Saturday, September 14, 2013

Larry Summers and Ethical Compromise

One of the troubles with academics blogging about the "real world" (that is, everything outside academia) is that it is easy to dismiss what we say on the basis that we are ivory-tower pinheads who don't know how the real world works. We preach our moral and political idealism from our privileged positions, goes the argument, but the real world is messy and complex. To get anything done you have to make compromises all the time in pursuit of larger objectives, and the important thing is to stay on the right side of the law.

There is a certain truth in the premise that academics, especially the ones with tenure, have the privilege of being idealists, and that is why I am so disappointed that so few of us speak up.

But there is a huge gray area between unlawful and ethical behavior, acts that are not illegal but good people don't do, no matter how profitable or how self-serving. Of course there are no bright-line rules about where to draw a boundary. Many of the questions about Larry Summers come down to this: Does he even realize that there is a difference between unlawful and unethical?

Summers has derided the attempts to set ethical rules for government officials. When deposed in the Shleifer case, he said,
I wasn't ever smart enough to predict -- things that seemed very ethical to me were thought of as problematic and things that seemed quite problematic to mere were thought of as perfectly fine. … there was no per se disqualifying of the validity or morality of advice based on the holdings of financial positions in the entity, area, place, type of investment, or anything else with which the advice was given.
I have blogged on this point before. For a professor (and especially a University Professor at the WGU), this is a devastating failure, because when a worldly professor (and particularly a rich and famous economist) questions the distinction between legal and ethical, students will follow his lead. As I wrote of Summers,
He loves to split legalistic hairs, and denies that ethical conduct exists outside the context of such hairsplitting. And he is living proof that if you do something wrong and simply refuse to acknowledge it, never apologizing and, when put on the spot, wriggling out of the question on the pretext of technicality, you can live to succeed and rise to power once again. Students are no fools; they see what grown-ups say and do and how it pays off. It will be bad enough if Obama appoints Summers, but the panting adulation he will receive in Harvard publications and Web pages will be powerful signals to Harvard students to go and do likewise.
This sort of amoral evasiveness is, of course, not all that great a quality in the Fed chair either.

Two items came to my attention this week that focused me on trying to define what exactly is wrong in this stew of personality and ethics. One piece is a post on the MathBabe blog. Its author, Cathy O'Neil, summarized Summers's involvement in the Shleifer mess quite eloquently:
Some people still think Larry Summers got fired from being the president of Harvard because of the ridiculous comments he made about women in math (see my post about this here) or because of the comments he made about Cornel West. Actually, the truth is something worse, and for which he should actually be in jail. It’s also something that makes Harvard look bad, so maybe that’s why it’s less known. … I was inspired to write this by being disgusted at continued rumors that he could get yet anotherprestigious job. It’s like this guy can’t fail spectacularly enough! Let’s give him another chance! 
Let’s set the record straight: Summers was directly involved with defrauding the U.S. Government (see below) and Russia. He admitted to not understand conflict of interest issues (see below). It is particularly appalling, knowing these things, that he would be considered for the World Bank head, which presumably requires nuanced understanding of such issues.
That's right -- she wrote this a year and a half ago, when Summers was up for the World Bank job. This week I came across an even older post, from 2011, in which she drills down on what she learned about Summers, and about herself, from working with him at D.E. Shaw. First she offers a tutorial on the concept of "dumb money":
Once you understand the mentality, it’s easier to understand the “dumb money” phrase.  It simply means, we are smarter than those idiots, let’s use our intelligence to anticipate dumb peoples’ trades and take their money.  It is our right as intelligent, imminently starving people to do this.  Chasing dumb money can take various forms, but is generally aimed at anticipating lazy fund managers:  if you know that they always wait until Friday afternoon to balance their books, or that they wait until the end of the month, or that they are required to buy certain kinds of things, you can anticipate their trades, make them yourself a bit before they do, thereby forcing them to pay more, and getting a nice little profit for yourself.  In short this works in general, since statistically speaking the anticipated trade wasn’t driving up the intrinsic value of the underlying, but rather was being affected by trade impact for a short amount of time.  If we can anticipate big trades by lots of dumb money, then the short-term market impact will be large enough and last long enough to buy in beforehand and sell at the top, while it still lasts, assuming there’s sufficient liquidity.  The subtext of taking dumb money, going back to the football team issue, is: if we don’t somebody else will, and then we will feel like fools for not doing it ourselves.
She comments that she kind of enjoyed the combative debates she had with Summers, and had nothing to contribute to the question of what he thinks about women. But, she continues,
when I think about that last project I was working on, I still get kind of sick to my stomach.  It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds.  There’s no real way to make that moral, or even morally neutral.  There’s no way to see that as scavenging on the marketplace.  Nope, that’s just plain chasing after dumb money, and I needed to quit.  I still don’t know if that model went into production.
Plenty of people who work in the financial industries would giggle with delight at being able to identify such opportunities and not tell anyone else about them, while they watched the cash roll in. I'd rather not have the guy at the head of the Fed be of that mentality. At the risk of getting tarred with another stereotype of academics, as anti-capitalist anti-free-market lefties, I think the country would be better served by having someone in that role who might feel slightly sickened by the realization that certain structures and policies were incentivizing hedge funds to take dumb money from pensioners.

[Aside to Harvard folks: MathBabe also has a wonderful tribute to my colleague Radhika Nagpal, who sits literally in the office next door to mine.]

There is a terrific article by Michael Hirsh entitled, "The Comprehensive Case Against Larry Summers." Hirsh, unlike almost any other journalist who has written about Summers, actually mentions the Shleifer mess. (I have, over the past couple of months, talked to several journalists about it, and shared my copy of the deposition. No reference to Shleifer has appeared in any of their stories. It is almost as though there is some  cartel of editors making sure this thread never gets pulled on. So I consider any reference by any journalist to be good news.)

But the good thing about the Hirsh piece is not this passing reference to Shleifer, but the careful and well documented history and analysis of where Summers's bullying and other personality offenses verge into actual ethical (if not legal) problems.

What do you call someone who will not admit he was wrong? There is no law requiring anyone to answer questions directly and honestly. There is nothing unlawful about obfuscating or even lying about the past. It's just dishonorable behavior, that's all -- behavior that should make you not want to hire the person to be your housecleaner, much less your arbiter of money policies. Summers has been very, very careful never to give an inch on any of his misdeeds. Hirsh describes several, for example:
Summers helped midwife a major series of policy errors dating back 20 years that led directly to what many economists now believe was the worst financial crisis ever. In particular, Summers's opponents—he faces a phalanx of opposition among Democrats on the Hill—point to the Commodities Futures Modernization Act of 2000, which effectively deregulated the global market in over-the-counter derivatives and was Summers's signal achievement as Treasury secretary. The final report of the Financial Crisis Inquiry Commission convened by Congress in 2009 puts the government's failure to rein in these derivatives at "the center of the storm." 
Summers has, since then, engaged in what appears to be an effort to deny or cover up these errors and posture as a champion of regulation—an act of misrepresentation that flabbergasts many former colleagues and congressional opponents.  
He quotes Sheila Bair, former head of the FDIC, on exactly this point. "One of the things that bothers me about Larry is that he's never really said he made any mistakes." That is so familiar. I have sometimes said, when asked about the end of my deanship, that probably Larry preferred deans around him who would tell him he was right. He loves arguments and debates--as long as the ground rules are understood: at the end, he will be declared the winner.

Hirsh has a smart comment on Summers's famous arrogance.
Summers's allies say his arrogance is more unconscious than malicious, a product of his aggressive search for new thinking. Clinton's tough-talking trade representative, Charlene Barshefsky, remembers when Summers, as Treasury undersecretary in the 1990s, humiliated her deputy in a room full of staffers, telling the deputy that he would have flunked him as a student if he'd made such weak arguments about a trade issue. Afterward, the diminutive Barshefsky walked up to the beefy Summers and said, "If you ever do that again, I'll break your fucking knees." Summers was shocked, and perhaps dismayed, that he'd offended a Cabinet official. "He didn't even know what he did," Barshefsky recalls. Summers later called the aide to apologize.
It has been speculated from time to time that Summers has a specific cognitive deficit that makes it (I am using my own language here) impossible for him to understand what it feels like to be inside the other person's skin. His mania to be smarter than you are in a one-on-one, and to be recognized as the smartest guy in a room of three or more, blinds him to the feelings of the people he is talking to. This tendency to be blinded by his own brilliance may account for the disastrous conversation with Cornel West; it could certainly account for his failure to understand how an anthropologist might take Summers's judgment that "economists are smarter than political scientists, and political scientists are smarter than sociologists." 

Hirsh catalogs a series of Summers misjudgments on financial matters, and of denials that he had been wrong. Read the article; I will quote just one, which introduces a character familiar to those who have followed Summers's career.
Even after the financial crash of 2008, Summers did not relent in his view that little else could have been done back then, despite the FCIC's report and other studies that concluded otherwise. Summers's boss and mentor, then-Treasury Secretary Robert Rubin, conceded during the post-crash hearings in 2010 that Born was "right about derivatives regulation." Even former President Clinton later admitted he should have reined in derivatives trading. 
Arthur Levitt, who ran the Securities and Exchange Commission during the Clinton years, told me after the crash that he and his colleagues had made a serious mistake in pillorying Born. "All tragedies in life are always proceeded by warnings," he said. "We had a warning. It was Brooksley Born. We didn't listen to that." But Summers was still so sure of his own correctness that, when he saw Levitt on Capitol Hill in November 2008, he fought back. "I read somewhere you were saying that maybe Brooksley Born was right. But you know she was really wrong," Summers said, according to someone who overheard the conversation, which Levitt later confirmed. "Her plan was no good. And we offered a different plan." 
In truth, there had been no other plan, at least not one that anyone ever tried to enact. Summers appeared to be referring to a vague recommendation, bandied about in 1997, to get the SEC to regulate derivatives broker-dealers, which never got off the ground. When I asked him about this encounter in a 2010 interview, Summers said, "Well, you know, I didn't say she was really wrong. I said the reasons [Levitt] took the position [he] took was that there was concern that Brooksley's approach was going to undermine legal certainty [about the legitimacy of trillions of dollars of derivatives trades already out on the market]. It wasn't that we didn't want to regulate derivatives. We offered a different approach." But even Levitt said this demurral missed the point: Born had seen danger in a market that no one else did at the time, and she deserved credit for that. A little magnanimity was in order. Legal certainty could have been addressed under Born's approach. "Rubin and Greenspan were probably right in saying there were outstanding contracts thrown into uncertainty," Levitt said. "But we could have grandfathered those and said that thenceforward we were going to regulate them."
It is this kind of evasive hairsplitting  that drives people nuts about Summers. It sounds so much like having Harvard litigate whether Shleifer was "assigned to" Russia, in a jury trial, which was costly both to Harvard and to US taxpayers, and which Harvard decisively lost. How would it play to have a Fed chair who could not be counted on to represent his past conversations fairly, and thought there was nothing wrong with twisting the retelling in an effort to bolster his own reputation?

Finally, Hirsh takes on the claim, which you knew was coming, that Summers should get the Fed job because he has learned from his mistakes. This makes regular appearances in all Summers narratives, and sure enough, it's appearing again: That was then, but he's a changed man now!
At every stage of his career, Summers has been helped along by friends and sponsors who have assured doubters that he has matured, that he's smoothed out his rough edges. That is what his mentor, Rubin, told the Harvard search committee. ("Rubin made us confident we weren't getting a bull," a member later told The Boston Globe.) It's what Summers himself said when he joined the Obama administration, telling me in a 2009 interview: "I suspect over time there's maybe a little less of the brusqueness that people experienced when I was younger." (Romer later complained that Summers had treated her "like a piece of meat," according to author Ron Suskind.) And it is what Summers's defenders are saying about him now as a prospective Fed chief. "We're now talking about the 58-year-old Larry, not the 30-year-old Larry," fellow Harvard economist Kenneth Rogoff told me this week.  
But in the end, despite all his other sterling qualities, Larry Summers's character and temperament have never seemed to change much. And those qualities could easily run amok in the closed world of the Federal Reserve, where a single individual holds sway over the course of the entire global economy. Is that a risk Barack Obama is prepared to take?
Two new pieces have appeared in the past day. Politico reports that Senator John Tester (D-MT) has announced himself as opposed to Summers; as a seasonal resident of Montana, I am glad to see the Senator stand against the apparent preferences of his president.

And the Wall Street Journal has a kind of wet-kiss piece about Summers and his eminent uncle, Paul Samuelson, drawing on correspondence between the two. Note the editorial leger-de-main:
A few days after Lawrence Summers was forced out of the presidency of Harvard University in February 2006, he got an emotional, typed letter of consolation from his uncle. 
"I grieve for you," Nobel Prize-winning economist Paul Samuelson wrote to his nephew, who had clashed with the faculty and caused a storm by making impolitic remarks about women in science. 
"Mob psychology can be much the same on college campuses as elsewhere," Mr. Samuelson said. He counseled his nephew to avoid bitterness.
Now maybe Samuelson thought that Summers lost the presidency over the women-in-science remarks, and maybe some part of his letter specifically mentions that. But this looks to me like deceptive reporting by the Journal, playing into the heroic myth that the harpies are to blame for Summers's downfall. Let's remember the timeline. The NBER speech was on January 14, 2005. That was far in the past by February 7, 2006, when Professor Fred Abernathy asked Summers his firm but polite question in a faculty meeting (thanks to Prof. Abernathy for permission to reprint it).

President Summers and Dean Kirby,

I have been a member of this faculty for more than 45 years and I am no longer easily shocked.  But on reading the WEB story How Harvard Lost Russia, by David McClintick the author of the lead story in January 13, 2006 issue of Institutional Investor I was deeply shocked and disappointed by the actions of this University.  The story is still available at  [this link works now].

I will gladly send the URL to anyone interested in this story.

The story is said to be based on the trial records and depositions involved when the Federal Government took Harvard to court to recover the Federal funds involved in the HIID project in Russia.

Harvard and several of the project’s associates paid the Federal Government over 31 million dollars to settle the case.

The story, if true, portrays Harvard defending activities that at the very least are not consistent with Harvard’s Statements of Values, issued after the settlement to be sure,

•      Respect for the rights, differences, and dignity of others
•      Honesty and integrity in all dealings
•      Conscientious pursuit of excellence in one’s work
•      Accountability for actions and conduct in the workplace

I have sent a copy of the 37-page article to Dean Kirby and to James Houghton, Senior Fellow of the Corporation several weeks ago but I have not yet had a response.

My questions are: 
1) What is the Harvard response to this article?

2) Does the article accurately reflect the events in the litigation?

It appears to me that during the litigation, Harvard was defending the indefensible. 

Now that all of this is before the public, how do you feel about this episode?
[The Statement of Values is rarely mentioned today, but it was was one of Summers's less bright ideas, a response to the Living Wage conflict that resulted in the occupation of Massachusetts Hall in the spring before Summers became president. Turned out there were already so many policies and procedures about so many things that there was not a lot you could say that was nontrivial, universal, and consistent with everything else on the books across the university.]

Abernathy had followed protocol in providing the text of his question to the president in advance of the meeting. When Summers simply said he had recused himself, Abernathy, halfway back to his seat, returned to the microphone and asked if Summers really had no opinion about the affair. Summers' lie, that he didn't know enough about it to have an opinion, was the death blow for his presidency. Not the women-in-science speech. He survived that; he was done in by his own lying on an entirely different subject more than a year later.

So here is the Journal helping him out with more sleazy rewriting of history. Interestingly, Samuelson did acknowledge that Summers did not handle the Shleifer mess properly, but cast the blame at Rubin's feet:
… Mr. Samuelson believed Mr. Rubin, who was a member of Harvard's governing board, had failed to properly advise Mr. Summers when he was Harvard president. In particular, his uncle was upset about the handling of Harvard economics professor Andrei Shleifer, one of the issues that contributed to faculty unhappiness with Mr. Summers.…
"Rubin should have compelled Larry to stay out of the Andrei Shleifer Moscow business," Mr. Samuelson confided to Mr. [Stanley] Fischer in the 2008 letter.
This is an interesting revelation, in light of Hirsh's report that Summers acknowledged to him that he didn't answer Abernathy's question properly.
"I should have chosen my words differently at that faculty meeting. And I'll always wish that I had," Summers uncharacteristically told me in 2010.
This admission is uncharacteristic to be sure; I can't think of a single other case where Summers has gone that far in fessing up to a mistake. On the other hand, he doesn't say how he should have responded to Abernathy, only that he regrets what he did say. And one can't help suspecting that he was willing to go this far in accepting responsibility for his mistake only because he had his Uncle Paul's blessing. It wasn't really his fault anyway--Rubin should have made sure he did not get into the fix he was in.

Summers may be brilliant, but it is a hollow, debate-team kind of brilliance. The record of policy failures, followed by evasive retellings of history, don't make the case for the kind of brilliance that deserves respect. Only in an amoral world could one feel satisfied with success by evasion. That does seem to be the world of academic economics -- as a student said of Andrei Shleifer when he resumed teaching after the court found he had conspired to defraud the government,
“He is an excellent professor and does remarkable research and those to me are the two main criteria that you should be using in deciding whether or not he’s going to be a valued professor,” [a student] said. “The other stuff, that is for other people to worry about.”
In the real world, people do worry about the other stuff. As economist Joseph Stieglitz puts it, "brilliance is not the only determinant of performance. Values, judgment and personality matter, too."

[Revised 10:40 PM on 14 September to include Hirsh's quotation of Summers and the student's assessment of Shleifer. Thanks to the reader who directed me to the Hirsh quotation.]
[Revised 2:50 PM on 15 September to include final version of Abernathy question as actually read.]


  1. Good blog, Harry, as throughout the last couple of months. It worked!!

    1. I would love to see the phone logs of John Tester. I think that domino may have been crucial. I think David Warsh probably said it best: "The closer you look at Summers’s not-so-tacit approval of the [Shleifer] affair, the more appalling it becomes. That fact that no one in economics has mounted a defense of Shleifer’s and Summers’s conduct – not Andrei, not Larry, not any of their numerous seconds – should tell you all you need to know: their actions were indefensible. All the more alarming has been Summers’s ability to suppress criticism. Taken altogether, my hunch is that the story is more than enough to put the kibosh on his appointment. He can make money, give advice, mentor students, but no more running for high office."

  2. Oh, there would have been interesting hearings! So much for "something to do" while waiting for the play-offs to get underway.

  3. "Dumb money" is money that invested in a rigid manner. "Smart money" does capitalize on "smart money", but it also makes markets more efficient (better reflective of economic values) and creates a social good.

    Here is an example. If a lot of money tracks a benchmark such as the Russell 2000 index of small-capitalization stocks, there will be a lot of buying and selling pressure on the days that stocks are added to and deleted from the index. "Smart money" will anticipate which stocks are going to be added and accumulate positions in those stocks over time. It will sell to "dumb money" on the rebalance date. The existence of "smart money" leads to smaller price spikes on the rebalance day than would occur in their absence, because there are ready sellers of added stocks on the rebalance date.

    This is not just academic theory. There are many examples of market inefficiencies that have diminished over time because
    they were exploited by "smart money".

    If Lewis understood economics better he might not have such a vendetta against Summers.

    1. Tell it to O'Neil. I am sure with a name like Quant, you will be taken quite seriously.

      To be fair, I acknowledge this isn't my strongest point; she doesn't tell us enough about what was going on to draw any conclusions with confidence. More a story that was consistent with the rest of the evidence.

  4. Hi, quant and blogger mathbabe here. Dumb money was a phrase we used to mean the dumb people who were in charge of investing huge amounts of money typically coming from retirement funds and the like. The word "dumb" definitely referred to the people trading.

    Thanks for the post, and I'm wondering who you'd like to see appointed to the Fed now that Summers is out. I'm thinking Romer.

    1. Hey, nice to hear from you! Quant is right that I know economics from nothing, so I am not really entitled to an opinion. But since you asked: Stanley Fischer. I happen to know the guy and his family a little bit for nonprofessional reasons. He is a prince of a human being.

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