Obama's pick for the Fed? Larry Summers's Billion-Dollar Bad Bet at Harvard

[dkf]

During the financial crisis, Harvard lost nearly $1 billion because of some unusual and ill-judged interest rate swaps that Summers implemented in the early 2000s during his troubled tenure as the university's president.

Interest rate swaps allow borrowers to lock in a fixed interest rate on floating-rate debt, which can be good to hedge against short-term uncertainty. The problem with Harvard was that Summers wanted to lock in interest rates for money that the university hadn't actually borrowed and wasn't planning on borrowing for a very long time.

There aren't a lot of ways to interpret this exotic instrument except as a bet that the future level of interest rates would be higher than the market pricing implied at the time. That bet was wrong, and Harvard lost a billion dollars. Anonymous finance blogger Epicurean Dealmaker puts it well:

"I have rarely encountered a corporate client who feels confident enough about both their absolute funding needs and current and impending market conditions to enter into a forward swap starting more than nine months into the future. Entering into a forward start swap for debt you do not intend to issue up to 20 years in the future sounds like either rank hubris or free money for Wall Street swap desks."

Why, back in 2004, did Summers feel so confident that interest rates were going to be much higher than they actually were? Reuters blogger Felix Salmon found one clue in a speech Summers gave in October of that year. Among other he things, Summers warned of the dangers created by the U.S. current account deficit and highlighted the seemingly absurd fact that short-term borrowing costs were lower than the rate of inflation. Perhaps Summers's experience with foreign-exchange crises in Asia and Latin America convinced him that something similar could happen in a country that borrowed in its own currency.

Not only was Summers wrong in 2004 about where interest rates would be -- he was willing to bet a lot of other people's money that he knew better than everyone else. The damage at Harvard was bad enough. ***Imagine what that sort of thing could do to the U.S. economy.***

http://mobile.bloomberg.com/news/2013-07-18/larry-summers-s-billion-dollar-bad-bet-at-harvard.html

[Rex]

1. Setting us up for TARP II & III.

The of course the 400 trillion, SUPERTARP in 2023.

[dkf]

2. My stomach is feeling queasy at the thought.

[rhett o rick]

3. What's not to believe here? This is right in step with the Pres other nominees. You can kiss your

"hope and change" good bye.

[Dragonfli]

4. My response to this such as it is is here:

http://www.democraticunderground.com/?com=view_post&forum=1002&pid=3326998

I feel too disillusioned and cynical to expand or even repeat how I feel.

I am a sucker, plain and simple and am old enough that I should have known better.

[roguevalley]

5. I hear ya. I am defeated and done. I am also old. I am sorry for you young ones.

I can remember when dems weren't republicans.

[AdHocSolver]

6. Why assume that Summers made a "bad bet".

Considering how much profits were made by bankers and Wall Street financiers on these "bad bets" and financial "mistakes", it seems more likely that our economic problems are the fall out of a get-rich-quick-scheme planned and enabled by a select group of the one-tenth percent.

Let's not give the Fed a pass on its collusion in the pillaging of the American economy.

The interest rates paid on bank deposits, which are essentially set by the Fed, are kept artificially lower than the inflation rate, so that depositors are losing money by putting their money into banks. The resultant "profit" is enjoyed by the banks and Wall Street.

In effect, the foxes are guarding the hen house and stealing the chickens.

K and R.

[Wilms]

7. ^

[AnotherMcIntosh]

8. What could possibly go wrong?

Does Obama even ask himself that question?

[dkf]

9. He values friendship and loyalty above competency IMO. Worrisome.

[AnotherMcIntosh]

11. Apparently he's in the camp that believes that its good to have rich Republican friends.

[ananda]

10. I'm having a hard time thinking of anybody worse than Summers for the job.

It just makes me sick to my stomach.

[Waiting For Everyman]

12. Who could've seen it coming? LMAO!

Summers is always fucking wrong about his "bets". Since when has he ever been right? He doesn't have to be right, he has a license to steal.

Ohhh... I get it. Harvard thought he wouldn't steal from his friends, eh? But, but, "he's one of us", right?

Hiring Summers... what could go wrong?

Larry was just demonstrating his "expertise".