Monday, November 18, 2013

The Essential Larry Summers: How He and Alan Greenspan Laid the Groundwork for the Financial Crisis and Larry Lost $1.8 Billion for Harvard

We are pretty sure we know the purpose of Larry Summers' Nov. 8 speech (Summers on bubbles and secular stagnation forever) to the IMF and the (delayed) reaction to it this weekend. First though some backround on Mr. Summers.

In 2009 PBS broadcast "The Warning" which told in devastating detail how Robert Rubin, Alan Greenspan and Larry Summers laid the groundwork for the financial crisis of 2007-2009 and how in the early 2000's they attempted to destroy the career of the woman who warned of what was coming.

For folks who read faster than they watch here's the transcript of the show:
Michael Kirk
Jim Gilmore
Mike Wiser
Jim Gilmore
Michael Kirk
ANNOUNCER: Tonight on FRONTLINE, long before the economic meltdown, the story of one woman who tried to warn about the threat to the financial system.
MANUEL ROIG-FRANZIA, The Washington Post: She saw something that people either had not seen or refused to see. And she tried to sound the warning. Nobody listened.
Rep. SPENCER BACHUS (R), Alabama: What are you trying to protect?
BROOKSLEY BORN, CFTC Chair, 1996-'99: We're trying to protect the money of the American public.
ARTHUR LEVITT, SEC Chairman, 1993-'01: I was told that she was irascible, difficult, stubborn, unreasonable.
NARRATOR: Before the toxic assets poisoned the economy, she warned of their danger.
RON SUSKIND, Author, The Price of Loyalty: And that made her the enemy of a very, very large number of people.
NARRATOR: She would fight an epic battle with one of the most powerful men in Washington.
DAVID WESSEL, Author, In Fed We Trust: He was, as George Bush put it at the time, a rock star.
JOE NOCERA, The New York Times: It got pretty nasty pretty quickly.
MICHAEL GREENBERGER, CFTC Director, 1997-'99: Greenspan turns to her, she turns to him, his face is red and he's clearly quite upset.
NARRATOR: A story from inside the highest levels of the Clinton administration.
TIMOTHY O'BRIEN, The New York Times: They were all part of a very concerted effort to shut her up and to shut her down. And they did, in fact, shut her up and shut her down.
NARRATOR: Tonight on FRONTLINE, Alan Greenspan, Brooksley Born, and The Warning.
JIM CRAMER, CNBC: You need to get in the game!
NARRATOR: In 2005, economic cheerleaders dominated the airwaves.
JIM CRAMER: I'm betting on Microsoft. That stock is not done going up, either!
NARRATOR: Times were good. Alan Greenspan ruled the economy.
JIM CRAMER: When you can get a 3.7 percent yield with up side, that's a lot better than getting a
NARRATOR: Washington's hands-off attitude toward Wall Street seemed to be paying off.
JIM CRAMER: So now it's all systems go between now and
And I recommend a buy on it!
NARRATOR: It was time for a celebration.
WHITE HOUSE ANNOUNCER: Ladies and gentlemen, the recipients of the Presidential Medal of Freedom.
Pres. GEORGE W. BUSH: Alan Greenspan is one of the most admired and influential economists in our nation's history.
NARRATOR: The nation's highest civilian honor was bestowed on the man many called "the wizard."
Pres. GEORGE W. BUSH: always be known as one of the phenomenal
DAVID WESSEL, Author, In Fed We Trust: More than one story was written about Alan Greenspan as "the wizard," the man behind the curtain, the Wizard of Oz.
ARTHUR LEVITT, SEC Chairman, 1993-'01: Alan was a great wizard. No one understood what he said, but he said it in such a way that everybody bought it.
Rep. MAURICE HINCHEY (D), New York: What's going to happen when all of this stimulation starts to decline?
*ARTHUR LEVITT: Everybody hung on every word.
ALAN GREENSPAN, Federal Reserve Chairman: Congressman, it depends on what is going on in the world generally.
DAVID WESSEL: The wizard, the man behind the curtain who mumbled in ways that ordinary people couldn't understand, but who appeared to be controlling absolutely everything.
ALAN GREENSPAN: Then we're going to get an exceptionally large amount of fiscal stimulus, which we're not going to want.
ARTHUR LEVITT: Very few people wanted to take him on or challenge him because he knew so much more than they did. And if he didn't, he certainly appeared to.
Pres. GEORGE W. BUSH: In 18 years as Fed chairman, he applied
NARRATOR: Five presidents had watched Alan Greenspan work his magic. it started back in the Ford administration.
ROGER LOWENSTEIN, Author, When Genius Failed: Alan Greenspan was a financial consultant who was hired by Gerry Ford, first to be head of his Council of Economic Advisers in the '70s.
NARRATOR: But Alan Greenspan was not your stereotypical economist.
ROGER LOWENSTEIN: He was also very charming and a man about Washington.
NARRATOR: He played jazz clarinet, had made himself rich on Wall Street. And he had embraced an unusual political guru
AYN RAND: I'm challenging the moral code of altruism.
NARRATOR: the Libertarian philosopher Ayn Rand.
AYN RAND: Everybody is enslaved to everybody.
JOE NOCERA, The New York Times: Greenspan is a disciple. She is the great champion of government as a destructive force that just gets in the way.
MIKE WALLACE, 60 Minutes: Can I ask you to capsulize your philosophy?
AYN RAND: I am opposed to all forms of control. I am for an absolute laissez-faire, free, unregulated economy. Let me put it briefly. I am for the separation of state and economics.
NARRATOR: Greenspan talked about Rand in his autobiography.
[Alan Greenspan, The Age of Turbulence: "Ayn Rand became a stabilizing force in my life. It hadn't taken long for us to have a meeting of the minds mostly my mind meeting hers."]
NARRATOR: Rand stood in the Oval Office as her star pupil was sworn in.
DAVID WESSEL: Greenspan had a very clear ideology about regulation.
HENRY KAUFMAN, Dir., Lehman Brothers, 1995-'08: His philosophy was in the form of what was called Libertarianism. And that meant those who do well prosper, those who do poorly fail, and the market clears the transactions.
Pres. RONALD REAGAN: that I will faithfully execute the office of president of the United States.
NARRATOR: It was a philosophy made to order for Ronald Reagan.
Pres. RONALD REAGAN: Government is not the solution to our problem, government is the problem.
NARRATOR: In 1987, Reagan made Greenspan the most powerful banker in the world, the chairman of the Federal Reserve.
JOSEPH STIGLITZ, Sr. Clinton economic Adviser, 1993-'97: Greenspan was a believer in Ayn Rand, a believer in free market. A little bit curious for a central banker, because what is central banking? It's a massive intervention in the market, setting interest rates.
NARRATOR: Greenspan worried about this contradiction in his autobiography.
[Alan Greenspan,The Age of Turbulence: "I knew I would have to pledge to uphold not only the Constitution but also the laws of the land, many of which I thought were wrong."]...MUCH MORE
Here is the report's homepage and here is the sitemap which includes:
If you prefer to watch we embedded the program in this October 2009 post or you can see it at the show's website or purchase the DVD.

Next up, the New York Times, April 3, 2009:
Financial Industry Paid Millions to Obama Aide
Lawrence H. Summers, the top economic adviser to President Obama, earned more than $5 million last year from the hedge fund D. E. Shaw and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money, the White House disclosed Friday in releasing financial information about top officials.

Mr. Summers, the director of the National Economic Council, wields important influence over Mr. Obama’s policy decisions for the troubled financial industry, including firms from which he recently received payments.
Last year, he reported making 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....MORE 
From the Boston Globe, Nov. 29, 2009:
Advisers told Summers, others not to put so much cash in market; losses hit $1.8b
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....MORE
And the Washington Post, June 22, 2006, seven months before the wheels started coming off:
Advice to Invest Less in U.S. Bonds
A former U.S. Treasury secretary is advising some of the world's biggest holders of U.S. Treasury bonds that they ought to find much better ways to invest their money.

Lawrence H. Summers, who headed the Treasury in the last 18 months of the Clinton administration, has argued in recent speeches that developing countries in Asia, Eastern Europe, Latin America and Africa should put much of their excess funds into stocks. Too often, he contends, the central banks of those countries invest their hoards of foreign securities -- now totaling several trillion dollars -- in safe but low-yielding U.S. Treasurys.

The return "will be zero" on those Treasurys after inflation and currency changes are factored in, Summers said in a lecture last week at the Center for Global Development, a Washington think tank. Meanwhile, he said, the developing countries are passing up much more lucrative investments -- "this, in societies where hundreds of millions of people are still desperately poor." In another speech, this one in Bombay a few weeks ago, he said, "It is striking to estimate the cost to developing countries" of their Treasury-heavy portfolios....MORE
Finally, just for grins and giggle we have:
The Confidential Memo at the Heart of the Global Financial Crisis
You can probably tell I am not impressed.
More to come.
See also yesterday's:
Economists,Top 0.0001% Agree, Time For a New Bubble