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Larry Summers

Who Else Is Paying For Those Fat Wall Street Profits?

Moe Tkacik | April 15, 2009, 6:21PM

There's another big reason -- besides AIG -- that Wall Street trading desks have been booking such fat profits lately: fees they're collecting closing out interest rate swaps that have been exploding in the faces of cities, states, towns and public utilities over the past year.

Put another way: they're not just booking those billions soaking the government, they're booking them soaking...the government. Along with hospitals, utilities, park authorities, pretty much every other realm of the public or nonprofit sector...

Including Harvard! In December the university raised $2.5 billion dollars in a bond offering partially designed to give them the capital to buy out of $570 million in underwater interest rate swaps it had invested in back in 2005. The swaps were expressly endorsed by then-president Larry Summers, now head of the National Economic Council.

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Topics: Goldman Sachs, Larry Summers

Harvard Derivatives Whiz Fired For Emailing Larry Summers About "Frightening" Trades?

Moe Tkacik | April 1, 2009, 1:31PM

Late update: Harvard spokesman John Longbrake called to emphasize that the university had conducted thorough investigations of all allegations about Harvard Management Company and point out the 13.8% annualized returns HMC delivered in the ten years that ended June 2008. In a separate development, we learned that Mack was scheduled to be the subject of a February 23 Newsweek story by Michael Hirsh that had been subsequently shelved. Hirsh declined to comment.

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.

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Topics: Harvard Management Company, Larry Summers

Barack Obama

What Obama Can Learn From JP Morgan CEO Jamie Dimon

Moe Tkacik | March 27, 2009, 2:17PM

Whatever the 25 bank CEOs descending upon the White House this morning told the president and his economic team, we hope JP Morgan CEO Jamie Dimon repeated one line from the speech he gave at the Chamber of Commerce earlier this month. (It's about 11:30 in.)

One of the main root causes [of the crisis], and this has been going on for a long time, was the huge trade and global financing imbalances which fueled very low rates and excess consumption, and over a long period of time I do not believe you can run those kind of trade deficits...

Dimon was getting at one of the root structural causes of the current crisis -- America takes, the world (China especially) makes, an unsustainable situation sustained above all by an increasingly usurous financial services industry. As the CEO of PNC Financial Services just pointed out, banking is the biggest sector of the American economy -- and it's been to the detriment of everything else.

And while that might seem obvious, intuitive even, Dimon's speech came just three days after Larry Summers told the Financial Times that the global trade imbalance wasn't the problem anymore, that it had been eclipsed by more pressing emergencies, etc. etc.

Naturally Dimon went on to condemn the demonization of Wall Street and corporate America.