1956, which has effectively barred most financial concerns from owning both commercial banks and insurance companies, said the Federal officials, who spoke on condition of anonymity. Mr. Rubin's speech will represent the first time that the Administration has taken a position on eliminating the legal and regulatory barriers among financial industries.

• Volcker, who eventually made his way to the dinner table the evening of April 27, earned a reputation for standing up to Wall Street in the 1980s when, as Fed chairman, he brought inflation down to 1 percent from 15 percent by pushing the fed funds rate up to 20 percent.
   
• Now, he’s urging radical regulatory reforms that would limit how big banks can get, separate deposit taking from trading at financial institutions and force all derivatives trading onto public exchanges. His proposals go beyond what Geithner, Summers and other members of the Obama administration have advocated.
• After the inauguration and Geithner’s confirmation, Volcker was elbowed aside, White House insiders say. His economiype: disc; margin: 0px 30px; padding-left: 0px; padding-right: 0px; padding-top: 5px; padding-bottom: 0px"> Summers pushed for deregulation while Treasury secretary under President Bill Clinton, advocating the repeal of the Glass- Steagall Act, which had separated investment and commercial banking for more than 60 years. Geithner was president of the Federal Reserve Bank of New York during a period when banks ratcheted up their leverage. Both men are proteges of Robert Rubin, a former Clinton Treasury secretary who served on Citigroup Inc.’s board from 1999 until this year and has been criticized for allowing the bank to pile up $544 billion of derivatives and securities before it became the recipient of more government assistance than any other bank.
• The reform proposals presented by the Obama administration, crafted largely by Summers and Geithner, fall short of what Volcker wants.
• Geithner, 47, and Summers, 54, have also put forward a mechanism for dismantling large banks that fail. It doesn’t include rules for preventing them from getting too big, as Volcker urged.
• The Geithner plan allows (derivative) contracts that can’t be standardized to be traded outside the central clearinghouse. Volcker wants to discourage that by imposing capital requirements on trading parties, people familiar with his thinking say. He also wants derivatives to be traded on exchanges, where investors can see prices for themselves, which would bring down profits for the dealers who act as intermediaries.
• “While Summers and Geithner worry about not antagonizing the banks, Volcker is the only one who can say loudly what needs to be done,” says Timur Gok, who teaches finance at Northern Illinois University in DeKalb, Illinois. “The Summers-Geithner stamp is clear in this framework because it’s not very radical. We’ll see whether Volcker’s views are heeded more in Congress.”
• The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.

• The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on. “You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”
• In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking. “Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
• The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.

“He did a lot of things, in all his different roles serving the public, knowing that he’d be criticized. He has never flinched. He doesn’t flinch because he’s a man of utter conviction and absolute integrity.”

Larry SummersObama Campaign Advisor-Wall ST Consigliere-Paid News Commentator - Democratic Underground

Agreed. Geithner and Summers have some secrets...
F. W. ENGDAHL: GEITHER’s DIRTY LITTLE SECRET

....

In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new
book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.

One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency,
Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from Government regulation.

At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his
assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner’s old boss, Larry Summers, is President Obama’s chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.

The ‘Dirty Little Secret’

What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives.

Number five, the merged Wells Fargo -Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh.
Uh Huh?

This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.

This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate
bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.

Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize’ the Federal Reserve and take the power of money out of the hands of private bankers such as JP
Morgan Chase, Citibank or Goldman Sachs.

[Jan 20, 2009] Steve Keen Out-Thinks Larry Summers

By George Washington of Washington’s Blog.

Inside the beltway and among mainstream economists, Larry Summers has the reputation of being a genius.

But Australian PhD economist Steve Keen points out a huge gap in the thinking of Summers – and all neoclassical economists.

Specifically, in an essay written today, Keen explains the weakness in the Obama administration’s approach to the economic crisis:

Following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? …

Keen concludes simply:

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers…

Obama has been sold a pup [i.e. tricked into buying something that is not worth anything] by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

kevin de bruxelles:

Why is Keen taking as given the idea that Summers is anything more than a tribal hack who’s first priority is his Wall Street business associates?

Why this assumption that Summers cares a whit about the rest of America?

It seems clear to me that Summers sees that his mission is to divert as much wealth from normal Americans towards his friends on Walls Street. And why shouldn’t he? Until the vast sea of normal Americans wakes up they should indeed be taken to the cleaners by the corrupt cabal who currently lead them; and by that I mean both parties and the wealthy elite these parties serve.

RebelEconomist :

Steve Keen’s model does not look so smart to me. Unless it includes the effect of moral hazard on the next cycle (which it does not seem to), channelling help via debtors will just make matters worse in the not so long run. I know: “in the long run we’re all dead, yadda yadda”. I remember hearing the same thing in 2001.

If Keen outthinks Larry Summers, and Larry Summers is in office, God help us!

Brick:

To be fair neither stimulus works if you don’t have a banking system and the assumption is that firms and consumers are not getting a stimulus which is not exactly true. All that agency debt buying, commercial paper buying and the tax rebate checks are really stimulus. I do however agree with Keen that continued support to banks won’t have any long term effect for all the reasons he explained. Keen does not touch on the moral hazard implications of bailing out firms who actually took on too much debt and expanded too fast. My opinion is that the stimulus should have been directed to those who are neither debtor nor creditor. Probably the best way to do that it is to let bad firms collapse and the good ones get there assets for next to nothing.
 

[Aug 3, 2009] Harvard: "Like a Ferrari Without the Engine"

July 27, 2009  | The Bond Tangent

There is an interesting article by Nina Munk, Rich Harvard, Poor Harvard, in Vanity Fair suggesting that Larry Summers mismanaged the institution into a state of calamity. I am somewhat predisposed to accept this argument on its face because I think Summers is an egomaniacal, chauvinist cad whom the Navy should deposit on a deserted island far away for the good of all humanity. Alas, Munk employs a more balanced approach to making her point, as evidenced by the fact that she can discuss Summers at length and only drop the f-bomb once.

Munk lists multiple reasons for Harvard's decline that are all ultimately attributed to Summers' delusions of grandeur, and which have created a perfect storm of sorts for the university:

1. increased spending, especially on a massive capital construction program, based on the assumption that Harvard's endowment would continue to outperform forever;
2. an investment philosophy involving aggressive risk-taking; and
3. the gradual alienation of financial talent.

I would agree that Harvard has been mismanaged for these reasons, but what the article misses is that this behavior is hardly unique to Harvard, and some of the assertions made in the article are based on things that have been completely blown out of proportion by the financial press and blogosphere. (I am thinking primarily of Harvard's interest rate swap "crisis." The fact that so many people consider Harvard's swap termination payments a travesty of Summers' rule only goes to show you how little people understand the bond market and what actually happened in late 2008.)

With respect to the university over-building its campus, Munk writes:

Consider this: Over the 20-year period from 1980 to 2000, Harvard University added nearly 3.2 million square feet of new space to its campus. But that’s nothing compared with the extravagance that followed. So far this decade, from 2000 through 2008, Harvard has added another 6.2 million square feet of new space, roughly equal to the total number of square feet occupied by the Pentagon. All across campus, one after another, new academic buildings have shot up. The price of these optimistic new projects: a breathtaking $4.3 billion.

In Allston, a Boston neighborhood just across the Charles River from the school’s main campus, you can view Harvard’s billion-dollar hole in the ground, a vast construction pit. It’s the foundation of Harvard’s most ambitious project of all: the sprawling Allston Science Complex, once scheduled to be completed by 2011 at a cost of $1.2 billion—but now on hold.

Harvard is hardly alone in the ambitious scope of its capital construction program. I think campus construction is a bubble not unlike what emerged in the residential real estate market, and it has been fed by the same forces. Universities have had access to easy money for a long time due to historically low interest rates (and innovation) in the tax-exempt bond market, investment performance, and (for most universities, although not necessarily Harvard) students that can borrow excessively against their future earnings to extend their educations. (On account of the lavish amenities now available to students on university campuses, I've often joked with colleagues that universities have transitioned from being cathedrals of higher education to cathedrals of second infancies.) Like the mortgage on a McMansion, the bill eventually comes due.

It seems to me that Harvard arrived late to the facilities arms race with its Allston Campus, compared to other universities with proportionately similar development plans, perhaps because Harvard had to secure a considerable swath of land. And this is why Harvard is now the proud owner of a really, really expensive crater.

At any rate, Harvard has been sidelined by its investment performance for the moment. I expect most public institutions will eventually follow suit (absent an immaculate recovery) when stimulus dollars run out and states have not bounced back from their revenue shortfalls. As a hedge fund manager interviewed for Munk's article put it, "None of these schools has the ability to cut expenses fast enough... They are completely f-----."

There is some juicy discussion of the in-fights between Summers & Friends and the money machines that ran the university's endowment, primarily over compensation issues ("by the early 2000s, Harvard's top moneymen were making as much as $30 million to $40 million a year"), that culminates in Jack Meyer leaving the Harvard Management Company in 2005 and taking his brainy underlings with him, "decimating Harvard's trading floor." Apparently, being a money manager at Harvard now is almost as thankless and politically-charged as working at Calpers. (Kidding.) My favorite line from the article is from a portfolio manager who joined Harvard after the exodus: "It was 'like a Ferrari without the engine.'"

On the topic of risk, Munk draws a line between Meyer and his predecessor, Walter Cabot, who evidently preferred a much more traditional approach to investing. Upon his arrival in 1990,

Meyer and his team moved Harvard's money into all sorts of things: private equity, real estate, oil, gas, fixed-income arbitrage, timberland, hedge funds, high-tech start-ups, foreign equities, credit-default swaps, interest rate swaps, cross-currency swaps, commodities, venture-capital funds, junk bonds. As if all those exotic, illiquid investments weren't enough to amplify returns, Meyer added a heap of leverage.

I've talked about this at length on this blog on a number of occasions. This is the "Yale Model" for investing, pioneered by David Swensen at Yale, which has become the new paradigm for many colleges and universities, pension funds, and pretty much every investor that fancies itself in theory not to have a time horizon. It is not unique to Harvard at all, and these groups are now (hopefully) learning a lesson about time horizons and cash flow.

There has been much ado in the blogosphere about the derivatives Harvard used to hedge future debt issuance related to the development of the Allston Campus (see Felix Salmon here and here, Dr. Mankiw here, and The Epicurean Dealmaker here). I think most of these arguments are based on a populist distaste for derivatives in the wake of the financial crisis, which is not entirely unfounded but does betray a degree of naivete about what is involved in managing a portfolio of outstanding debt obligations and the financial administration of a major capital construction program. Basically, they argue that by entering into forward swap agreements to hedge interest rate risk, Harvard was not entering a hedge at all, but speculating on the future direction of interest rates.

I would submit to you, however, that under most circumstances, if an institution undertook a massive capital construction program that was mostly funded by debt and did not enter into forward swap agreements (or something similar) - that is to say, if the institution just left the future debt issuance as an unknown in its budget going forward - then it would be speculating on the direction of interest rates. I will confess that I am not personally familiar with all of the specifics of these transactions, but if it were simply a matter of establishing a fixed rate hedge for the issuance of future variable rate debt, this is not uncommon at all.

When Harvard went to market in December of last year (in the early stages of this blog), I scoffed at the idea that the university could maintain its AAA rating in spite of what were obviously catastrophic investment losses in its endowment and wondered in print about the magnitude of Harvard's termination payment. Again, I do not know for sure, but I would guess that Harvard's derivatives moved sharply out-of-the-money right before the university went to market and the university, uncertain as everyone else was if a Great Depression redux lurked around the corner, decided to take a massive hit and terminate the swaps before the mother-of-all-worst-case-scenarios obtained. The limitations the tax code places on the use of derivatives might also have left the university without much a choice at the time. A billion dollars does not seem right in terms of the loss (at the time the debt was issued, Bloomberg said that the university had swaps associated with $3.5 billion of debt), but the divergence between swap and bond rates (and the near collapse of the variable rate debt market) were absolutely insane at the time.

Why would they do this, both go to market and terminate the derivative agreements? The article seems to imply that Harvard was driven to the debt markets in late 2008 because its managers did not want to sell investments at fire-sale prices, but it is not like the university could issue long-term tax-exempt debt to offset its operating expenses, so I am not sure what the author is getting at here. I think some of the panic that prevailed at the time is lost here too. If you would have asked me then if Harvard had selected the worst possible time to go to market, I probably would have said that they were lucky to have the perceived creditworthiness to get some money in the bank when all hell was breaking loose.

I am surprised that the university did not realize before late 2008 that its expansion plans were not feasible and did not start to unwind the associated investments at that point, however. The university had a pretty decent glimpse months before it went to market that its investment losses were going to be steep. Hindsight, etc.

Volcker We Need Radical Regulatory Reforms By Barry Ritholtz

June 25th, 2009 | The Big Picture

“The biggest obstacle to Volcker’s reform agenda is Summers”

There is a long article at Bloomberg very much worth reading about Tall Paul: Volcker Gets Less Than He Wants in Curbing Wall Street Excesses.

Consider the following:

“If Volcker is at one end of the spectrum arguing for tougher financial rules, Summers and Geithner are at the other. Summers pushed for deregulation while Treasury secretary under President Bill Clinton, advocating the repeal of the Glass- Steagall Act, which had separated investment and commercial banking for more than 60 years. Geithner was president of the Federal Reserve Bank of New York during a period when banks ratcheted up their leverage.

Both men are proteges of Robert Rubin, a former Clinton Treasury secretary who served on Citigroup Inc.’s board from 1999 until this year and has been criticized for allowing the bank to pile up $544 billion of derivatives and securities before it became the recipient of more government assistance than any other bank. Rubin declined to comment.”

When it comes to regulatory reform, the Geithner Summers pairing are the phlegmatic duo.

And, they epitomize why Team Obama’s economic legacy will likely amount to very little in terms of lasting change or significant legislation.

O may aspire to FDR’s greatness and legacy, but it is wildly obvious that when it comes to either economics or financial regulations, O is no FDR.

What is it that Volcker wants?

• Impose capital requirements on trading parties, people familiar with his thinking say.
• Make bigger banks smaller
• Reduce the role of an overstretched Fed
• Force Derivatives to be traded on exchanges
• Transparent investor prices of Derivatives;
• More-aggressive capital reserve requirement
• Bigger role for exchanges.

Of course, major Wall Street banks, (such as JPM and Goldman Sachs) ALREADY sent a letter to the New York Fed supporting less supervised clearinghouse.

The Case Against Larry Summers   By Elizabeth MacDonald

Fox Business

Federal Reserve chairman Ben Bernanke presents the Fed’s semi-annual monetary-policy report on Capitol Hill today, the start of two-day hearings.

On tap will be the Fed’s massive quantitative easing programs and the exit strategy out of them, a dicey proposition that analysts say ranks right up with the US’s exit strategy out of Iraq.

But although Bernanke is winning kudos and praise for making brilliant moves to save the US economy, chatter on the cocktail party circuit in Washington, DC is that Bernanke may not get asked back as the world’s most powerful central banker when his term expires in January 2010, due to a variety of reasons (see below).

Reasons that have caused 60% of House members to co-sponsor a new bill that would give the Government Accountability Office the right for the first time to inspect the central bank’s books, its monetary policymaking, its lending and its connections with foreign central banks, all now off-limits to Congressional interference.

Word is that instead President Barack Obama may tap Lawrence Summers, director of the National Economic Council and former Treasury Secretary, as the next Federal Reserve chairman. Besides Summers, other potential options include San Francisco Fed president Janet Yellen, and former Fed vice chairmen Roger Ferguson and Alan Blinder.

But would Summers be the best choice to replace Bernanke as chairman of the US Federal Reserve?

Dig deeper into Summers’ background, and you’ll not only see that Summers is potentially so radioactive that the White House may not decide to put him up as a replacement for Bernanke, but why it did not even deign to choose him to be US Treasury secretary, picking Timothy Geithner instead, as Summers may not have survived a Congressional confirmation hearing.

Summers is widely praised as a top notch economist nonpareil, with innovative contributions to economic research in public finance, labor and macroeconomics. For one, Summers was a key backer of a cut in the capital gains tax rate, arguing such taxes were inefficient.

However, at minimum the criticisms about Summers–his prior positions on bank regulatory policies, notably derivatives, his conflicts of interest with Wall Street, his incendiary remarks–would make for volatile confirmation hearings.

And the case against Summers as Fed chairman is separate from a sense in Washington that Summers is simply too blunt and domineering, that he would condescend to Einstein if he could, as one analyst said, or that he is a self-made man who worships his own creator.

Below is a tip sheet on what to watch out for in this growing debate about Summers as the new Fed chair.

You’ll find also key issues that affect your investment portfolio, the stock market, and the economy.

The tip sheet was compiled with the assistance of Fox News analyst James Farrell, a sharp financial analyst.

The question lawmakers are struggling with is this: are the following Fed actions done on Bernanke’s watch enough to replace him?

That under Bernanke the Fed has blown out its balance sheet to more than $2 tn to bail out Wall Street and the banks; that the Fed is now more entangled in fiscal policy and subject to political pressures than ever before, threatening its cherished independence; that it used taxpayer money to make 100% whole the recklessly disastrous bets made by Wall Street firms in the AIG bailout, including Goldman Sachs; that the Fed gave $20 bn in taxpayer money without conditions to Bank of America to buy Merrill Lynch, after chief exec Ken Lewis threatened to ditch the deal; and that Bernanke’s own actions have raised questions over whether the Fed can be the systemic risk regulator when as Fed governor, for example, he agreed with Greenspan in keeping rates drastically low during the bubble years, inflating the bubble even more, or that he said subprime loans were not a problem before the credit crisis blew up in the summer of 2007.

Summers Soft on Derivatives Regulation

Derivatives have created a worldwide financial meltdown, a daisy chain of toxic paper that has zapped investment portfolios worldwide. These ticking time bonds have created havoc in governments from here to Europe to Russia to Asia.

What’s gone unnoticed is that in the late ’90s Summers did nothing to stop former Fed chair Alan Greenspan from pressuring US accounting rule makers to water down a proposed new derivatives accounting rule that may have helped stop the current crisis. Many business leaders had strongly opposed the new rule.

In fact, in 1998, Summers testified in Congress against regulating the derivatives market.

Derivatives, such as mortgage-backed bonds, are financial contracts whose values are linked to, or derived from, those of underlying assets such as bonds, stocks or commodities.

Ten years before the worst meltdown since the Great Depression, in the summer of 1997, Greenspan demanded that the Financial Accounting Standards Board weaken the new rule, which would have forced companies to book changes in the market value of their derivatives contracts. The FASB sets the rules for how companies report their profits.

Greenspan wanted the FASB to eliminate the profit adjustment and instead force only large companies to merely disclose the fair market value of their derivatives in supplements to their financial statements.

Greenspan said the new rule “may discourage prudent risk-management activities,” would create “volatility” in bank capital levels and give an inaccurate picture of banks’ financial conditions.

Greenspan’s pressure came just three years after the business world had pressured the FASB to stop a new rule that would force companies to book for the first time the value of stock options as an expense.

Thanks to pressure from Greenspan and business executives, it took the FASB years more to pass the new rule.

In 1998, Summers also defended derivatives in testimony before Congress.

He said that Wall Street firms who make these trades “are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws.”

Summers added that to “date there has been no clear evidence of a need for additional regulation of the institutional OTC [over the counter] derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need.”

(Summers might now very well conclude that the current financial mess has provided the “clear evidence” to support regulating derivatives, Farrell says).

Summers also threw down another obstacle to cracking down on the ticking time bonds that are derivatives when he said that any move to regulating derivatives by the Commodity Futures Trading Commission “ought to come with the legitimacy of a clear legislative mandate from Congress.”

Summers Supported Repeal of Glass-Steagall

Market analysts, watchdogs, and members of Congress now argue that the repeal of Glass-Steagall in November 1999 also helped create the current Chernobyl-level meltdown on Wall Street and the collapse in the US economy.

Glass-Steagall is the Depression-era act enacted in 1933 which put up a firewall between commercial and investment banking. With its repeal deposit-taking banks for the first time could wade into the dicey securities business, putting deposits at risk.

Specifically, the repeal let commercial lenders such as Citigroup, once the largest US bank by assets that is now on government life support, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities, says the Journal of Economic Perspectives, an economic journal published by the American Economic Association.

Banks had lobbied for the repeal of Glass Steagall beginning in the ’80s out of fear over the rising economic might of Japan–never mind that Japanese banks were notorious for, ironically, having razor-thin capital cushions (as US banks subsequently did). Japan’s banks soon led the country into its economic collapse.

When President Bill Clinton signed the Financial Modernization bill in 1999, which effectively repealed Glass-Steagall, then-Secretary Summers stated:

“This is the culmination of years of effort by many, many people, reflects the work of presidents, Treasury officials, members of Congress, those in the private sector, from both parties, and dedicated professionals, both inside and outside the government. With their help, I believe we have all found the right framework for America’s future financial system.”

Summers’ Wall Street Fees and Perks

Summers has met with withering fire for accepting lucrative fees and perks from Wall Street, which he has been and is now paid by the US taxpayer to regulate.

Summers has come under criticism for accepting perks from Citigroup, including free rides on its corporate jet in the summer of 2008 during the presidential election.

At the time an economic adviser to Democratic presidential candidate Obama, Summers  reportedly got a free ride on a Citigroup jet in August 2008 while attending the Democratic National Convention in Denver.

Summers also earned decent fees from Wall Street in the year before he joined the White House and began helping to oversee the financial industry.

Specifically, the New York Times reported in April 2009 that Summers was paid millions of dollars in 2008 by Wall Street firms over which he would eventually exert regulatory power. Summers earned $5.2 mn from the hedge fund D. E. Shaw, and collected $2.7 mn in speaking fees from Wall Street companies that received government bailout money

The Times said that Summers reported in financial disclosure forms that he made “40 paid appearances, including a $135,000 speech to the investment firm Goldman Sachs, in addition to his earnings from the hedge fund, a sector the administration is trying to regulate.” The report says he also “appeared before large Wall Street companies like Citigroup ($45,000), JPMorgan Chase ($67,500) and the now defunct Lehman Brothers ($67,500), according to his disclosure report.”

Summers Pressured Congress to Stop Exec Pay Caps

According to the Wall Street Journal, Summers called Democratic Senator Chris Dodd, chair of the Senate Banking Committee, asking him to remove caps on executive pay at firms which have received bailout money, including Citigroup. Treasury secretary Geithner also called as well, the Journal says.

The White House was worried that the Senate’s rules “would prompt a wave of banks to return the government’s money and forgo future assistance, undermining the aid program’s effectiveness.”

The legislation restricted bonuses more severely than the Obama administration’s pay limits, as it would have barred any company “receiving bailout funds from paying top earners bonuses equal to more than one-third of their total annual compensation. That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.”

Summers’ Role in the California Energy Crisis

Did Summers do anything to stop high-level pressure on then California governor Gray Davis to relax regulation of the energy markets during the 2000 energy crisis.

According to the book “Conspiracy of Fools: A True Story” by New York Times reporter Kurt Eichenwald (Random House, 2005), then Federal Reserve chairman Greenspan and Treasury Secretary Summers met with governor Davis on December 26, 2000 to discuss California’s power crisis.

While Gray opened the meeting by stating that “if [energy] deregulation fails in California, it will fail in the United States,” Greenspan and Summers disagreed.

“Truthfully, governor, California hasn’t deregulated,” the book quotes Greenspan as saying. “The state simply replaced one form of regulation with another. It’s become a system of central planning run amok.”

The book says Summers silently agreed, and then joined in. “You have a fixed price set by the state for selling electricity to the public. But you have a variable, floating price when you buy electricity,” the book quotes Summers as saying.

“That’s not sustainable,” the book quotes Greenspan as saying. “The problem is your regulatory system. And there are a very limited number of solutions. But the first step is that prices for consumers are going to have to go up.”

Davis showed no emotion, the book says. “I really feel the problem is the energy producers,” he said. “They’re manipulating the markets and forcing up prices.”

“They may be,” the book quotes Greenspan as saying. “But that’s beside the point. That’s not causing the problem; that’s making it worse. The real problem is a supply-and-demand imbalance.”

Summers Remarks About Aptitude of Women

Summers stepped down as president of Harvard University in 2006 after a no-confidence vote by the university’s faculty. Among other things, Summers created a furor in a 2005 speech he gave in which he said that women’s under-representation in the top levels of academia is due to a “different availability of aptitude at the high end.”

In discussing why women may have been underrepresented “in tenured positions in science and engineering at top universities and research institutions,” because Summers said his “best guess” was that “there are issues of intrinsic aptitude, and particularly of the variability of aptitude.”

Summers said that this variation, combined with other factors, “probably explains a fair amount of this problem.”

Although he later said his statements were an “attempt at provocation,” Summers eventually apologized for his remarks and later stepped down in 2006.

“I was wrong to have spoken in a way that has resulted in an unintended signal of discouragement to talented girls and women,” Summers said, later adding: “Despite reports to the contrary, I did not say, and I do not believe, that girls are intellectually less able than boys, or that women lack the ability to succeed at the highest levels of science.”

Summers Opposed Infrastructure Spending?

Blogs on the Internet likely have this one wrong.

This controversy started when Democrat Rep. Peter DeFazio stated on MSNBC’s The Rachel Maddow Show that “Larry Summers hates infrastructure and some of these other economists. They were very much part of creating the problem, and now, they are going to solve the problem.  And they don’t like infrastructure. So, they want to have a consumer-driven recovery.”

Not quite.

Summers publicly advocated for infrastructure spending as part of a stimulus effort in Congressional testimony on September 9, 2008:

“There is a compelling case for significant new commitment to infrastructure spending. While infrastructure spending is often seen as operating only with significant lags, I have become convinced that properly designed infrastructure support can make a timely difference for the economy,” Summers testified before Congress.

Summers added: “Evidence from the Minneapolis bridge collapse suggests that it is possible to launch infrastructure programs where the vast majority of the money is spent within a year…Properly designed infrastructure projects have the virtue of being helpful as short run stimulus, especially for the employment of the workers most hard hit by the housing decline, while at the same time augmenting the economy’s productive potential in the long run.”

Summers Fired a Harvard Whistleblower?

Despite what the blogosphere says, the evidence is thin that Summers while president of Harvard University made a controversial decision to fire a whistleblower worried about derivatives investments in the school’s endowment. 

In 2002, a new employee of the company that manages Harvard’s endowment (Harvard Management), Iris Mack, wrote to Summers to express concern about the endowment’s investments in derivatives. Mack had asked Summers to keep the communication confidential. Marne Levine, chief of staff for Summers, assured her that the communications would be kept confidential.

On July 1, 2002, Mack was called into a meeting by her boss, Jack Meyer, then the chief of Harvard Management. The next day Meyer fired her. Meyer told Mack that she was fired for making “baseless allegations against HMC to individuals outside of HMC.”

When Mack threatened to sue for an unlawful firing, Harvard entered into a confidential settlement with her.

[Jul 19, 2009] "The Most Misunderstood Man in America"

Academic Mafiosi is still a Mafiosi :-). "Stiglitz, more than anyone on the Washington scene, was the biggest fly in the ointment of "free-market fundamentalism" pressed on the world in the '90s by Summers, Geithner and their mentor, former Treasury secretary Robert Rubin—advice that has now contributed to the worst financial crisis since the Great Depression"

Michael Hirsh wonders why the Obama administration hasn't consulted Joe Stiglitz more often on economic policy issues, and suggests the answer is an ongoing feud with Larry Summers:

Economist's ViewThe Most Misunderstood Man in America, by Michael Hirsh, Newsweek:

...Even in the contentious world of economics, [Joe Stiglitz] is considered somewhat prickly. And while he may be a Nobel laureate, in Washington he's seen as just another economic critic—and not always a welcome one. Few Americans recognize his name... Yet Stiglitz's work is cited by more economists than anyone else's in the world... And when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle. ...

... ... ...

... Stiglitz's defenders say one possible explanation for his outsider status in Washington is his ongoing rivalry with Summers. ... Since the early '90s, when Summers was a senior Treasury official and Stiglitz was on the Council of Economic Advisers, the two have engaged in fierce policy debates. The first fight was over the Clinton administration's efforts to pry open emerging financial markets, such as South Korea's. Stiglitz argued there wasn't good evidence that liberalizing poorly regulated Third World markets would make any one more prosperous; Summers wanted them open to U.S. firms.

The differences between them grew bitter in the late 1990s, when Stiglitz was chief economist for the World Bank and took issue with the way Treasury Secretary Robert Rubin, and Summers, who was then deputy secretary, were handling the Asian "contagion" financial collapse. After World Bank president James Wolfensohn declined to reappoint him in 1999, Stiglitz became convinced that Summers was behind the slight. Summers denies this...

Selected comments

Chris Rich says...

I'm increasingly convinced that this is the outcome of a deal with the Clintons. Obama's economic team is mainly the Clinton government in exile with Volcker as a kind of garnish.

Maybe he was insecure over the inexperience accusations during the campaign.

My hope is he'll eventually get rid of them by mid term. Summers is still widely despised over at Harvard. Last month I was doing a paint job on the edge of the campus and overheard a facilities manager in a huddle with two contractors.

The manager was treating them to juicy details about Harvard presidents, past and present. The current one is liked but when talk turned to Summers the guy's voice dropped to a near whisper as if the trees were bugged.

Larry once made a complete pest of himself during a routine fire drill where he demanded to return to his office before the drill was finished in some spoiled brat outburst of exceptionalism.

The undergrad alumni is still seething over the aggressive risk investment policy Summers introduced after years of staid careful investing.

The outcome was a multi billion dollar endowment haircut and craters in lower Allston where there were supposed to be new buildings in a campus expansion.

 

As Obama Taps Larry Summers, Recalling Summer's Days as a Regulation Foe Mother Jones By David Corn

November 24, 2008 | www.motherjones.com

On Monday, President-elect Barack Obama announced his economic team, noting that Lawrence Summers would be the director of his National Economic Council. In touting Summers, Obama praised the former treasury secretary for his work during the Clinton years

Larry helped guide us through several major international financial crises – and was a central architect of the policies that led to the longest economic expansion in American history, with record surpluses, rising family incomes and more than 20 million new jobs. He also championed a range of measures – from tax credits to enhanced lending programs to consumer financial protections – that greatly benefited middle income families.

As a thought leader, Larry has urged us to confront the problems of income inequality and the middle class squeeze, consistently arguing that the key to a strong economy is a strong and growing middle class....And as one of the great economic minds of our time, Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges.

While some of that might be true, Summers has been a controversial figure, and it's likely no accident that he is being handed a position that does require him to be confirmed by the Senate.

But despite Summer's intellect and experience, it's worth remembering that he did blow one of the major calls of the 1990s: what to do about financial derivatives--those esoteric financial products (such as credit default swaps) that helped grease the way to the subprime meltdown. Not only did Summers oppose greater regulation for those financial instruments; he led the opposition against it.

Back in May 1998, the Commodity Futures Trading Commission, then chaired by Brooksley Born, issued a memo noting it was "re-examining its approach to the over-the-counter (OTC) derivatives market." It noted:

While OTC derivatives serve important economic functions, these products, like any complex financial instrument, can present significant risks if misused or misunderstood. A number of large, well-publicized financial losses over the last few years have focused the attention of the financial services industry, its regulators, derivatives end-users and the general public on potential problems and abuses in the OTC derivatives market.

At the time the OTC derivatives market was valued at $28 trillion, according to the CFTC. The CFTC noted that it was time "to review its regulator approach to OTC derivatives." The CFTC was suggesting the time had come for it to regulate this complicated, opaque corner--or hidden continent--of the economy.

Summers, then the deputy secretary of the Treasury, had another idea--as did Robert Rubin, the secretary of the Treasury, and Alan Greenspan, the chairman of the Federal Reserve. These wise men each gazed with horror upon Born's proposed consideration of regulation for derivatives. Speaking for them, on July 30, 1998, Summers testified in the Senate against the notion of the CFTC even pondering rules governing the trading of derivatives. By releasing its memo, the CFTC, Summers complained, "has cast the shadow of regulatory uncertainty over an otherwise thriving market--raising risks for the stability and competitiveness of American derivative trading."

Summers blasted the CFTC for having raised" the possibility of increased regulation over this market." And he hailed derivatives:

The dramatic growth of the market in recent years is testament not merely to the dynamism of modern financial markets, but to the benefits that derivatives provide for American businesses.

By helping participants manage their risk exposures better and lower their financing costs, derivatives facilitate domestic and international commerce and support a more efficient allocation of capital across the economy. They can also improve the functioning of financial markets themselves by potentially raising liquidity....OTC derivatives directly and indirectly support higher investment and growth in living standards in the United States and around the world.

Even "small regulatory changes," Summers cautioned, could throw the whole system out of whack. Determined to slap down the CFTC, his Treasury Department, the Fed, and the Securities and Exchange Commission crafted a proposal that would prohibit the CFTC from issuing new rules regulating any swap or "hybrid instrument."

Summers told the Senate he and his fellow economic bigfoots were not slamming Born and the CFTC cavalierly:

We understood the seriousness of making this proposal. To question an independent agency's concept of its jurisdiction and then to propose legislation that would temporarily curtail that agency's ability to act is not something we do lightly. We concluded, however, that such legislation was necessary to avoid disruption and dislocation in the market while the underlying issues were being considered by Congress.

Congress in late 2000 did end up implementing the Summers approach, when Senator Phil Gramm, then the head of the Senate banking committee, used a back-room maneuver to slip into a must-pass spending bill a measure that prevented the CFTC or the SEC from regulating derivatives.

During that 1998 Senate appearance, Summers did acknowledge that there could be problems with derivatives:

They can also be abused. And there have been certain problems that have arisen in recent years in both the OTC and exchange-traded derivatives market, as well as problems arising from inappropriate investments in complex securities with embedded derivatives. More broadly, questions have been raised as to whether the derivatives markets could exacerbate a large, sudden market decline.

But all he--and Rubin and Greenspan--wanted to do at the time was to study the matter. After all, Summers noted, the Big Finance institutions buying and selling "these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves" from any problems with derivatives. In other words: fear not, the high-flyers of Wall Street and the world's financial markets know what they are doing.

Summers got that wrong. (See Citigroup.) While others--such as Born and her staff at the CFTC--presciently spotted potential problems arising from the exploding derivatives market, Summers, Rubin and Greenspan blithely fell back on the conventional view: regulation is a growth-killer. Summers' 1998 testimony was imbued with the hubris that led to the current financial disaster. Obama--and the rest of the nation--should hope that when it comes to thinking about regulation these days, Summers has experienced a market-driven correction.

Closing the barn door after the derivatives escaped by Andrew Leonard

May 13, 2009 | Salon

It would be mean, and probably unfair, to criticize Treasury Secretary's Geithner's brand-new proposals for derivatives regulation as a classic case of barn-door-closing after the horses, cows, pigs, geese, chickens and even the rats all skedaddled. Better late than never, right? The proposals are sensible and long overdue, and I hope Congress moves quickly to codify them into law.

No doubt: It is absolutely true that "An essential element of reform is the establishment of a comprehensive regulatory framework for over-the-counter derivatives, which under current law are largely excluded or exempted from regulation."

Yes! So bring on the centralized clearing houses for derivatives trading, the increased requirements for transparency, "robust" margins, "conservative" capital levels, and reporting. That would all be good.

But I do hope someone gets Lawrence Summers on the phone and extracts some kind of on-the-record admission that he and Robert Rubin and Bill Clinton and Phil Gramm screwed up royally in 1999 and 2000 when they ensured that these derivatives would not be regulated. Because the obvious interpretation to be drawn from Geithner's new rules is that beating back derivatives regulation 10 years ago was a disastrous mistake. Summers was there, and he blew it. Even Alan Greenspan has admitted he made some errors. How about it, Larry?

Did Larry Summers fire derivatives whistleblower at Harvard - Credit Writedowns

Posted by Edward Harrison on 1 April 2009 at 9:55 pm   

I am sure you realize by now that I believe Larry Summers is soft on derivatives, soft on regulation and soft on banking executives.  He exemplifies the self-regulatory zeal of the previous boom.  Given his indifference to responsible regulatory oversight of derivatives and other markets, the following account, now public does seem to fit a pattern.

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 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!).

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.”

Tim Geithner has taken a lot of heat for the Obama Administration because the new Administration seems to be just as fawning over the financial services industry as the old Bush administration. But, Larry Summers, as the White House’s Chief economic counsel, has a lot to say about the direction of economic policy.

If the allegations here are true, clearly Summers violated the law. More to the point for today, one should have little doubt that Obama and his team have a much cozier relationship with Wall Street than Main Street as reflected in the kid’s glove approach to banks and the hardball approach with the automakers.

It seems that some in the White House want to party like it’s 1999 and not in a good way.

Source
Harvard Derivatives Whiz Fired For Emailing Larry Summers About “Frightening” Trades? – TPM

FT.com - Columnists - Lunch with the FT - Lunch with the FT Larry Summers

Between that financial meltdown and the current one, Summers lived through a crisis different in scale and substance but perhaps even more personally challenging – his tumultuous leadership of Harvard University. That experience, I suggest, may be the first time in a golden career when something went wrong for Summers. The son of two economists and nephew of two Nobel laureates in economics, he went on to become an award-winning, tenured Harvard professor of economics when he was just 28, then moved to top jobs at the World Bank and the Treasury. From there, following George W Bush’s election, he glided into the nation’s most prestigious academic post, becoming in 2001 president of Harvard. That role came to a rocky end in 2006, when he resigned under pressure from faculty critics. I ask what the episode taught him.

With a slight grimace – the question has been asked many times before – Summers offers his standard, Kissinger-esque line: “Harvard and Washington are both political environments and I’m not sure that Washington is the more political of the environments.” Beyond that, he allows that the “negative” lesson he learnt at Harvard was the need to “maintain focus on your top priorities and avoid diversionary controversies that were apart from the agenda”, a possible reference to comments about women and science that helped to scupper his already-troubled tenure.

Summers is more forthcoming on how his thinking has been influenced by his recent, part-time stint as an adviser at the hedge fund DE Shaw – a job that created a brief political flurry this spring when financial records released by the White House showed that Summers was paid about $5.2m (£3.2m) in salary and other compensation in the last of his two years at the firm.

The chief intellectual casualty of the current crisis has been the “efficient markets” school – the theory, associated with such erstwhile laisser faire gurus as Alan Greenspan, that market participants are governed by rational expectations and markets are self-correcting. As an academic economist, Summers has studied the shortcomings of that approach but, working on Wall Street gave him, he says, a more visceral understanding of the “self-referential” character of markets: “Markets are concerned with the ultimate health of economies and the like but they’re equally or more concerned with what the likely judgments of other market participants in the short run are.”

Might this “more textured understanding” have caused Summers to reconsider some of his views from the 1990s – a time when he and former Treasury secretary Robert Rubin led a pro-market faction in the Clinton administration that some critics believe is partly to blame for the current crisis? (They cite, for example, Summers’ support for the 1999 repeal of the Depression-era Glass-Steagall Act, which had separated commercial and investment banking.)

Summers’ reply amounts to a qualified yes: “I think I always had the sense that our regulatory system was about the protection of individual institutions, and the important problems are often about the protection of the system. I was very worried in the 1990s about predatory lending, about systemic risk, about the stability of Fannie and Freddie. But the political constellation at that time didn’t offer a chance really to do more than report and warn about it. It’s a different world today. As Keynes famously said, ‘When the facts change, I change my mind.’”

[Jul 11, 2009] Larry Summers’ New Model Details, Contradictions, And Odd Assumptions By Simon Johnson

The Baseline Scenario

Larry Summers had “lunch with the FT” (p.3 in the Life and Arts section today) – although unfortunately the paper does not report when this happened; a week or two makes quite a difference these days.

Putting this next to his April speech to the IDB, Summers’ view of the way forward has a few problems.

Summers says “The American problem this time has more in common, at least qualitatively, with the Japanese post-bubble problem, where the issue was not reassuring foreigners but maintaining sufficient domestic demand to push the economy forward.”

But Japan had a chronic current account surplus, which became bigger as firms saved more in order to pay down their debts during the 1990s.  The Japanese government could finance its deficit domestically – and the country exported capital consistently.  In contrast, with our well-established and large current account deficit and our eye-popping budget deficit, we rely much more on the confidence of foreigners – unless Summers is assuming that the increase in our private sector savings will be truly enormous.

As Summers says, quite accurately, the Asian and other crises of the late 1990s,

“… took the form of a foreign lack of confidence in a country that led to a mass withdrawal of funds and made reassuring foreigners the central priority.  That’s why interest rates often had to be increased.”

Surely, we face some sort of hybrid Japan/emerging market crisis.  Or perhaps we are heading towards blending Japan in the 1990s and the US in the 1970s, i.e., there has been a permanent shock (oil then v. financial sector now) to which we should adjust, and if we attempt to postpone that adjustment excessively through overexpansionary macro policies, we’ll experience a great deal of inflation.

On Japan in the 1990s, Summers is famous for first arguing it was an aggregate demand problem and later coming to the view that the banks were undercapitalized and – without this – the economy could not sustain a recovery.  His ideas on the US are likely to go through the same evolution.

It is also striking that he makes no mention of balance sheets problems, either for consumers or businesses – in Japan then or the US now.  It sounds like he is getting ready to push for a second fiscal stimulus – actually, for him this would be the third stimulus, as he argued hard for the tax cut stimulus of early 2008.

Summers is almost certainly wrong when he says, “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years.”  On the contrary, most emerging markets are glad they had more reserves than in the past and are now wondering about how to build up those reserves further.  This may, of couse, help the US sell some of its forthcoming government debt – but it doesn’t reduce “global imbalances” or address the fact that we are on an unsustainable public debt and foreign debt path.  Most of all, it lets us dig a deeper hole for ourselves and for the world economy.

More broadly, Summers continues to argue, at least implicitly, that we face a temporary shock or one-off aberration of some kind.  He distinguishes sharply ”fixing” the banking system and “getting the economy out of the rut” from long-run issues, “like fixing health-care, like having real energy policy, like reforming education.”  He  apparently does not see much by way of connections between these two sets of issues.

But doesn’t the economic and political power of our troubled banking system threaten our longer run opportunities?  Aren’t our nonfinancial reform options (e.g., on universal healthcare coverage) already limited by the doubling of government debt (towards 80% of GDP) we are undertaking as a direct consequence of financial sector misfeasance?  And won’t Medicare – and much else – be undermined by the behavior of “too big to fail” banks down the road?

Summers has commendably switched some of his rhetoric, so now he emphasizes nonfinancial technology development – presumably in the private sector – as the road to sustainable growth.  And he rightly contrasts this with the financial engineering that brought us to this point.  But does his model really offer the most plausible or appealing path from here to there?

By Simon Johnson

1. H Baskerville
   
   We’ve come up with a standard doctrine (deficit spending with lower taxes) towards the intervention of recessions.
   • What if our blind acceptance of the solution is leading us down the wrong path?
   • What if studying the great depression/Japan/etc. for answers is actually the wrong thing to do because where we are now is so fundamentally different that a new treatment plan needs to be developed.

   It seems crazy to think that the same things that got us in this mess (low interest rates, deficit spending) are now the very cure. Maybe that’s the illogic of it all, we’re trying to restart the economy when actually we need to be fundamentally rebuilding.

[Jul 8, 2009] Dear Lord, Anyone but Lawrence Summers . . .

By Barry Ritholtz - July 8th, 2009, 11:07PM

I read articles like these with dread and horror:

“As the White House begins to ponder whether to reappoint or replace Ben Bernanke when his term expires in January, the Federal Reserve chairman’s standing on Wall Street is on the rise while attacks on him from Congress mount.

Treasury Secretary Timothy Geithner is expected to play a key role in advising President Barack Obama on whether to reappoint Mr. Bernanke. Mr. Geithner has worked closely both with Mr. Bernanke and with the leading alternative for the powerful post — Lawrence Summers, the former Treasury secretary, who is currently the president’s top economic adviser.

Before making a decision later this year, the White House also is expected to look at other economists, including Roger Ferguson and Alan Blinder, former Fed vice chairmen; Janet Yellen, president of the San Francisco Federal Reserve Bank; and Christina Romer, chairman of Mr. Obama’s Council of Economic Advisers.”

So help me God, if Obama nominates this incompetent, lacking-in-judgment jackboot to the FOMC chair, then in 2012, I will write in George W. Bush’s name for President . . .

Source:
White House Ponders Bernanke’s Future
JON HILSENRATH, SUDEEP REDDY and DAVID WESSEL
WSJ, July 9, 2009
http://online.wsj.com/article/SB124709730991015099.html 

Chief Tomahawk Says:
July 8th, 2009 at 11:18 pm

I believe Larry Kudlow has enthusiastically endorsed Lawrence for the job because Larry believes Lawrence will take a stand for “King dollar”. [Just nevermind that $1 billion hit Harvard took in their endowment fund recently...]

1. Onlooker from Troy Says:
   July 8th, 2009 at 11:21 pm

   Summers probably has Obama completely snowed. He (Obama) doesn’t have a clue what’s really going on as the info is filtered through the likes of Geithner and Summers.

   I have this fantasy that the Prez and most, if not all, of Congress takes a 2 week retreat during which they do nothing but bone up on what the blogosphere has been saying for the last couple of years. After which they come out and look at all their advisors and economists and say, “What the f&ck?!! You guys are completely incompetent! Somebody really did know this was coming.” And then they take us down the right path for a change.

   Hey, a guy can dream, can’t he? 

2. call me ahab Says:
   July 8th, 2009 at 11:38 pm

   BR’s comment about GWB is only a expression of utter disatisfaction- Obama has continued unabated policy as usual- same suspects favored- regardless of the BS that was spoken during the campaign- a colossal failure so far-

   my opinion - is- he is a lightweight against heavyweight opposition and has the wrong man in the corner - and the fight doctor better be on his toes- because a few more missteps and he may be down for the count

3. S Brennan Says:
   July 8th, 2009 at 11:38 pm

   Barry,

   If Obama pulls this stunt, what makes you so sure you’ll be voting in 2012?

   As an aside, while his press honeymoon continues unabated, Obama’s poll numbers indicate he’s slipping, particularly in swing states. With no higher job to shoot for, we’ll finally find out if the guy is competent at something other than promoting himself for higher office…sorta like Bush in 2001.

   If it were not so important, I’d laugh at a nation that replaced a folksie sounding amateur with an an amateur who had mastered the teleprompter.

4.  Onlooker from Troy Says:
   July 8th, 2009 at 11:43 pm

   Right after I penned my post above I went to Mish’s blog and saw this last line of this post:
   http://globaleconomicanalysis.blogspot.com/2009/07/states-use-stimulus-money-for-short.html

   “The administration needs to fire all its experts and start reading a few more blogs.”

   Ha! I thought that was very funny timing.

5.  Marcus Aurelius Says:
   July 8th, 2009 at 11:46 pm

   The usual suspects. Sheesh

   1. S Brennan Says:
      July 8th, 2009 at 11:47 pm

      Speaking of reading ” articles like these with dread and horror” here another piece of magic from our Wall Street welfare queens.

      http://www.bloomberg.com/apps/news?pid=20601087&sid=aeTzfvEedKpQ

   2.  drey Says:
      July 9th, 2009 at 12:06 am

      We’re screwed. BO might have been OK had he been dropped into the middle of a foreign policy crisis but he is in way over his head on the economy. We should have known we were in trouble with the Geithner appointment - what a weasel - and the nail in the coffin was the marginalization of Volker who it now seems clear was brought in merely for window dressing…

      I’ve never seen so many half-baked, ill-conceived economic policies, speaking of which, I’m so pissed off about this ‘cash for clunkers’ thing (which may or may not have BO’s imprimatur) I can’t see straight. Why should my neighbor with a household income of $170-180K receive a $3500-4500 subsidy from the federal govt for replacing an aging pickup truck that he was about to replace ANYWAY? Unfuckingbelievable.

      Ya listening, BO? Take Mish’s advice and start reading some blogs.

   3.  some_guy_in_a_cube Says:
      July 9th, 2009 at 12:08 am

      Summers as Fed Chairman? Sucks for you, unless you’re short. See you at SPX 150.

   4.  franklin411 Says:
      July 9th, 2009 at 12:18 am

      Such drama and hysterics. Relax, Barry. Considering other names besides the incumbent is part of the process–like interviewing 6 candidates for a position you’re going to give your cousin anyway. At any rate, Larry would never make it through Congress after what he said about women being bad at math. 2010 is an election year, after all.

   5.  Super-Anon Says:
      July 9th, 2009 at 12:20 am

      So help me God, if Obama nominates this incompetent, lacking-in-judgment jackboot to the FOMC chair, then in 2012, I will write in George W. Bush’s name for President . . .

      This is how Modern Liberals get converted to Traditional Liberalism…

   6.  Mike in Nola Says:
      July 9th, 2009 at 12:26 am

      First thing that came to mind was Darth Vader saying “The circle is now complete.”

   7.  Stranded_in_CA Says:
      July 9th, 2009 at 12:42 am

      I cannot see how this is a surprise to folks here. Ever since Obama was on the campaign trail he surrounded himself with plutocrats like Rubin and so-called “economic advisers” like Goolsebee, Manikw, Cutler and Liebman, and was given the good corporate stooge approval by Wall Street.

      His choice in associates should have scared the day lights out of most Americans given their hostility to the working and middle-class but they were to enamored of his manufactured persona.

      Furthermore when you factor in Obama’s support of Geithner’s repeated stonewalling in front of Congress when ask where the TARP/TALC funds went it adds to a man who is firmly in the pocket of the major financial houses.

      IMO expect the worse from Obama and his Wall Street masters and you won’t be surprised.

   8.  Mike in Nola Says:
      July 9th, 2009 at 12:51 am

      Interesting coincidental comment on BO as Hoover:

      http://www.newdeal20.org/?p=3027

   9.  clawback Says:
      July 9th, 2009 at 1:28 am

      “Summers probably has Obama completely snowed. He (Obama) doesn’t have a clue what’s really going on as the info is filtered through the likes of Geithner and Summers.”

      The man from Troy has hit the nail on the head. Forget convoluted conspiracy theories. The One is just in over His head. Sometimes the simple explanation is the right one. Look at His public comments — it is obvious they were spoonfed by Summers. Remember that obnoxious comment He made about the “spending” being the point of the stimulus (sic) bill? A little Keynesian nugget straight from Summers brain and out the mouth of the One.

   10.  franklin411 Says:
       July 9th, 2009 at 1:29 am

       @Mike
       Interesting, because I’ve been on a three day New Deal binge reading Arthur Schlesinger Jr’s three part classic “The Age of Roosevelt.” 1700 pages dealing with the late 1920s bubble to FDR’s 1936 reelection. The relevant work is part two, “The Coming of the New Deal.” (1958) Schlesinger makes the point that FDR resisted advice to be radical–in fact, many liberals wanted him to nationalize the banks for good, but FDR was not interested. Here is what Schlesinger says about the days around March 4, 1933, when the entire banking system had ground to a halt and the administration was working on the Emergency Banking Act:

       p. 5: “On the night before Congress convened (March 8), Senators Robert M. La Follette, Jr., of Wisconsin and Edward P. Costigan of Colorado, two leading progressives, called at the White House to urge Roosevelt to establish a truly national banking system. But they found Roosevelt’s mind made up. “That isn’t necessary at all,” La Follette later recalled Roosevelt saying. “I’ve just had every assurance of cooperation from the bankers.” The very moneychangers, whose flight from their high seats in the temple the President had so grandiloquently proclaimed in his inaugural address, were now swarming through the corridors of the Treasury.”

       So it seems history is quite a bit more complex than we learn in high school.

   11.  beaufou Says:
       July 9th, 2009 at 1:40 am

       [...]Ben Bernanke when his term expires in January…

       What makes you think there will be a FED in January, or that any of those crows will be anywhere near the US at the time?
       Seriously

   12.  aitrader Says:
       July 9th, 2009 at 1:59 am

       So much for change, eh? I guess “yes, we can” meant “yes, we can continue politics as usual”.

       The new prez seems just more of the same. Let’s all just admit it - the market is manipulated and owned by the big guys in the Wall Street club. Summers, Geithner, Paulson, ad infinitum are just the latest Wall Street cads to rotate into government. Obama is one of the “in crowd” and all of us little guys are being fleeced like sleeping sheep.

   13.  OkieLawyer Says:
       July 9th, 2009 at 4:20 am

       Off topic (again):

       OK, what does this story say about the economy?

       Stockbroker jumps to death wearing designer suit and holding glass of champagne

   14.  cvienne Says:
       July 9th, 2009 at 5:15 am

       “lacking-in-judgment jackboot”…LMFAO

       I can see the confirmation hearings now…

       Committee member: “Mr Summers, your resume looks sound on paper, seems like you’re a Harvard guy like the President, but it worries me that your policy decisions in the past have led some to describe you as a “lacking-in-judgment jackboot “, can you elaborate”?

       Summers (gruffly): “Eh, f*** ck off, and they’d better not give the position to that bitch Janet Yellen!”

   15.  VennData Says:
       July 9th, 2009 at 5:39 am

       Relax, it’s ballooning season in DC.

       Rahm wants to spend all the political capital, aggressively, on everything possible to show accomplishments, successes by the midterms in ‘10 ( about another year) so they launched this “Third Way” media balloon:

       1) If the WH supports Chairman Bernanke too much, he looks like a shoe-in and that belies the general view that “the economy is bad.”

       2) If they don’t support Bernanke the “The Street” is upset that their new hero is out and uncertainty reigns (not too mention - but I will - “The Street” would never credit a “Socialist” with the turnaround so they give all credit to the Fed Chairman)

       But notice the optics: how adding the other names makes it less a Bernanke vs Summers battle. This tells me to bet on Ben Bernanke (unless we slip back to March ‘09… which we won’t.)

   16.  BG Says:
       July 9th, 2009 at 5:40 am

       I would not trust Geithner with a lemonade stand. The MF would dip into the till, I guarantee it. He’s a cheat.

       We had better hope like hell that they reappoint Bernanke. I agree with comments above that Obama only knows what Summers and Geithner tell him.

       As for Volcker…if I were him, I would resign immedately from whatever position he currently has with the Administration before this whole damn thing goes to crap; otherwise, if he stays around he will get tainted along with the rest for what…..nothing. They aren’t listening, so I say, fuck’em!!

       By the way, I am already convinced Obama is a one-term President. He has disappointed me on Re-regulation, TBTF and surrounding himself with bankster puppets. The only thing that will have CHANGED in 2012 will be a massive (paralyzing) debt, record crime levels, record unemployment rates, a blackmailing financial system, severely deficient tax receipts and spotty/anemic growth.

       IMO, his goose is already cooked. Believe it or not, things will be worse in 2012 than they are now! You can’t continue to make all the wrong decisions and expect things to get better just because you want them too. And they won’t!

   17.  cvienne Says:
       July 9th, 2009 at 5:46 am

       You know???

       The more I think about it, the more this whole “team” (Obama - Geithner - Summers - Bernanke) reminds me of watching an NFL team with T.O. on it…

       I mean think about it…Right now you have Obama playing the role of Jerry Jones (Dallas Cowboys owner), he’s gotta decide if it is better for the team to stand back and ‘hopefully’ have it work out in a way that Tony Romo & T.O. get along and that the primadonna T.O. won’t cause too many locker room disruptions…

       You know the primadonna Summers (T.O.) would love the job as Fed chief…And you know that if Bernanke gets re-instated, then Summers is probably going to go off and pout in the corner…Geithner is just doing his best Tony Romo and saying to himself “please, please dear God keep the attention off of me & my incompetence and total propensity to “choke” under pressure”…

       Whatever…at least we have some COMEDY to look forward to…

       BTW - T.O. ended up in Buffalo…

   18.  cvienne Says:
       July 9th, 2009 at 5:53 am

       @VennData

       “But notice the optics: how adding the other names makes it less a Bernanke vs Summers battle. This tells me to bet on Ben Bernanke (unless we slip back to March ‘09… which we won’t.)”

       JMO - but I’ll take the other side of that bet (well - some of it at least)…Sure, Bernanke will be the “calmest” choice, but I DO think we slip back to March ‘09 before the year is over (and we take out the 666 low)…

       So that is going to ratchet up the pressure…Things are NEVER easy…& the Administration will certainly be looking for a scapegoat…It will be the final testimony to their utter incompetence if they react to the next phase of the crisis by replacing Bernanke with Summers (and make BB the whipping boy)…

   19.  cvienne Says:
       July 9th, 2009 at 6:16 am

       …let me put this to you another way…

       The VERY IDEA that Larry Summers’ name is in the mix PROVES his arrogance & incompetence…

       If Summers is supposedly the President’s “economic advisor”, then the best advice would be to NOT ROCK THE BOAT while we are in the midst of a delicate economic situation (which is likely to endure for quite awhile)…

       It is as clear as crystal that the markets would be “spooked” by an announcement that we were replacing the Fed Chief…Summers (if he had a clue), should know this…Therefore, he should RECUSE himself from nomination…

       The fact that he hasn’t, yet, makes him an “incompetent, lacking-in-judgment jackboot ” until proven otherwise…

   20.  constantnormal Says:
       July 9th, 2009 at 8:30 am

       … the only real hope here would be for Ron Paul’s assault on the Fed to bear fruit and hobble the monster instead of granting it even more godlike powers than it already has. Of course, if the Fed were more constrained, Summers would not want the job and go back to wrecking the economy from his current perch in the White House.

       But given the example from the primaries of how competent Ron Paul is at managing a campaign when the momentum is with him, I doubt that Larry Summers has anything to worry about.

   21.  constantnormal Says:
       July 9th, 2009 at 8:34 am

       Look on the bright side — how’s an ultimate bear gonna make money unless we move from bad to worse?

   22.  Mark E Hoffer Says:
       July 9th, 2009 at 8:51 am

       F411,

       finally finding out about the myth of St. FDR? That dude was nothing, but a Trojan Horse for the “Moneychangers”. Hardly, was he for “The Forgotten Man.”

       To your point re: H.S. ‘History’, peep would be better off reading, Aesop’s, Fables..

   23.  call me ahab Says:
       July 9th, 2009 at 9:37 am

       “At any rate, Larry would never make it through Congress after what he said about women being bad at math.”

       wow- sounds like quite the deal breaker- forget where he stands on policy- and to set the record straight-

       he implied that innate differences between men and women might be one reason fewer women succeed in science and math careers-

       “Nancy Hopkins, a biologist at Massachusetts Institute of Technology, walked out on Summers’ talk, saying later that if she hadn’t left, ”I would’ve either blacked out or thrown up.”

       wow- I am surprised she didn’t faint as well

    

Popular Google Product Suffers Major Disruption Hoocoodanode

Contrast this with Rubin's memoir "In an Uncertain World"
Rubin recalls a hearing at the U.S. Senate he and Summers attended:

When Senator Frank Murkowski asked me about the possibility of U.S. intervention to support the yen, I said that intervention was "a temporary tool, not a permanent solution." Weakness in Japan's currency, I said, reflected the underlying weakness in Japan's economy. In order to raise the value of the yen, the Japanese would have to address their fundamental economic problems.

That was all correct, but in focusing on Japan I mistakenly intervention in an intellectually serious way. Larry, who was sitting next to me, passed me a note that read, "Bob - Yen moved to 143.20 in last 15 minutes. I think we need more saber rattling." In other words, the foreign exchange markets were interpreting my remarks to suggest I had made the possibility of intervention to support the yen less likely

That's Summers' trademark politicking with the constant look back at the market reaction and pushing confidence in the "right" direction.

[Jun 3, 2009] Why We Should Banish Larry Summers from Public Life CommonDreams.org

April 20, 2009 | CommonDreams.org

by Naomi Klein

I vote to banish Larry Summers. Not from the planet. That wouldn't be nice. Just from public life.

The criticisms of President Obama's chief economic adviser are well known. He's too close to Wall Street. And he's a frightful bully, of both people and countries. Still, we're told we shouldn't care about such minor infractions. Why? Because Summers is brilliant, and the world needs his big brain.

And this brings us to a central and often overlooked cause of the global financial crisis: Brain Bubbles. This is the process wherein the intelligence of an inarguably intelligent person is inflated and valued beyond all reason, creating a dangerous accumulation of unhedged risk. Larry Summers is the biggest Brain Bubble we've got.

Brain Bubbles start with an innocuous "whiz kid" moniker in undergrad, which later escalates to "wunderkind." Next comes the requisite foray as an economic adviser to a small crisis-wracked country, where the kid is declared a "savior." By 30, our Bubble Boy is tenured and officially a "genius." By 40, he's a "guru," by 50 an "oracle." After a few drinks: "messiah."

The superhuman powers bestowed upon these men -- and yes, they are all men -- shield them from the scrutiny that might have prevented the current crisis. Alan Greenspan's Brain Bubble allowed him to put the economy at great risk: When he made no sense, people assumed that it was their own fault. Brain Bubbles also formed the key argument Greenspan and Summers used to explain why lawmakers couldn't regulate the derivatives market: The wizards on Wall Street were too brilliant, their models too complex, for mere mortals to understand.

Back in 1991, Summers argued that the subject of economics was no longer up for debate: The answers had all been found by men like him. "The laws of economics are like the laws of engineering," he said. "One set of laws works everywhere." Summers subsequently laid out those laws as the three "-ations": privatization, stabilization and liberalization. Some "kinds of ideas," he explained a few years later in a PBS interview, have already become too "passé" for discussion. Like "the idea that a huge spending program is the way to stimulate the economy."

And that's the problem with Larry. For all his appeals to absolute truths, he has been spectacularly wrong again and again. He was wrong about not regulating derivatives. Wrong when he helped kill Depression-era banking laws, turning banks into too-big-to-fail welfare monsters. And as he helps devise ever more complex tricks and spends ever more taxpayer dollars to keep the financial casino running, he remains wrong today.

Word is that Summers's current post may be a pit stop on the way to the big prize, Federal Reserve chairman. That means he could actually make "maestro."

Mr. President, please: Pop this bubble before it's too late.

This column first appeared in The Washington Post.

[Jun 3, 2009] Larry Summers His arrogance in chiefby Nicholas Gruen

January 4, 2009 |  Club Troppo

Paul Krugman points to a discussion on the prospects of the kind of financial meltdown (pdf) we’ve just had at Jackson Hole in which, most of the economists were in fawning agreement with Saint Alan Greenspan.  As Krugman says “Larry Summers, I’m sorry to say, comes off particularly badly.”

In another episode at Harvard, Larry Summers, musings on the inadequacies of women were both stupid and arrogant.  I have  nothing against the kind of issues he raised being raised, but it turned out (at least from the little reading I did at the time he did his thing) that his comments were in addition to being highly inflammatory, pretty half baked.  Anyway he paid dearly for his faux pas and left his post.

Anyway, Krugman’s comment reminded me to tell Troppodillians that I was listening to this interview with Summers (mp3) and was simply amazed by one cute little feature of his speaking style. On several occasions the interviewer tries to interrupt him to inject some new question into the conversation or steer him away from some topic when she’s had enough. Now journalists interrupting can be rude and annoying.  But this one isn’t particularly bad. And interrupting is a very normal and legitimate way of signalling various things in ‘real time’ between two people in a discussion. Providing it’s not too constant it is not particularly rude and it’s efficient and helpful in steering the communication. Further, in an interview the conversation has elements of a ‘performance’ where there are time limits to get through the material that the interviewer seeks to, so additional licence should be given.  Of course if the interruptions are repeated, stupid, rude or whatever, the interviewee has every right to complain and ask to be allowed to finish his answer.

Anyway in the face of probably about four or five such interruptions from a reasonably competent and pleasant interviewer, Summers just kept talking, simply refusing to respond to a word she said until his majesty had got off his chest whatever it was that was on it.  Comes of an an aggressive, arrogant prat.  Pity.  It will make him much worse at his new job than he’d otherwise be.

Richard's Real Estate and Urban Economics Blog I once felt good about having Larry Summers run the economy by Richard Green

If this story is true, Summers basically created balance sheet duration mismatch, with short assets and long liabilities. This creates negative duration, which is just as risky as more traditional positive duration (i.e., the S&L problem). I wonder if Summers plotted out a worst-case scenario for this transaction, or if he just thought he was really good at forecasting interest rates.

Drew Gilpin Faust and the Incredible Shrinking Harvard

Boston Magazine

Further squeezing Harvard was a transaction Summers had pushed it into in 2004, when he successfully argued that the university should engage in a multibillion-dollar interest rate swap with Goldman Sachs and other large banks.

Under the terms of the deal, Harvard would pay Goldman a long-term fixed rate while Goldman paid Harvard the Federal Reserve rate. The main goal was to lock in a low rate for future debt, and if the Fed had raised rates, Harvard would have made hundreds of millions.

But when the Fed slashed rates to historic lows to try to goose stalled credit markets, the deal turned equally sour for Harvard: By last November, the value of the swaps had fallen to negative $570 million. The university found itself needing to post more collateral to guarantee those swaps, and would ultimately buy its way out of them at an undisclosed cost.

HMC "took the university right to the edge of the abyss," one alumnus, a financier who is privy to details of the university's balance sheet, told me. I asked what he meant. "Meaning, you're out of cash.

"That," he added, "is the definition of insolvency."

[Jun 1, 2009] “Is Larry Summers Taking Kickbacks From the Banks He’s Bailing Out?”

"Larry Summers appears to have a less than operational moral compass." In an interview for this article, William Black, a former bank regulator who exposed the $160 billion Savings & Loan scandal and its ties to powerful U.S. Senators, remarked, “Summers wasn’t hired [by Revolution Money] for his expertise because he doesn’t have relevant expertise in this kind of credit card operation.”

Larry Summers appears to have a less than operational moral compass.

The former Treasury Secretary, now head of the National Economic Council (and presumed Fed chairman if Obama decides against recommending Bernanke for another term) was in the employ of hedge fund DE Shaw to the tune of $5 million for sixteen months while working with actively on Democratic economic policy, with the clear expectation that he would have a policy role. In other words, Summers is already way too cozy with the financial services industry.

And now we have the latest, from Mark Amos (hat tip reader Marshall). I’ve put up some excerpts, and strongly recommend you read the entire piece.

Amos points out that a number of very big Wall Street firms made an unusual investment in a start-up, one Revolution Money, a “PayPal meets Mastercard” in the Steve Case “Revolution” sphere. Weirdly, the company says Summers was on the board, and Summers certainly was talking up to the media, but filings suggest otherwise. But while the exact nature of Summers’ relationship is unclear, he was certainly promoting the venture.

While Summers did terminate his relationship with the Revolution Money before the big players invested, fundraising and getting to closing documents is generally a lengthy process, so it is reasonable to surmise that Summers’ salesmanship and relationship with the company played a meaningful role in these banks’ decision to invest in a company with lousy performance, dubious prospects, and no obvious synergies. Amos notes the investees got off better in the stress tests than their brethren did. That may be happenstance, but it was reported that the stress tests were tougher on loans than on trading portfolios, and the investors in Revolution Money all had big capital markets operations.

The Amos piece is provocative, but it’s certain no explicit payoff was made. But the flip side is it is highly likely the banks invested to curry favor with Summers. Even if the only payoff was privileged access to him, that alone would be troubling,

From Amos:

Is Larry Summers taking kickbacks from the banks he’s bailing out?

Last month, a little-known company where Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks.

A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected — thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)

The fact that the banks invested in the company just a few months after Summers resigned suggests the appearance of corruption, because it suggests to other firms that if you hire Larry Summers onto your board, large banks will want to invest as a favor to a politically-connected director…

According to filings obtained for this story, Summers first joined the board of directors of Revolution Money back in 2006 (when it was called “GratisCard…Revolution Money/GratisCard was a startup headed by former AOL chief Steve Case. Revolution Money billed itself as the Next Big Thing in online payment,…

In September 2007, Revolution Money announced that it had raised $50 million from a group of investors including Citigroup, Morgan Stanley and Deutsche Bank. Some found the investment strange even then, because normally big banks don’t get involved in seeding small startups — that’s the domain of venture capitalists, not mega-banks. Especially not in September, 2007, when these same megabanks were Chernobyling their way into full-fledged balance-sheet meltdown.

What seems clear is that at least part of Revolution Money’s success in raising funds is due to their star-studded board of directors — which included not only Larry Summers, but also the notorious Frank Raines, the former Fannie Mae chief whom Time Magazine named to its “25 People To Blame For The Financial Crisis” list. Raines is still a board member.

Over the next year and a half, Revolution Money didn’t quite live up to its promise of competing with PayPal or Visa/Mastercard. At least some of this could be attributed to the difficulty of starting up an online credit card company in the middle of a triple-cluster credit crunch, banking crisis and recession. But there is also evidence that the company wasn’t run well. Another one of Steve Case’s “Revolution” brand startups, “Revolution Health,” (which also features a star-studded board of directors including Carly Fiorina, Colin Powell, and several future-Obama Administration officials) essentially folded last autumn when it was sold to Everyday Health last September and merged into that company’s operations.

In spite of all of this, on April 6, 2009, Revolution Money announced the happy news: it had just successfully raised $42 million dollars in the most difficult market since the 1930s. The investors? Goldman Sachs, Citigroup and Morgan Stanley — bankrupt institutions that Larry Summers was transferring billions in bailout funds to.

At the very same time that these three megabanks were pouring millions into Summers’ former company, Obama’s economic team, starring Larry Summers, was subjecting these same banks to a “stress test” to decide how deep in shit these same banks really were. The banks wanted the government to fudge the results for obvious reasons — who wants the world to know how deep of a hole you’ve dug for yourself?

When the stress test results were finally released, the banks all came out with glowing reports that beat expectations and caused plenty of skepticism.

In an interview for this article, William Black, a former bank regulator who exposed the $160 billion Savings & Loan scandal and its ties to powerful U.S. Senators, remarked, “Summers wasn’t hired [by Revolution Money] for his expertise because he doesn’t have relevant expertise in this kind of credit card operation.”

“He’s not a techie. He doesn’t have business expertise,” Black said. “So this is solely someone hired for the name and contacts because he’s politically active and politically connected. And that’s made all the more clear by the fact that Frank Raines was put on the board at a time when he was pushed out in disgrace from Fannie Mae. Why? Because of his political connections.”

And it worked, as the recent investment shows.

“That’s the pattern of this entity,” said Black, “Which hasn’t been doing well financially and desperately needs to get money from others, and has been able to get money from banks at a time when [these same banks] largely stopped lending to productive enterprises. But with this politically-connected entity [Revolution Money], they’re happy to dump money.”

According to a company spokesperson, Summers resigned from the board of directors at Revolution Money this January, just three months before the banks invested. On one of Revolution Money’s main websites, Revolution Money Exchange, you could still see Summers’ name still listed as a director when this story was filed…

Whatever the case, Summers was pushing Revolution Money as recently as last September, in an interview with Portfolio magazine:

“I’ve enjoyed being involved with a number of smaller companies such as the Revolution Money venture….”..

His involvement wasn’t just incidental—if you look at the press releases, Larry Summers’ name is always touted as part of its selling point — one press release in 2007 refers to Summers as “Legendary.”

Moreover, Summers’ longtime chief of staff, Marne Levine, who also served as Summers’ chief of staff when he was in Treasury under Clinton and again at Harvard, joined Summers at Revolution Money, serving as “Director of Product Management.”

Black pointed out another sleazy aspect of Revolution Money’s pitch: it proudly boasted in late 2007 that it would make it easier than ever for people with low credit ratings to find access to lines of credit. In other words, Revolution Money billed itself as the ultimate ghetto loan shark.

According to a 2007 press release, the same one boasting of “Legendary” Larry Summers, “Unlike most bank credit card issuers who are limited to a narrow scope of credit approval guidelines specific to their bank, RevolutionCard seamlessly utilizes multiple partners to achieve unparalleled consumer approval rates.”

Nineteen months later, Larry Summers, now in control of the economy, told Meet The Press, “We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again savings, and families are again preparing to send their kids to college, for their retirement and so forth.”

So once again, Larry Summers creates a problem that the rich profit from, then is put in charge of “fixing” it after vulnerable Americans have been picked clean.

Whether or not the three bailed-out banks’ investment in Revolution Money last month represents some kind of bribe or kickback or even the appearance of corruption is almost secondary, because the shameless cronyism is the problem, and this is the reason why America is in the horrible mess today.

“Polite society was supposed to impose social pressures to make sure this wasn’t tolerated,” Black said. “Like the old phrase about hogs being slaughtered. But now the hogs get even wealthier, even fatter.”

[Apr 27, 2009] Do Crises Cluster If So, Larry Summers' Debt Crisis Solution May Be Flawed -- Seeking Alpha by  Clive Corcoran

April 27, 2009 | Seeking alpha

In a recent article Simon Johnson provides a very interesting summary of what he takes to be the cornerstones in the thinking of Larry Summers about the current financial mess. There are five key components to the Director of the White House National Economic Council's perspectives, as spelled out in a speech that Summers gave last Friday, and Johnson, who has analyzed the speech, outlines them below including, in parenthesis, some comments of his own.

1. All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

2. We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago. It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.”

3. There is a critical need to support financial intermediation and to ensure it is adequately capitalized, with a view to the risks inherent in the current situation. He then said, with a straight face, that the current bank stress tests are designed with this in mind.

4. Growth in the 1990s and more recently was based too much on finance (this appears to be a relatively new thought for Summers). The high and rising share of finance in corporate profits “should have been a warning”. The next expansion should be based less on asset bubbles and more on investment in key public services.

5. The financial regulatory system “in fundamental respects has been a failure”. There have been too many serious crises in the past 20 years (yes, this statement was somewhat at odds with the low frequency of major crises statement in point 1).

The one that bothers me the most is the first. There is always a danger when considering crises - not only financial but also natural disasters - of thinking in terms of periodicity i.e. that is the reasoning behind the view of Summers that they only come along four times in a century. From this it seems to follow that since we've had the big one we won't get the next one for a generation or so. There are several problems with this view.

Firstly the sample size is too small for any meaningful application of quasi-statistical techniques to determine for example the average period between crises or the dispersion of them. We have so little to go on with regard to how they are distributed and it would be foolish to have the presumption that they are periodic and normally distributed. Just like earthquakes there is no safety in assuming that there could not be two major quakes on a fault line in quick succession even if there has not been a large seismic event for much longer than the alleged time to wait period.

How does one 'discretize' or individuate a financial crisis? What of the 1930's - was that a single crisis event or a series of inter-related critical events?

From several academic studies of major disruptions in time series data, there is a strong case for believing that critical episodes of illiquidity and volatility have a tendency to cluster rather than to be evenly distributed across the time spectrum.

In my opinion it would be very unwise to assume that we've had our crisis and now - as Larry Summers appears to be suggesting - have a breathing space to re-build our economy and repay our debts. There might be another leg to this crisis - indeed there could be several more.

The fact that, even if turns out that we do have a breathing space, we might not take the opportunity to re-build our economy and pay back our debts - for lack of political will for example - is of course a different topic.

Selected Comments

bricki

Clustering of crises makes some sense to me. Once a crises occurs, whatever the cause, be it a natural disaster or political event tensions become heightened and the after-effects of the first crises are likely to trigger a second follow-on if things are not carefully defused.

The cycle of wars in Europe over the late 19th and early 20th century is a clear example of such a chain.

Larry Summers’ New Model What happened to the global economy and what we can do about it

The Baseline Scenario

with 64 comments

Larry Summers spoke on Friday afternoon at the InterAmerican Development Bank in Washington DC.  As he was addressing a group with  much experience living through and dealing professionally as economists with major crises, he spoke the “language of economics” (as he called it) and largely cut to the analytical chase.

Summers made five points that reveal a great deal about his personal thinking - and the structure of thought that lies behind most of what the Administration is doing vis-a-vis the crisis.  Some of this we knew or guessed at before, but it was still the clearest articulation I have seen.

1. All crises must end.  The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions.  Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.
2. We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago.  It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.”
3. There is a critical need to support financial intermediation and to ensure it is adequately capitalized, with a view to the risks inherent in the current situation.  He then said, with a straight face, that the current bank stress tests are designed with this in mind.
4. Growth in the 1990s and more recently was based too much on finance (this appears to be a relatively new thought for Summers).  The high and rising share of finance in corporate profits “should have been a warning”.  The next expansion should be based less on asset bubbles and more on investment in key public services.
5. The financial regulatory system “in fundamental respects has been a failure”.  There have been too many serious crises in the past 20 years (yes, this statement was somewhat at odds with the low frequency of major crises statement in point 1).

Crises definitely end.  But do they end with rapid recovery or with stagnation?  There was nothing in Summers speech that addressed how we avoid - at the US or global level - becoming more like Japan in the 1990s, given the state of consumers’ and firms’ balance sheets around the world.  There is no issue with debt levels; apparently, we can turn everything around with fiscal expansion and support for banks.

The essence of the government’s short-term strategy is obviously to prop up the financial sector, in order to sustain something close to the current levels of debt in the economy.  But there was no hint in his remarks that this creates tension with point #4 - growth needs to be less finance-oriented in the future, i.e., talent has to be allocated elsewhere.  If the rents are now government-generated but still in the financial sector, why would people or capital move?

And if enormous effort goes into sustaining the prosperity (and apparently the bonuses, according to first quarter set-asides) of Big Finance, how will that help with serious regulatory reform - which presumably will be opposed by the banks that are now regaining their fortunes?  This thinking,  put next to the NYT article this morning on Tim Geithner’s work at the NY Fed, is not encouraging.

More generally, there was not even an indirect mention of political economy.  Summers’ public narrative for the crisis is essentially that there was an accident: stuff happens.  This narrative matters.  Irrespective of what he thinks privately, unless he and other senior Admininistration officials can start to use the language (even of economics) regarding regulatory capture, political connections, and the way in which economic booms can create disproportionate political influence for the finance sector, we are unlikely to change the structure of power and the risk of crisis in our economy.

You may not care too much about this - “let’s first turn the corner and then worry about other things”, is a standard refrain.  And for a recovery, obviously, much depends on actions that Summers and the White House can only indirectly influence - including the Federal Reserve’s push towards inflation and the actions of European governments.

But defering to big banks and prefering fiscal expansion is very much a decision in the hands of Treasury and the White House.  They may feel this is essential to restoring confidence, but that is not the general experience of countries facing major crises.  The usual advice - given by the IMF, often at the behest of the US Treasury - is: manage an insolvency process for failed banks, precisely to reduce fiscal costs now and in the future, and to help restore confidence in the economy.  Come to think of it, wasn’t this exact point made - forcefully and publicly - by Summers to the Japanese government during the 1990s?

Forbearance on banks may work, but at great cost to the taxpayer.  And how is that helpful to either to Summers’ stated strategy of growth led by further public investment, or - given the existing state of our public finances - to a more plausible strategy of (nonfinancial) technological innovation?

By Simon Johnson

1. In my totally uninformed opinion, Japan may be a best case scenario for us. We didn’t have quite the leveraged bubble that they had in relative terms, but they had a high personal savings rate to fall back on, where we will have to get to and likely overshoot on a long term sustainable savings rate over the next decade (net, including a sustainable amount of govt. debt.) Further, Japan had an overheated global economy to export into. And look what’s happening to them now: with all that, they’ve only managed to delay their depression a decade and a half.

   The glimmer of hope that I see is that U.S. population growth means we have at least a shot at growing ourselves out of this. (If I were a betting man, and I’m not, I’d lay a small bit of money down on our population peaking earlier than expected, as it is with Japan. See the recent articles on a rise in both abortions and vasectomies.)

   Muddling along Japanese-style may be the best thing we can hope for.

   Cheers,
   Carson
    

2. Japan is actually ahead of the curve regarding the need to reconcile the cancer cell philosophy of endless growth that drives our economic system with the realities of a finite planet and resource base. If growth were the answer, how come we are not in nirvana by now with national productivity having steadily risen since 1980, approximately doubling every decade? We need to progress to an economic system not driven by demographic growth. “Growing ourselves out of this” is kind of like a drunk “drinking himself out of” getting a hangover; all it does is postpone the inevitable and makes it worse when it does occur.
    
3. I agree with Ted. I am slightly bemused to hear everyone refer derogatorily to Japan’s lost decade. As a long time resident of the country, I can assure you things are not as bad as some may like to imply. For starters, the landing from the economic bubble was very soft indeed.

   I know the liberal economists were cheering for more blood and guts, like fans at a nascar event. But let us not forget we talking about real people, with friends and family, not just numbers or god forbid, workers! One must concede that compared to the phenomenal growth enjoyed by the US economy in the last decade, Japan’s growth was quite pedestrian. It limped along at about 1 or 2 percent. But when combined with the deflation of prices, the actual buying power of average people actually increased. In other words, people’s life styles somewhat improved. Can the same be said for Americans? I mean regular Americans, not just the CEO class.

   And what good is all that growth anyway if it is just erased overnight, leaving massive debt and dread? I could also talk about Japan’s national health insurance, impeccable public transportation system, superior energy efficiency, ridiculously low crime rate, etc. I think America would be lucky to meet the same fate Japan did after their bubble economy. But I know that for Americans this is just not sexy enough. We demand infinite growth, even if that means an endless series of booms and busts. Perhaps we are just trill seekers more enamoured with the bumpy ride and HOPE then with actually getting anywhere...
    

4. Point #4 is the most terrifying to me, since it represents Obama’s motivation. The banksters have essentially told Obama exactly what he wants/needs to hear to justify the bailout. Does he really think that digitizing healthcare records and a carbon cap will save the economy?

   Forget regulatory capture. This is kool-aid capture!

5. Unfortunately, #1 sounds much too like the idea that markets will simply self-correct. This only makes sense if you understand the underlying nature of the problem, and you also know that those forces will not impede market recovery. However, points 2-5 suggest that may be it is not so simple. Alas, I am afraid that may represent the true case.
6. Restoring the status quo ante would be a good thing, if the status quo ante had been a good thing. But was it? We need a new “philosophical idea” about what we want our society to be about. Absent a “new idea” it is hard to see what will drive this recovery. Like the Bush Administration before it, the Obama Administration is suffering from a “failure of the imagination.” But who expects “imagination” from people who are straining to retain power?
7. At some point people will generally realize that the entire intellectual framework of this administration, despite it’s ‘progressive’ pretensions, is an attempt to turn the clock back.

   Giving back legal privileges to the unions, we’ve been there. Their response to the financial crisis is solely about trying to find a way to write a check big enough to return us to where we were. Environmental restrictions aim to take us back to some pre-industrial or early industrial age. Even in the area of health care, where they want to do something which would be new for the US, the goal is to take us back to where the UK was in 1947.

   No matter how many smart people work in the administration, they aren’t going to engage any of our real problems and opportunities without shedding this framework. Unfortunately, if one can discern a core element in Obama’s thinking, this appears to be it.

8. (Whatever happened to transcripts?)

   #1: I suppose the inherent contradiction in #1 (if it takes massive “one-off” govt. actions every 25 years, then how is the system “self-equillibriating”?) is obvious to everyone?

   This is aside from previous work Summers has written about situations where the system is specifically not “self-equillibriating” - such as when he argues that price flexibility can be destabilizing (1986) or that aggregate demand management might very well reduce long term unemployment (1988). Of course those were the DeLong papers… So maybe DeLong was the brains behind the duo.

   #2: Summers is expressing an utterly perverse version of Keynesian anti-cyclical demand management. Most Keynesians (even new Keynesians) argue that government should PRINT MONEY to support demand as leverage deflates (and allow it to deflate smoothly without causing systemic shock and deflation). Then destroy that money later on as the economy booms (and there are many ways to destroy money - most scholars focus on interest rates and Fed actions, but raising taxes to pay off our massive federal debt is another way to destroy money during boom-times to prevent bubbles - if only we had the political will to enforce it).

   Who in their right mind argues that the key to easing the economy out of debt is to create more debt?

   Or, does Summers believe that the debt ratios in the US economy really were sustainable long term? (Which seems inconsistent with his sudden realization - #4 and #5 - that finance really has gotten too big and isn’t producing much of real value?)

   #4 & #5) Hallelujah!

   Perhaps Summers should ask himself (or one of his previous co-authors) these fundamental questions:

   WHY is the government dependent on banks to maintain the size of the money supply?

   WHY is _credit_ the “lifeblood of the economy”? (Isn’t _money_ supposed to be the lifeblood of the economy?)

   What, exactly, are the tradeoffs to running a money supply on _privately created debt_ vs. _publicly created money_?

   I am certain that manipulation of the money supply & demand through interest rates seemed like such an elegant solution - compared to the “crude” method of taxation/spending/printing money. But perhaps there are some hidden costs that weren’t in those models? Like the size of the finance sector, the allocation of labor talent, moral hazard, the zero bound, and so forth…

   Until Larry Summers answers these questions for himself, or President Obama decides to make a staff change, we are unlikely to see real change. Bernanke, I think, is a few steps ahead of Summers.

9. Although we debate in terms of extremes, the real world surely lies somewhere in the middle.

   It’s not really whether we have public money or private money (e.g. bank debt), but what percentage of the money supply is public vs. private.

   Public money is secured with the promise of the govt. and the force of law. Private money is secured by private resources (capital, assets, reputation, credit rating). Too much of one or the other seems to cause problems. Each has advantages and disadvantages. But right now, we have a lot of private money, which was secured by private capital (that got vaporized by the asset bubble deflation). Creators of private money have benefited from a windfall as debt rose faster than base money, and now that assets are deflating the public taxpayer is confronted with a choice to accept worldwide depression, or backstop private money.

   If taxpayers are going to be on the hook, should they not benefit from a reduction from a slight reduction in taxes that should occur when government actually gets to spend the money that gets created, rather than banks?

10. The underlying assumption of Summers and many economists, including those in the government, is that house prices were irrationally inflated due to an asset price bubble.

    Subsumed in this thinking is that the decline in home prices were not due to any rational response to changes in future expectations about the value of this asset class. Instead, the assumption is that the price decline is a return to normative valuations and a return to rationality. While there may be some negative overshooting of the correct price, the correct price is nowhere near previous valuation levels.

    However, homes are long-lived assets, in fact inter-generational. What if homes were correctly valued based on a rational expectation of the future economy and demand prior to their sharp price declines? If the new, lower home prices correctly reflect changes in investor and owner expectations about the future economy and house demand, then the self-equilibrating point of the economy will be substantially below that envisioned by Summers and others in the government.

    As an example, Earl Thompson, an economist at UCLA, studied the 1600s Dutch tulip bulb mania and found that the bursting of that “asset bubble” was a rational response to a change in demand and a change in the law. Germans who were a significant part of the demand for tulip bulbs lost a battle with the Swedes and the German peasants began a revolt. German demand for tulips declined. In addition, Dutch law changed and tulip bulb futures contracts became option contracts. Dutch futures required purchase of the bulbs, but options did not require purchases. The decline in tulip bulbs prices was a rational response to a changing demand environment for bulbs.

    If the bursting of the tulip bulb bubble was a rational response to a changing legal and demand environment, there is the possibility, (according to rational expectations and efficient markets a highly likely possibility) that the recent and continuing decline in home prices is a rational change to a changing future economic environment for housing. Since homes are an inter-generational long-lived asset class, a substantial decline in house prices can happen before the future events that caused the decline reveal themselves.

    We may not as of yet seen the economic, legal and societal causes for the rational decline in home asset values. If that is the case, the government may not have responded correctly as of yet to offset this future economic, legal or societal event, or its actions to date, or expected, may have unintended future consequences which are responsible for the decline in the stock market and home values.

    There may have been permanent shifts in consumer and housing demand for rational reasons yet unknown and unrevealed. While the economy may be self-equilibrating, it may not be at the place Summers envisions or wants.

    Milton Recht

    April 27, 2009 at 10:54 am

    Reply

11. this is precisely why we have to keep housing away from the financial engineers. what we saw in the last decade is that if we allow housing to become a financial asset — something to be financed with huge leverage and borrowed against — then it will be rational for prices to rise in a competitive market.

    however, we are all better off if housing is cheap and safe. maintaining conservative financing and leverage practices will keep housing prices low.

q

April 27, 2009 at 11:28 am

Reply
12. The rational response arguments begin with locally rational behavior under specific conditions, and project it to globally rational behavior.

    Even if individuals were rational in buying houses at inflated values, even if lenders were rational in making unsecured loans to people with undocumented incomes and questionable credit records and no/minimal down payments (with the only collateral being the house as an asset), and even if CDO buyers were rational in buying those loans…

    We are still left with the fact that a long term change in asset performance that is projected into the present can instantly wipeout asset values, and when those assets are purchased with leverage, that turns wealth negative. Given that home prices were so high (predicated on sustained very high economic growth, which was driven by the financial sector), and so many of those homes were purchased with massive leverage, then are you still implying that those decisions were rational?

    They only seem rational if you have _very high_ confidence that the bull market economy would continue uninterrupted for decades.

    And given history, that doesn’t seem very rational, does it?

    StatsGuy

    April 27, 2009 at 12:32 pm

    Reply

13. i should clarify my response. imho the early boom years were in some way “rational” in that financial innovation actually made houses more valuable. the mere fact that i can easily borrow money against my house makes whereas previously i couldn’t makes it more valuable to me.

    however, doing this increases my risk.

    banks are supposed to keep the aggregate level of risk low (they are supposed to care about getting repaid when they make loans) but for a number of reasons they failed to do this. certainly by 2006, we were in a serious irrational bubble.

    milton, like anything, housing prices should be driven by supply and demand, and not by utility. it doesn’t cost that much to build housing and so it shouldn’t price that much above replacement cost. so i am not sure what your logic is.

    q

    April 27, 2009 at 3:47 pm

14. Here’s why “let’s turn the corner and worry about other things” is correct: 1) health care reform, and 2) climate/energy policy.

    On both, the administration and congress are moving ahead with very good choices. “Going long” on finance/banking right away would have been a mistake.

    Geithner and Summers can always be dumped later. Nothing is written in stone….except for the health insurance crisis, where people are going bankrupt NOW, and the global climate disaster, where the costs of inaction far outweigh the trumped up and relatively low costs of action.

    This is the window where we need policy change beyond just finance.

    Frank Carmelo

    April 27, 2009 at 11:32 am

15. Unfortunately the let’s turn the corner view is prevailing because we have not felt enough economic pain for the political will to attack the financial sector. Sadly this is reminiscent of the Bosnian/Serb conflict. They were not ready for peace until each had suffered enough pain to be willing to negotiate.

    Until we feel our second wave dip in this crisis we will happily talk about “green shoots”. The administration may as well work on health care and energy policy. They are not ready to take on finance.

    Ted K

    April 27, 2009 at 12:00 pm

16. Simon, I really appreciate your expertise and writing on these important issues.

    Probably wishful thinking here, but I’m hopeful that the administration understands the political economy. I actually think the narrative is slowly changing and that this is in some part because those outside the White House like yourself are pushing for it.

    If it is true that our short-term needs and current microeconomic issues are competing with the regulatory and structural changes that will make us stronger long-term than I wonder if they can really do both at the same time as many argue.

    I’m thinking it’s possible they could be too effective in pushing a narrative that would prevent our government from taking the necessary actions to keep us afloat. The abuses of those in power and the resulting damage only become more clear. As public outrage grows, so does political will. Hopefully your efforts will help to reduce the amount of apathy and ignorance that allowed us to get into this situation.

    Bilbo

    April 27, 2009 at 12:14 pm

     

    Reply

17. Go back to sleep, Larry. You got nuthin’. donna

    April 27, 2009 at 12:36 pm

18. Thank you Simon for writing this piece without the obligatory “brilliant” reference to Summers that seems so prevalent in the media whenever he is spoken of. Even when media speaks of him in unflattering terms, folks still find it necessary to say how brilliant he is, i.e. “arrogant but brilliant”. A simple question needs to be asked, what makes this guy so special?

    Maybe we need someone with less “brilliance” and a little more common sense. Let’s stick to the real economy and not esoteric econobabble that Summers seems so fond of. The general public has to stop being intimidated by the way Wall Street talks and see through it. America, these people aren’t as smart as you think they are, they don’t know what you think they know.

19.  

    [...] a recent article Simon Johnson provides a very interesting summary of what he takes to be the cornerstones in the [...]

    TheTradingReport » Blog Archive » Do Crises Cluster? If So, Larry Summers’ Debt Crisis Solution May Be Flawed

    April 27, 2009 at 1:47 pm

     

    Reply

20.  

    Paul Samuelson (Swedish Bank Prize) spawned: Larry Summers (Just A Prize) - Stantley Fischer (Bank of Israel) - Robert Merton (Swedish Bank Prize).

    Summers is Samuelson’s nephew. Is this significant in any way?

    Uncle Billy Vs. Mont Pelerin

    April 27, 2009 at 2:23 pm

     

    Reply

21.  

    The notion of financial “self-equilibration” without rules, in this case, about money, seems like a cart before horse problem. Those, like Mr. Summers, who are betting on “self-equilibration” need a history lesson. I wonder how many Romans expected something similar to occur…until Atilla showed up.

    This mess was created by the removal of rules. Perhaps the old rules were not the best, but the decision to drop rules altogether and justify this by mystification of finance was just silly.

    There is, it seems to me, a science of money- and all science aims to discern the governing rules. On that note, the current crisis is a wonderful data point on what happens when there are no rules in finance.

    Dave Lewis

    April 27, 2009 at 2:40 pm

     

    Reply

22.  

    Nice discussion. I’m not an economist, but I see a flawed assumption. Am I wrong?

    The Obama Administration Faulty Assumption: If the government gets the banks to supply loans, then the economy will expand, so the government must expand the capital of banks.

    By analogy that is like saying if you want to expand the sales of autos create more autos.

    Shouldn’t the assumption be: Expand aggregate demand and borrowers will appear.

    Am I missing something? Sure, we needed to stem the depositors panic, and Bernanke did, but shouldn’t the emphasis be now on massive stimulus (preferably investment that yields a return), not the little stimulus congress passed? The banks will heal if borrowers appear, won’t they?

    With the information now coming out on Wall Street relationships, I fear this treasury department effort will all come out badly. Geithner and Summers are part of the Wall Street power structure. Obama is not. Perhaps Obama will pull away from these people if things start to get worse, not better, and take a new path. I hope so, but time is running out.

    Ken K

    April 27, 2009 at 2:58 pm

     

    Reply

23.  

    Yes, crises always end. Sometimes they end with revolution and war. Maybe Summers failed to notice.

    Larry G

    April 27, 2009 at 3:27 pm

     

    Reply

    •  

      Finally, someone who see’s the light. NOTHING will change in America, until THE PEOPLE flat out demand it. All this blogging and complaining is NOT going to end the theft that is occuring now. You must let those who bet and lost, lose what they bet. I believe your government is planning on reimbursing Wall Street for it’s malfeasance, then allowing the whole thing to collapse AFTER the losses are passed on to the American taxpayers. The evidence is clear - 100% reimbursement for Goldman Sachs on CD’s that have not even yet defaulted? THATS THEFT. And, I might add, against the Federal Reserve act, which means it’s theft. “Just because” the thieves are dressed in suits, and occupying offices in Washington, doesn’t make stealing and breaking long established banking regulations legal. If a guy in a good suit robs a bank at gunpoint, is it OK? No. This is no different. YOU ARE BEING ROBBED. And they will continue to steal from you until you take action. All this nonsensicle “blogging” on web sites like this one is idiotic. TAKE ACTION. March into Washington, armed, and then you may get “change you can believe in”. Can someone tell me why Chris Dodd has not been indicted?
      AA
      AA

      adios amigos

      April 27, 2009 at 4:21 pm

       

      Reply

      •  

        “NOTHING will change in America, until THE PEOPLE flat out demand it. All this blogging and complaining is NOT going to end the theft that is occuring now.
        ”

        I’m a longview big picture type myself and the way I see it, you’re not gonna get the PEOPLE to flat out demand anything until unemployment is a bit higher than it is now, say 20 percent, at least.

        I’m just wondering how long before we get there. A year? Two?

        donailin

        April 27, 2009 at 10:04 pm

         

        Reply

24.  

    I still say Summers is the privileged white boy version of Sarah Palin. This whole argument is a complex mesh of rationalizations for taxing the poor and funding the rich. For instance, his complaint that “regulation in the past 20 years has failed”. Well, yes, because you and yours persuaded our leaders that it wasn’t necessary. There’s every reason to believe that Summers is a narcissistic con man. Why does anyone trust him?

    Krawk!

    The Raven

    April 27, 2009 at 3:57 pm

     

    Reply

25.  

    I’ve always wonder what Obama was thinking when he chose Summers.

    Now, I’m totally kerflummoxed. “Crises always end” with total disregard as to how it will end and in what shape will the social fabric be left? Tone deafness at its worst; it so sounds like “I’m fully vested and I couldn’t care less what happen to the little people”.

    There is a big price to pay for an attitude like that and Obama should know that.

    Dr. Frankie

    April 27, 2009 at 4:43 pm

     

    Reply

26.  

    We are a nation of common laws…laws of precedent as opposed to statute or constitutional laws. By ignoring to enforce constitutional laws we establish a law of precedence which automatically invalidates it. All illegal future behavior under a common law precedent cannot be legally enforced so that any law passed to nullify a common law precedent cannot be enforced. It is incumbent upon us to look back so that we can look forward to preserving for our progeny the great law abiding America they deserve. I love my grand children…don’t you? alfie

    alfie

    April 27, 2009 at 5:17 pm

     

    Reply

27.  

    Phase 1: Prop up the banksters.

    Phase 2: ????

    Phase 3: New growth, but not finance oriented.

    Larry Summers is an Underpants Gnome!

    No matter how much blood you pump into a zombie, it’s still a zombie.

    lambert strether

    April 27, 2009 at 5:49 pm

    Reply

28.  

    There are many things I do not understand about the economy system we currently see in America. Simon’s summation of what Larry Summers had to say in his speech leaves my questions unanswered.

    Here are just three questions I’d like Larry to tackle:

    1) How can the “self-equilibrating” nature of the economy ultimately prevail, when the market forces are overruled by any number of interesting policy decisions - like forcing BofA to buy Merrill; spreading tax dollars by the billions to healthy AND diseased firms, etc.?

    2) PLEASE CORRECT ME IF I’M WRONG - but it is my understanding that the “toxic assets” on the books of the Wall Street firms nearly brought down the economy last fall. So where is the money coming from to fund the exorbitant salaries of the Wall Street execs?

    In this NY Times story (http://www.nytimes.com/2009/04/26/business/26pay.html?pagewanted=1&sq=pay%20at%20investment%20firms&st=cse&scp=1), their pay is on track with the golden moments of yesteryear.

    But with asset sheets clogged with toxic debt/assets, whatever they are, shouldn’t the profits from this quarter go to recapitalize?

    3) Are taxpayers the only ones responsible for the losses these firms experienced in 2007?

    I’m hoping any of the astute readers of this blog would feel free to jump in with their answers….

     

29.  

    [...] Larry Summers’ New Model [...]

    teucercapital.com Blog » Blog Archive » Larry Summers’ New Model

    April 27, 2009 at 6:33 pm

     

    Reply

30.  

    “Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.”
    One of the many statements that are made trying to explain or justify the problem.Yet things are VERY simple.There is NOT/CANNOT be a healthy economy when is based on borrowing PERIOD.The math is not there to supported it.Is an impossibility.A healthy economy is based in spending of DISPOSABLE income.Until that happens (and it won’t) ten years from now we are going to have the same problem (look 80s and 90s).
    To correct the pattern first we have to OUTLAW LOBBYING (it won’t happen),second we have to reform the BANKING LAWS (it wont happen)third we have to get rid of the Wall Street (good luck),fourth we have to reform the Judicial system (not much hope there either) and fifth the most important part of the deal, we have to TOTALLY REFORM EDUCATION (we are a third world country right now on that subject.If you think we have problems now, wait five more years.The time for discussion, politics and views has long gone .This is the for action ONLY.Every new piece of legislation, every new way the government is finding to justify bail outs it get us in to a deeper hole.Look at the noise about saving GM -so many people will loose their jobs- they said.Yet GM today announced that is letting go of 20,0000 people.Why would you save GM the bustards haven’t made a good car the last thirty years, and singlehandedly give the industry to the Japanese.How many investors got any money from the wall street bailout?And the rest of us are keep forking out the money. I’m willing to bet any expert $100 to my $ than in ten years we will be having the same problem and we will be claiming then as do today, that this is new and we have not see it before.LOL

    realestateplaintalk

    April 27, 2009 at 6:58 pm

     

31.  

    The next expansion should be based less on asset bubbles and more on investment in key public services.

    This is a particularly ironic turnabout, since it was Summers and Rubin who most forcefully argued the contrary in the first year of the Clinton Administration — bureacratically eviscerating those, like Robert Reich, who thought more investment in key public services was what “putting people first” was all about.

    It took me some time — and repeated exposures — to Summers to understand that for all his intellectual fire power, his emotional and social retardation really does cripple his analytical abilities. Now it looks like everybody’s gonna get a chance to find out.

32.  

    http://online.wsj.com/article/SB124078909572557575.html
    Here is a story for you boys.

    http://online.wsj.com/article/SB124078909572557575.html

    April 27, 2009 at 7:45 pm

     

    Reply

33.  

    Sommers is working off an agenda that Obama has bought into. The goal of taking care of the crisis now, and dealing with the reforms and controls later is something that the niave Obama may feel good about - as a politician, but to all the others that are involved, it is duplicitious. The big joke to me is that we will grow out way out of the crisis and pay back the debt — through growth? Just like Bush pass thge war off to is successors, Obama is passing the reconciliation off to…. his daughters. NMP.

    Plebeianswillrevolt

    April 27, 2009 at 7:51 pm

     

    Reply

34.  

    [...] Larry Summers’ New Model Larry Summers spoke on Friday afternoon at the InterAmerican Development Bank in Washington DC.  As he was addressing [...] [...]

    Top Posts « WordPress.com

    April 27, 2009 at 8:11 pm

     

    Reply

35. If this is true, then Summers is stunningly naive about risk.

    Big Finance went all-in on black. For a long time, it kept coming up black, and Big Finance kept doubling-down, congratulating itself on its brilliance.

    Then it came up red.

    I guess that’s what an “accident” looks like!

    some guy in a cube

    April 27, 2009 at 8:47 pm

36.  

    This site seems to me to be one of the few places one can get reasonable reports on the state of the economy, and once in a while somebody mentions “political economy,” but what worries me is that no one, as far as I can see, has talked about the fact that it takes a couple of million dollars to win a seat in Congress. Not only the economy, but our electoral system is broken. Obama could get rid of the current set of oligarch supporters and hire people like Stiglitz, Krugman, and our host, and still be unable to get anything significant through a Congress controlled by the moneybags. How are we going to change that?

    Carter Jefferson

    April 27, 2009 at 9:04 pm

37. [...] Larry Summers’ New Model « The Baseline Scenario (tags: finance crisis blog) [...]

    links for 2009-04-27 at DeStructUred Blog

    April 27, 2009 at 10:04 pm

    Reply

38. Does this speech by Summers mean that the US is likely to risk their #1 position in the world economy?

    What position will have the US in the world if Finance is highly regulated and deleverage? He admits that finance grow out of proportion and can not sustain that grow anymore.

    Thanks to finance most US companies offshore and outsource thusands of jobs to other countries so companies can low their cost. With such low cost and highly sucess in the financial markets this companies enjoy huge, and huge amounts of wealth. Does this mean that the US government is willing to bring that jobs backs. If so, what is the time for that to happen. Or are there too much green jobs to support the #1 position in the world.

April 09, 2009 | Choosing Democracy

Larry Summers, $800 million, and the bankers Living Large and in Charge

By Robert Scheer
April 7, 2009, Truthdig

http://www.truthdig.com/report/item/20090407_robert_scheer_april_8_column/

Not surprisingly, Lawrence Summers is convinced that he
deserved every penny of the $8 million that Wall Street firms
paid him last year. And why shouldn't he be cut in on the
loot from the loopholes in the toxic derivatives market that
he pushed into law when he was Bill Clinton's treasury
secretary? No one has been more persistently effective in
paving the way for the financial swindles that enriched the
titans of finance while impoverishing the rest of the world
than the man who is now the top economic adviser to President
Obama.

It is especially disturbing that Summers got most of the $8
million from a major hedge fund at a time when such totally
unregulated rich-guys-only investment clubs stand to make the
most off the Obama administration's plan for saving the
banks. The scheme, as announced by Treasury Secretary Timothy
Geithner, a Summers protégé, is to clean up the toxic
holdings of the banks using taxpayer money and then turn them
over to hedge funds that will risk little of their own
capital. At least the banks are somewhat government-
regulated, which cannot be said of the hedge funds, thanks to
Summers.

It was Summers, as much as anyone, who in the Clinton years
prevented the regulation of the hedge funds that are at the
center of the explosion of the derivatives bubble, and the
fact that D.E. Shaw, a leading hedge fund, paid the Obama
adviser $5.2 million last year does suggest a serious
conflict of interest. That sum is what Summers raked in for a
part-time gig, in addition to the $2.77 million he received
for 40 speaking engagements, largely before banks and
investment firms, and on top of the $587,000 he was paid as a
professor at Harvard.

Summers was a top adviser to the Democratic presidential
candidate last year, and that might have enhanced his
speaking fees, which seem to have a base rate of $67,500, the
amount he received on each of two occasions when he appeared
at Lehman Brothers before that company went bankrupt. Lehman
had purchased a 20 percent stake in D.E. Shaw while Summers
was employed by the hedge fund, and it would be interesting
to know if the subject of the overlapping business came up
during Summers' visit to Lehman.

Lehman was only one on an impressive list of top financial
firms that consulted Summers during a troubled period.
Goldman Sachs was so interested in his thoughts that it paid
him more than $200,000 for two talks, even though it soon
needed $12 billion in taxpayer bailout funds. Citigroup,
which has been going through hard times, managed only a
$54,000 fee for a Summers rap. Merrill Lynch could pony up
only a scant $45,000 for a Summers appearance last Nov. 12,
but that was at a point when Merrill was in deep trouble,
with the government arranging its sale. Summers, anticipating
an appointment in the administration of the newly elected
Obama and perhaps wanting to avoid any embarrassment the fee
might bring, decided to turn over the $45,000 to a charity.

Why was someone as compromised as Summers made the White
House's point man overseeing $2.86 trillion in bailout funds
to the financial moguls whom he had enabled in creating this
mess and many of whom had benefited him financially? Will no
congressional panel ever quiz Summers about his grand theory
that the derivatives market required no government
supervision because, as he testified to a Senate subcommittee
in July of 1998: 'The parties to these kinds of contracts are
largely sophisticated financial institutions that would
appear to be eminently capable of protecting themselves from
fraud and counterparty insolvencies. ...'

Think of the sophisticates at AIG when you read that
sentence, and then ask why Summers is once again at large in
the public sector. Or take White House spokesman Ben LaBolt's
word for it that 'Dr. Summers has been at the forefront of
this administration's work - to put in place a regulatory
framework that will strengthen the financial system and its
oversight-all in an effort to help the families across
America who have paid a very steep price for risky decisions
made by Wall Street executives.'

The very same executives that Summers had previously assured
us could be trusted without any regulation. Why should we now
trust Summers any more than we trust them? Couldn't Summers
just take his ill-gotten gains and go hide out in some
offshore tax haven? If this was happening in a Republican
administration, scores of Democrats in Congress would be all
over it, asking tough questions about what exactly did
Summers do to earn all that money from the D.E. Shaw hedge
fund. As it is, with their silence they are complicit in this
emerging scandal of the banking bailout. Summers

It was Lawrence Summers, as much as anyone, who in the
Clinton years prevented the regulation of the hedge funds
that are now at the center of the explosion of the
derivatives bubble.

_____________________________________________
Larry Summers, chief economic advisor to President Obama 

Posted by Duane Campbell at 10:08 PM

Labels: Banking crisis, corruption, Larry Summers

[Apr 5, 2009] A Rich Education for Summers (After Harvard) By LOUISE STORY

April 5, 2009  | NYTimes.com

Lawrence H. Summers plays down his stint in the hedge fund business as a mere part-time job — but the financial and intellectual rewards that he gained there would make even most full-time workers envious.

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Disclosure Form

Financial disclosure form, released by the White House:

• Lawrence E. Summers, director, National Economic Council

Related

• Financial Industry Paid Millions to Obama Aide (April 4, 2009)
• Times Topics: Lawrence H. Summers

Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House.

Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week.

Much is known about Mr. Summers’s days in Washington and Cambridge, but little attention has been paid to his two years in New York, from late 2006 to late 2008, advising an elite corps of math wizards and scientists devising investment strategies for D. E. Shaw & Company.

Mr. Summers said in an interview that his experience at Shaw, however brief, gave him valuable insight into the practical realities of Wall Street, insight he is now putting to use in shaping economic policy in the White House.

“I have a better sense of how market participants sort of think and react to things from sort of listening to the conversations and listening to the way the traders at D. E. Shaw thought,” he said.

Mr. Summers and Shaw executives say his role there was to be a sounding board for Shaw’s traders. But interviews with friends and former colleagues suggest that Mr. Summers’s role at D. E. Shaw was wider and more complex.

Mr. Summers, these people say, was a marquee hire, a prized spokesman for Shaw. He routinely made himself available for private consultations with Shaw’s clients, an attractive perk for investing with the firm, as one client put it.

Mr. Summers, who taught economics and public policy at Harvard while advising Shaw, also met with investors in the United States, as well as in the cash-rich Middle East and Asia. He spoke at industry conferences, mixing with officials from public pension funds, endowments and other large institutions with many billions of dollars to invest.

While at Shaw, Mr. Summers also peered into the inner workings of the $2 trillion hedge fund industry, which the Obama administration is now relying on to buy billions of dollars of worrisome assets from the nation’s beleaguered banks.

Some of his critics worry that such ties raise questions about whether the government’s ever-changing effort to bolster the financial industry will benefit Wall Street in general, and hedge funds in particular, at the expense of taxpayers.

“This is what might be called contamination,” said Andrew Sabl, an associate professor of public policy at the University of California, Los Angeles. “Did Summers spend so much time with the hedge fund, or its investors, sovereign wealth funds and so on, that he started to think like them?”

Mr. Summers joined the hedge fund world after his tempestuous, five-year term as the president of Harvard came to an unhappy end in February 2006, after a statement he made that women might lack an intrinsic aptitude for math and science.

It was at that time, to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say.

Although he once compared finance to ketchup sales, Mr. Summers discussed job possibilities with Goldman Sachs, long considered the premier Wall Street bank, and with