Alex Beam on Larry Summers
Posted on March 27th, 2009 in Uncategorized |
The Globe columnist has a timely piece today about how perceptions of Larry Summers’ time at Harvard are again changing, thanks largely to the university’s financial decline.
Now, as Summers prates and japes on the national stage as Barack Obama’s chief economic adviser, the tale of his Cambridge tenancy is mutating.
A recent Forbes magazine cover story on the university’s financial meltdown suggests none too delicately that Summers helped break up the university’s successful investment team, and that he pushed the university into risky, money-losing interest rate swap investments….
Beam also gives this blog a shout-out for pointing out that the Harvard-Google deal was brokered by Summers and his former Treasury chief of staff, then a Google exec, in a private meeting. Appreciate that. I always felt that this was a decision with far-reaching implications, and the fact that it was made, in secret, by two old buddies just didn’t feel right.
There’s something else I like about this column. I’ve been astonished at how quickly the Washington press has just blown off Summers’ experience in Cambridge. It’s as if, somehow, the inside-the-Beltway types have just decided that it’s not relevant. And in their glowing, please-be-a-source-for-me-later profiles of Summers, they give his time at Harvard perhaps a paragraph. There’s a Washington arrogance and/or ignorance here that’s typical of the city.
But Beam’s column rejects that fallacy and says, wait a minute—what happened here is relevant. Thus the “prates and japes,” which is a nice turn of phrase. It says to the reader, Summers may have fooled you guys up there, but we know him. And whether you agree with that position or not, it’s the kind of thing that makes Beam’s contrarian voice so valuable.
What’s bad for Summers, Beam concludes, is good for his successor.
The new Larry Summers narrative does bode well for the current president, Drew Faust. Comparisons are odious, but as Summers’ stock declines, hers rises proportionately.
One possible challenge for Faust, though: Did Summers damage the university so much that most of her presidency will be devoted simply to restoration?
12 Responses
3/27/2009 12:20 pm
Richard,
There have been seven comments posted re Beam’s column. Below is part of one reply. It might be well for those criticizing Larry for the recent endowment results, to note this sentence. It is spot on.
” It is also rather foolish to suggest that Summers was intimately involved in decision making over their portfolio managers.”
Furthermore, Beam quotes Forbes (“A recent Forbes magazine cover story on the university’s financial meltdown suggests none too delicately that Summers helped break up the university’s successful investment team.”). Both he and Forbes got it wrong. Some day, the real story will come out.
3/27/2009 1:19 pm
Sam–I think the sentence you quote is a red herring, though. In fact, I haven’t heard anyone say that LHS was involved in “decision-making over portfolio management.”
(To be honest, I’m not even sure what phrase means.)
The question that people have raised is Summers’ role in the purchase of interest-rate swaps, no?
3/27/2009 3:20 pm
Sam,
The “real story,” as in the real story of the Harvard-in-Russia affair, with which Summers claimed to be utterly unfamiliar? Given that whopper, I’m afraid those suspicious of Summers’ other involvements as president have to be forgiven if they demur when you say that the Forbes piece is wrong but you won’t tell us why. And I wonder if you also endorse the sentence just before the one you quote from the comment: “Since the markets have suffered world wide it seeems preposterous to suggest that any ressidual Summers decisions would have resulted in Harvard’s losses.” I am no economist, but is it really preposterous to suggest that a decision taken more than a year earlier could have affected the size of Harvard’s losses? And if that’s not preposterous, why should we pay any attention to the other comment from this mysterious sage known only as “fastphil10″?
3/28/2009 11:04 am
Harry,
You asked “is it really is preposterous to suggest that a decision taken more than a year earlier could have affected the size of Harvard’s losses?” It is not preposterous to suggest it, but with all due repsect to you, it is preposterous to believe it. Why is that so? That is very simple… because it is not true. Larry, and all other board members had little, very little, to do with regard to HMC portfolio decisions. Almost all the decision making was in the hands of the CIO. That is how it was. I don’t know how investment policy is set today.
3/28/2009 11:36 am
Sam,
Are you playing a semantic game? To paraphrase Richard, are you excluding the interest-rate swap as a non-portfolio decision, or are you saying that Forbes is flat wrong about Larry’s role in that? Indeed, you seem to be saying more than that — that if the CIO had put the entire endowment down on Bessie to win the fourth race at Pimlico, neither Summers nor Rubin nor Rothenberg nor anyone else on the Board could be held responsible if Bessie stumbled out of the starting gate and Harvard went bankrupt.
3/29/2009 12:50 am
Harry,
Anyone at Harvard who knows me, knows that I don’t play semantic games.
I found the Forbes article so mixed on what it says about swaps, that the article in that regard made no sense to me (nor did some of the other points made in the article). I can’t figure out what the article is trying to say… really. Because you seem to understand what it is saying about swaps re the portfolio, could you explain it to me. Thanks.
3/29/2009 9:09 am
Sam–Here’s how the Times put it (this is very carefully couched):
—Several years ago, the university had envisioned an ambitious capital expansion program stretching for more than a decade. Lawrence H. Summers, then Harvard’s president, had raised the possibility of locking in interest rates that appeared to be at historic lows, a plan the university adopted, said several people familiar with the endowment.
All went well at first. But in the second half of last year, interest rates plummeted, and Harvard turned to the endowment to meet hefty collateral calls, which could rise to $1 billion if rates remain weak, according to a person with knowledge of the university. —
http://www.nytimes.com/2009/02/21/business/economy/21harvard.html
3/29/2009 10:39 am
And here’s Bloomberg’s version. “The forward swaps were signed when Summers, now the director of President Barack Obama’s National Economic Council, was Harvard’s president, from 2001 to 2006. Summers declined to comment on the record about the matter.” Each of these sources uses different language in gesturing toward Summers, but all three are describing the same interest rate speculation. (By the way, is there a difference between “declined to comment” and “declined to comment on the record”?)
3/29/2009 12:31 pm
Harry,
I’ve re- read the Forbes, The Bloomberg and The NYT articles, as well as your comments. As an aside, from my comments on this blog, you know that I don’t think Fabricant knows much about the financial world. Her article that you referred to doesn’t cause me to change my mind.
The only thing I know about Harvard’s interest rate swap situation is what is in Harvard’s annual reports and what has been summarized in newspapers.
That being said, I know a fair amount about interest rate swaps in general. With that in mind and again, with all due respect to you, your comments on interest rate swaps, HMC’s portfolio performance and how portfolios in general are managed, display a lack of familiarity with “this business of money and investment.” In my mind, it would be similar to my trying to write some complex computer code. I know the basics, but you’d be chuckling at my naivete in really understanding what should be done.
Cash flow, mark to market losses, collateral, permanent losses, transactions held to maturity; these are only some of the intricacies one faces in trying to make total sense of the situations of which we are speaking.
In one such situation that was brought up, the interest rate swap transaction, it was a transaction that was done several years ago. From the newspaper accounts, it appears that that transaction was recently modified or terminated. That action wouldn’t necessarily make the initial transaction wrong and it doesn’t mean that the person who initiated the transaction was wrong. Furthermore, conflating portfolio management and portfolio performance, with funding for capital structure, is ingenuous.
If you’d like, at some future time when our schedules allow it, I’d be happy to sit down with you for a tutorial lasting a few hours, so that that you could learn some more about what you’d like to comment on with regard to these subjects. I did this with the late Dean of The FAS and he said that he found it very educative (I did as well).
I’d like to make one more point. Your comment on placing the entire endowment on Bessie in the fourth at Pimlico (“if the CIO had put the entire endowment down on Bessie to win the fourth race at Pimlico, neither Summers nor Rubin nor Rothenberg nor anyone else on the Board could be held responsible if Bessie stumbled out of the starting gate and Harvard went bankrupt”) is a good attempt at an analogy, but, unfortunately, way off base.
The board of a company such as HMC or a mutual fund basically does three things: sets asset allocation; provides broad general risk parameters; reviews investments above a certain high amount. Boards of these types of companies do not involve themselves with picking investments. That is the job of the CIO and her staff. Therefore, even if it knew that Bessie in the fourth would not stumble coming out of the gate, and as a 100 to 1 long shot would win, HMC wouldn’t buy a ticket that risked all its money.
Harvard doesn’t bet on Bessie in the fourth, nor Harry The Horse (Gallatin or not) in the eighth. It tries to be The Crimson Courier, standing by a lamppost, taking both sides of “the trade” as well as 10% vig, and it does it thousands of times. By the way, to my knowledge, Bob Rubin is not on the HMC board and hasn’t been for some time.
Best,
Sam
3/29/2009 6:04 pm
Sam,
This last reply of yours is pretty rude, I think. Harry’s point was quite simple: isn’t Summers accountable for the financial direction to which the school committed during his tenure? The answer might be No, but in this last post you’re not even trying to explain why that might be the case.
The further question (mightn’t a negative track record with the endowment, if Summers had one, suggest that he lacks credibility in his current job?) is more tendentious and should be avoided, because more expert heads have already answered it in the negative, and committed the country in some measure to that answer. God help us if they’re wrong, and in a year we’ll know and will need as a citizenry to act accordingly.
To explain to Harry that the University doesn’t gamble with its endowment is three things:
1) rude. Harry knows what an endowment is.
2) willfully obtuse. Harry is making the point that if the University did something incredibly stupid SOMEone would be accountable (or would they?).
3) a little bit awkward, since it’s clear that on SOME level the University made a gamble in the last few years, and that in some way it lost big. (The reporting that suggests much of its holdings were very difficult to disentangle, which is what draws Summers into the picture. Also of course there’s the fact that he might be expected to be more involved with the finance decision-making, for a number of reasons, than your Rudenstines or Boks.)
I have a joke to make here that begins “Speaking of Boks,” which goes with the theme of rudeness, but I will abstain from making it because of teh Google. I might someday seek respectability in public, after all!
SE
3/29/2009 6:16 pm
Now, SE, no need to scold Sam on my account. He explains the situation quite clearly: There could be no question of accountability for a bad investment gamble by Harvard because it couldn’t possibly happen! Silly me for not understanding the obvious.
Sam, don’t throw your pearls of wisdom before swine like me. Why not perform a larger service? Use your hours instead writing something about which decisions Summers did not get involved in — relying just on your knowledge of the industry and what you’ve inferred from the Harvard financial statements, of course. Just as I am glad for the reassurance, I am sure Forbes, Bloomberg, and the New York TImes will want you to set the record straight with everyone they and their sources have so grievously misled.
3/30/2009 2:37 am
Harry,
Sorry I can’t be of help to you.