Larry Summers' Potential Conflict of Interest

The man cited to be Ben Bernanke's replacement if and when the stock market (not the economy) takes a decided turn for the worse, Larry Summers, has been implicated in an act that may make his transitioning into his role of running monetary policy for the world's biggest economy slightly more complicated. A report that was issued several months ago by Asia Times' blog discloses that the man who has President Obama's attention on all matters financial was in fact selling the AAA-rated tranches of toxic CDOs held by his former employer, multi billion hedge fund D.E. Shaw after the collapse of the CDO-loaded Bear Stearns hedge fund.

White House economic advisor Larry Summers, a former Treasury Secretary and President of Harvard University, had brief career as a part-time pitchman for a hedge fund. His activities may bear on his ability to serve the country with maximum effectiveness. According to sources who attended meetings with him, Summers traveled to Asia during July 2007 with a pitchbook recommending the AAA-rated tranches of collateralized debt obligations to Asian sovereign funds and financial institutions, in his capacity as a Managing Director of the hedge fund D.E. Shaw.

In terms of how well an investment of this kind, by what are likely the same entities that gobble up U.S. Treasuries as if there is a limited supply in the latter, would have performed, can be gleaned by the following:

In July 2007 the AAA-rated tranches of mortgage-backed securities backed by subprime collateral were trading at around 90 cents on the dollar. Now they are trading at less than 40 cents on the dollar.

And here is where it may get a little hairy, especially as pertains to potential conflicts of interest between Larry, recent reincarnations of TALF programs geared to purchase exactly such CDO tranches, and a potentially very pregnant DE Shaw.

The AAA-rated tranches of CDO’s, of course, are the “toxic assets” that the US government now is proposing to buy from banks to unclog their balance sheets. D.E. Shaw, ranked fourth by size among hedge funds with about $30 billion in resources, owns an unspecified amount of such structured products. Late in 2008 it suspended some redemptions by investors seeking to cash out, and continues to “gate” redemptions. Although D.E. Shaw’s investments are proprietary, the perception of the investment community is that the firm is stuck with big positions in such “toxic assets” that it cannot sell. The overhang of hedge fund redemptions on the market artificially depresses the price of structured product, which in turn has forced massive writedowns on the part of banks.

According to my sources, Summers enthusiastically urged Asian investors including sovereign funds to purchase such instruments just weeks after the collapse of a Bear, Stearns hedge fund whose failure triggered the collapse of the whole structured market. I do not know precisely what was in Summers’ pitchbook, but if I were a member of a Congressional committee responsible for the oversight of economic policy, I would very much want to know what was in it.

Zero Hedge wholeheartedly agrees with David Goldman's conclusion on the matter:

[Larry] has a responsibility as a public official to account for any baggage he may have brought in with him. The right thing to do would be to make public his July 2007 D.E. Shaw pitchbook.

Perhaps at the next congressional hearing it might behoove politicians to request said pitchbook (and the request goes out to Zero Hedge readers): it would be very enlightening to read just how Mr. Summers justified a "credible upside thesis" for an investment in an asset class which, if he was at all reading contemporary literature, would have had to know was very precariously positioned at a time when Bear Stearns' CDO laden hedge fund had collapsed and many say was the direct precursor to the chain of events that culminated with Lehman's bankruptcy.

We recommend reading the full Asia Times Blog posting.

Comments

[nova:]

doubleguns wrote:
" Wait till he gets caught selling the clunkers."

He does it already!

Aug 14 08:06 AM

[John Galt:]

Hold up Tyler...

You really expect a power hungry politican to come out and do the right thing? There is a better chance of the 0-16 Detroit Lions coming out and winning back to back Super Bowls.

Aug 14 08:37 AM

[yellowhoard:]

Anyone that could wreck Harvard's finances, and screw the Asian's out of a boatload of money, sounds like a perfect fit for this administration.

Too bad Madoff isn't available.

Aug 14 08:59 AM

[the Gnome:]

Good reporting Tyler. No chance of this administration taking "Larry" to task.

Aug 14 09:02 AM

[CautiousInv...:]

He has more than that working against him.

Larry Summers during his tenure as a senior Treasury official during the Clinton years was intimately involved in laying the regulatory and philosophical foundations for the bubble.

Along with Rubin and Greenspan, Summers played a pivotal role in abolishing Glass-Steagal, allowing mergers that created too big to fail banks, permitting excessive financial leverage among banks and failing to regulate certain derivatives, including CDS.

He was also an ardent supporter of NAFTA, disastrous legislation which resulted in job losses in the US and the creation of global sweatshops.

Aug 14 09:43 AM

[Max Cavalera:]

Great find! but in the grand scheme of things with several such instances of conflicts of interest (Goldman Sachs, Warren Buffett to name a few) this seems like another one of those in a big hair ball of complex connections and relationships between all the policy makers. Does not sound good any way you look at it..

Aug 14 02:22 PM

[ex- bond tr...:]

Even Harvard kicked Summers to the curb, it's high time this bloated
lying pig goes back into his pen.

Aug 14 03:35 PM

[Old Trader:]

Perhaps the top administration figures should be forced to take something like the Hypocratic oath taken by doctors. I'm thinking specifically of the part that says "First, do no harm".

Aug 14 08:01 PM

[Bling Daddy:]

Agreed 100%. As a physician, I am astounded by the lack of ethics in the administration of our society's well-being; fiscal and otherwise.

Is it possible they actually think they are doing the right things here?

I wonder how much personal gain really plays into their game plans?

Good work, Tyler. Keep up the investigations!


On Aug 14 08:01 PM Old Trader wrote:

> Perhaps the top administration figures should be forced to take something
> like the Hypocratic oath taken by doctors. I'm thinking specifically
> of the part that says "First, do no harm".

Aug 14 10:36 PM

[drone:]

Many doctors long ago abandoned the Hypocratic oath, focusing more on their wrist watch and prescription pad.


On Aug 14 08:01 PM Old Trader wrote:

> Perhaps the top administration figures should be forced to take something
> like the Hypocratic oath taken by doctors. I'm thinking specifically
> of the part that says "First, do no harm".

Aug 15 03:10 AM

[whidbey:]

None of this is a surprise, whoring by appointed officials is common in the Washington Circles this man runs in. He made 8 million dollars from his nefarious representations.

He will be fortune is he is not indicted for misrepresentations in the course of his current appointment. For credibility purpose, Summers is not a possible for further policy service due to his conflicts, rumored and admitted.

Aug 16 08:00 PM