Harvard derivatives bets may play key role in fed chair race

eFC logo

The competition to become the next head of the Federal Reserve has been brewing in the court of public opinion for months, with many giving the nod to former White House adviser Larry Summers, due mainly to his close ties to the Obama administration. But don’t count out Janet Yellen just yet. Come vetting time, Summers will have plenty more questions to answer than the Fed’s vice chairwoman.

The most obvious parts of his background that require vetting are the relationships that Summers has built with Wall Street since leaving Washington, particularly his ties to Citigroup and hedge fund D.E. Shaw. But plenty of top central bankers have cultivated relationships the Street. The fact is, the ability to view the economy from both sides of the ledger can be a strength – if of course you have the right person at the helm.

No, the most curious aspect of his background revolves around the five tumultuous years he spent as the president of Harvard University. Among several missteps, including the infamous comments he made regarding women’s aptitude for science, Summers ran the university into a serious financial problem, one that eventually cost Harvard nearly $1 billion.

In 2004, Summers made the decision to finance a $2.3 billion expansion effort with instruments near and dear to Wall Street bankers: financial derivatives known as interest-rate swaps. He was hedging against the risk of interest rates rising. They did not. Rates nosedived. .

Four years later, with Summers gone and the economic crisis tearing at the university’s endowment, Harvard faced a liquidity issue, arguably due to the manner in which Harvard invested – a policy endorsed by Summers. At the end of 2008, with losses mounting, Harvard pulled the plug, paying J.P. Morgan and Goldman Sachs $923 million to unwind the derivatives.

Summers bet the wrong way on interest rates. President Obama will surely need to take that decision into consideration when making his choice.

Read the full Bloomberg article here.

Background Checks (eFinancialCareers)

As you’d likely imagine, financial services firms are more stringent than nearly every other private industry when it comes to pre-employment screenings. Some red flags are career killers. Others are more subject to interpretation if you’re honest and play the situation correctly.

Sketchy Hires (Bloomberg)

J.P. Morgan is investigating its recruitment practices in Asia after reports surfaced that the bank hired children of Chinese officials in an attempt to win business in Asia. More than 200 past hires are being reviewed.

Where Does Blame Lie? (eFinancialCareers)

Josef Ackermann’s abrupt resignation from Zurich Insurance Group following the suspected suicide of CFO Pierre Wauthier begs the question of accountability. Suicide among people in performance-based roles that are tied to economic conditions, market volatility or natural disasters is nothing new in a culture that puts constant strain on everyone from interns to the C-suite. What should be done?

Dress like a Goldmanite (Business Insider)

Want to dress like you work at Goldman Sachs? Buy at least 20 identical pairs of socks every six months and never wear plaid or pocket squares.

Attack-man (Business Insider)

"I've learned from watching CNBC that announcing your shorts isn't the best idea because it sometimes invites competition,” Jeffrey Gundlach, founder of DoubleLine Capital, told CNBC. Wonder if he was talking about Bill Ackman?

Going Out on Top (FIN Alternatives)

Karsch Capital Management is closing its doors after 13 years. Founder Michael Karsch is reportedly prepping his own consulting firm.

Don’t Lie to Me! (Bloomberg)

In 2009, former Merrill Lynch banker Michael Eggleton took over a bank in Kazakhstan that was hemorrhaging money. His fix? A polygraph machine. The test is voluntary, but employees who say no aren’t eligible for bonuses or promotions. A bit draconian, but it’s working.

Buzz Around the Office

Crush the Shoulders of Giants (CNN)

Going away to college can be a stressful experience. If only every incoming freshman got this pump-up speech.

List of the Day: Consulting Keys

Think you can be a great consultant? You’ll need these attributes.

  1. You view yourself as your own best investment.
  2. You thrive on unpredictability.
  3. You keep cool under pressure.

(Source: eFinancialCareers)

Popular job sectors


Search jobs

Search articles