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.