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by Peter A. Belmont / 2009-04-20
© 2009 Peter Belmont
Larry Summers,[1] a Professor of Economics and former Secretary of the US Treasury, was President of Harvard University from 2001 to 2006, roughly the period of time in which the mathematical theory of David X. Li became popular. Li’s theory on measuring market risks served to justify the investment strategies regarding collateralized debt obligations (CDOs) and, used as a crutch in aid of greed, led the world to financial ruin in 2000-2008. These were roughly the years of Summers’s Harvard presidency which is best remembered for a January 2005 gaffe in which he expressed the opinion that women are under-represented in science and math careers not because of sex discrimination but because they are not as qualified as men in mathematics and science.
Summers is not remembered for ever departing from the view generally held among economists, most of them men, who jumped on the CDO bandwagon, eagerly accepted the apparent protection of Li’s theory (which, as we now know, was either mathematically unsound per se or was applied in circumstances to which it did not apply—you know, like using a soup ladle to fix a flat tire). I am sure that many people saw trouble coming and spoke up about it, but a quick web-search reveals only one—a woman, Paris Welch.
”The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents. “Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
The article I read does not reveal whether Ms. Welch is a qualified mathematician, or whether she merely opened her eyes and saw what was there to be seen by anyone willing to look. Since a lot of science consists of carefully noticing the actual, it seems that, contrary to Mr. Summers’s expressed view of women in science, Ms. Welch is more qualified as an “economic scientist” than an awful lot of men, including Mr. Summers. The men, it seems, did not listen to Ms. Welch. Was this an example of sex discrimination in science? Of the innate superiority of men?
Knowing when to use mathematical formulas is as important as knowing whether or not they are internally correct. The economists fell down on the (mathematical) job, Summers among them, like “true-believers” whose faith is firm and cannot be shaken by any mere fact. While Summers was relying on unsound mathematical practices, Harvard’s endowmant fund was becoming endangered, and now the importance of Summers’s put-down of women in science comes into even better focus.
During the 8-year self-immolation of the markets, Mr. Summers, as President of Harvard, had a fidurecitationciary responsibility to the university to see to it that its enormous endowment made money (or at least didn’t lose money unnecessarily) as well, perhaps, as a duty to keep wealthy potential donors (and the parents of potential tuition-paying students) making money. In short, it was not his duty to parrot the “received wisdom” (or, as we now know, the “received stupidity and cupidity”) of the financial professionals, but, instead, to be a prudent manager of at least that portion of the wealth upon which Harvard relies which it directly controls. Even if he was not personally charged with hands-on-the-portfolio management of Harvard’s funds, he was as well placed as anyone and better placed than many to call attention to the perilous state of the global financial situation. In the event, the fund took big losses.
”Harvard Management Co., which runs the world’s largest endowment fund, has had until recently an incredible record. Over the past six years, it succeeded in more than doubling the notional value of Harvard’s endowment to $36.9 billion in fiscal 2008 (which ended on June 30) even after paying for about one-third of Harvard’s operating expenses. So its recent loss of $8.1 billion from July 1 to Oct. 31, 2008, came as a stunning blow. Yet this huge loss, as staggering as it sounds, might be only the tip of the iceberg of illiquid investments. According to a source close to the Harvard Management Co., the damage, if the fund’s illiquid investments are realistically appraised, may be closer to $18 billion—or more than twice the amount previously reported. (This is in line with a report, released today, showing an average 22.5 percent drop in endowments in North America.)” See here.
While one may wonder whether an action would lie (that is, whether a lawsuit might properly be brought) against Mr. Summers for breach of fiduciary duty to the University, it’s well to consider the ways of corporate governance in the US (including the governance of university corporations) and the possibility that all corporations would be better governed if managers bore greater personal responsibility for their doings, including but not limited to loss of pay and perks when performance has been poor. Mr. Summers earned $8M recently—after the meltdown—from financial firms paying him for his economic wisdom (or as some doubters seem to think, in payment for his influence in the Obama administration). I wonder what Harvard paid him to preside over the 50% diminishment of its endowment fund while simultaneously ignoring the accurate economic predictions of women and declaiming the inherent superiority of men over women in matters scientific and mathematical.
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[1] Just dismissed as President Obama’s chief economic advisor (see analysis by Robert Scheer)
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