Harvard reported losing $8 billion but real losses may be $18 billion, half of Harvard's endowment. Before he was fired, Larry Summers directed Harvard's endowment fund managers to invest in derivatives and risky investments that they were unqualified to manage. Now Harvard Crimson reports that he fired the derivatives expert who blew the whistle on the mismanagement of Harvard's endowment. Instead of fixing the problem bad investments directed by Summers himself ended up costing Harvard billions.
Forbes reported on the implosion of Harvard's endowment two weeks ago.
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.
The strain of market turmoil is visible in staff turnover at the management company, which axed 25% of its staff recently and is on its fifth chief in four years. Mendillo, 50, came to Harvard last July after running Wellesley's small endowment. She declines to comment. But how much blame she should get is unclear; the big bets on derivatives and exotic holdings were in place before she got there. The bad bet on interest rates--a swap in which Harvard was paying a high fixed interest rate and collecting a low short-term rate--goes back to a mandate from former Harvard president Lawrence Summers.
Now, the Harvard Crimson reports that Summers fired the whistleblower who warned that Harvard's fund managers lacked the training to manage the risky derivatives.
In an e-mail sent May 30, 2002 to Marne Levine, chief of staff for then-Harvard President Lawrence H. Summers, Mack detailed her concerns regarding what she deemed HMC’s "frightening" usage of derivatives and statistical modeling techniques, as well as the Company’s lack of a timely and portfolio-wide risk management system, high employee turnover rate, and low level of productivity in the workplace, specifically among managers.
Mack sued Harvard for wrongful termination and reached a settlement that barred disclosure of the amount. Mack now feels regret that she didn't do more.
Now, with the economy in an unprecedented slump in part due to the widespread and unregulated use of derivative contracts, Mack says she feels "vindicated" but also sad.
"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."
Larry Summers didn't listen then and he isn't listening now. He needs to go.