Jonathan Ernst/Reuters
Among the top prospects to oversee the Fed, Lawrence H. Summers leads in Wall Street experience, and wealth.
By LOUISE STORY and ANNIE LOWREY
Published: August 10, 2013 554 Comments
When Lawrence H. Summers left his job as President Obama’s top economic policy adviser at the end of 2010 to return to Harvard University, one of his first steps was to set up a roster of part-time positions that would touch on just about every corner of the financial world.
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Steven Senne/Associated Press
RE-ENTERING PRIVATE LIFE Since leaving the Obama administration at the end of 2010, Lawrence H. Summers rejoined the Harvard faculty.
Pool photo by Jason Alden
He has given a number of speeches, including at the London School of Economics in March.
Left, Fred Prouser/Reuters; right, Jean-Christophe Bott/Keystone, via AP
TIES IN TECHNOLOGY Marc Andreessen, the co-founder of a venture capital firm, and Sheryl Sandberg, the chief operating officer of Facebook.
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But as he negotiated with a prominent venture capital firm in Silicon Valley, Mr. Summers made one thing very clear: he needed an exit plan, in case he returned to public service.
“That was generally the assumption,” said Marc Andreessen, the co-founder of the firm. “If he did, he needed a way to do a clean disengage.”
Today, the Obama administration is considering nominating Mr. Summers as the next chairman of the Federal Reserve. If the White House does so, Mr. Summers’s financial disclosure — including his recent consulting jobs, paid speeches and service on company boards — will be one of the hottest documents in Washington. Among the top contenders for the position, Mr. Summers has by far the most Wall Street experience and the most personal wealth.
In addition to rejoining the Harvard faculty in 2011, he jumped into a moneymaking spree. His clock was ticking partly because he knew that the Fed chairmanship, to which he has long aspired, was likely to open up in early 2014, when Ben S. Bernanke’s second term will come to an end.
“With Larry, my wife always says that it’s hard to be happy if you want to have the most money because you’ll never have the most money,” said Jeremy I. Bulow, an economics professor at Stanford University who is a friend and co-author of academic papers with Mr. Summers. “He’s kind of been going about his life just on the basis of ‘who knows what’s going to come next?’ and just sort of maximizing his experiences, given the opportunities in front of him.”
The opportunities have been many over the last two years. Mr. Summers, 58, has been employed by the megabank Citigroup and the sprawling hedge fund D. E. Shaw. He works for a firm that advises small banks as well as the exchange company Nasdaq OMX. And he serves on the board of two Silicon Valley start-ups: both financial firms that may pursue initial public offerings in the next year. One of them, Lending Club, offers loans to consumers and small businesses by making arrangements directly with online investors, a new business model that falls into a regulatory gap that consumer advocates say may lead to risky borrowing.
Before his tenure in the Obama administration, Mr. Summers had accumulated personal wealth of at least $7 million; the last two years have most likely added considerably to that. But his money and Wall Street connections put him in an awkward position, partly because the next person to lead the Federal Reserve will oversee the writing of several key new regulations from the Dodd-Frank financial reform bill.
Wall Street experience is not unprecedented for a Fed chairman. The departing chairman, Mr. Bernanke, has never been employed on Wall Street, spending most of his career at Princeton. But his predecessor, Alan Greenspan, was the president of a consulting firm and worked in investment banking early in his career, and Paul A. Volcker, an earlier chairman, did some work at Chase Manhattan Bank, which is now a part of JPMorgan Chase.
Still, some senators are speaking out against Mr. Summers. They are raising questions about potential conflicts of interest and noting his role in the repeal of the Glass-Steagall law, which limited the sorts of activities banks could undertake, and his opposition to regulating derivatives in the 1990s — decisions that many critics say contributed to the financial crisis.
“I start from a position of being extraordinarily skeptical that Larry Summers is appropriate to chair the Fed,” said Senator Jeff Merkley, a Democrat from Oregon. “I have serious doubts that Mr. Summers, who as a committed deregulator drove policies that set the stage for the Great Recession, is the right person for a key regulatory position.”
Mr. Summers declined to comment. But whatever his views on regulatory policy, those who know and admire Mr. Summers say he arrived at them honestly.
“There has to be a distinction between talking to people, even for payment, and doing what they want you to do,” said Robert Z. Lawrence, a professor who taught a course at Harvard with Mr. Summers this year. “When it comes to Larry Summers, for good or for bad, he’s uncontrollable when it comes to the positions he takes. He doesn’t take them for that reason.”
Wall Street Wealth
Mr. Summers’s wealth comes mainly from two periods of private sector work between government postings. After a lengthy tenure at the Treasury Department in the 1990s, he became the president of Harvard — a job that Robert E. Rubin, who preceded Mr. Summers as Treasury secretary, helped him obtain.
But in 2006, Mr. Summers was forced out of the university presidency for a variety of reasons, including remarks he made questioning why few women engage in advanced scientific and mathematical work. Soon after, a young Harvard alum brought him into the hedge fund world with a part-time posting at D. E. Shaw. That firm, one of the largest in the industry, paid Mr. Summers more than $5 million.
Mr. Summers’s wealth soared from around $400,000 in the mid-1990s to between $7 million and $31 million in 2009, when he joined the Obama administration, according to a financial disclosure he filed at the time. Before returning to government service, he earned $2.7 million from speeches in one year alone.
As for his current work, representatives for Citigroup, Nasdaq and D. E. Shaw declined to disclose his pay. His speaking rates today run into the six figures, according to an associate who spoke on the condition of anonymity, and Mr. Summers has spoken to Wall Street companies like Goldman Sachs, JPMorgan Chase and Citigroup.
The job that is likely to generate the most scrutiny for Mr. Summers is his work with Citigroup, which was rescued from the brink of bankruptcy by the federal government’s bailout. Though he does not have an office there, two people with direct knowledge of the matter said he was a regular consultant. In a statement, Citigroup said he provided “insight on a broad range of topics including the global and domestic economy” to prestigious clients, and attended internal meetings.
Citigroup hired Mr. Summers in part to advise Vikram S. Pandit, who resigned as chief executive last year. With his work there, Mr. Summers followed in the footsteps of his friend, Mr. Rubin, who joined Citigroup after he left the government and earned more than $100 million.
Some of Mr. Summers’s employers used to work with him in government.
“I don’t think of him as an employee, I like to think of him as an adviser,” said Lewis A. Sachs, a former Treasury official who runs a Maryland firm called Alliance Partners that is backed by BlackRock, the asset management firm, and BlueMountain Capital, a hedge fund active in the derivatives market.
Mr. Sachs, a frequent visitor to the White House and Treasury, said Mr. Summers’s financial work would make him a better Fed chairman.
“It will certainly give him a lot of windows into different parts of the financial system, different parts of the economy,” Mr. Sachs said.
Asked why Mr. Summers would not have simply opted out of financial work, given the questions it could raise if he were nominated to lead the Federal Reserve, Mr. Bulow, the Stanford economist, said he thought Mr. Summers’s early experience with cancer (at the age of 28, he was treated for Hodgkin’s disease) had been formative. It shaped him to make decisions based on present options, Mr. Bulow said, rather than worrying about future unknowns, like whether President Obama would choose him for the Fed.
“He doesn’t proceed that way,” Mr. Bulow said. “I think basically, you know, it’s a little bit like Sheryl Sandberg says, ‘Don’t leave before you’re leaving.’ ”
Mr. Summers’s spokeswoman, Kelly Friendly, declined to provide details about his current pay, but said his “broad exposure to different parts of the economy gives him a unique perspective on what makes America work.”
In 2009, Mr. Summers said in an interview with The New York Times that he kept boundaries between his private and public work. “I wanted to be involved as an economist, not as a lobbyist,” he said. “I never wanted to be in a position of taking public policy positions based on anything other than my convictions as an economist or a potential policy maker.”
Close Contacts in Finance
Mr. Summers not only has a variety of professional contacts on Wall Street, he also has many friends there. At D. E. Shaw, for instance, Mr. Summers has worked with Darcy Bradbury, the firm’s head of external affairs, who has known him for more than 30 years, ever since she was a student at Harvard.
Ms. Bradbury, who also worked with Mr. Summers in the Clinton administration, was elected chairwoman of the hedge fund industry’s association shortly after Mr. Summers began his work in the White House in 2009. That group, the Managed Funds Association, has been involved in discussions of industry trading rules as well as pushing for the preservation of a tax loopholes that benefit investment firms.
Trey Beck, a managing director of D. E. Shaw, said in a statement that Ms. Bradbury did not meet with Mr. Summers on behalf of D. E. Shaw or the hedge fund association while he was in the White House. He added that “Darcy’s friendship with Larry had absolutely nothing to do with Darcy becoming M.F.A. chair.”
Richard W. Painter, a former chief ethics lawyer for President George W. Bush, predicted that Mr. Summers’s work in finance would not derail his nomination or confirmation.
“Remember, we had two secretaries of the Treasury, which is a regulatory position, who were chairmen of Goldman Sachs,” said Mr. Painter, who is now a professor at the University of Minnesota. “We did it with Hank Paulson. Clinton did it with Bob Rubin.”
Mr. Painter noted that if Mr. Summers became Fed chairman, he would have to fully divest himself of all interests in the financial companies he works with.
The divestitures, he said, would include even the start-ups, companies that have the potential for Mr. Summers to make sizable future earnings, if they pursue public offerings.
If Mr. Summers goes to the Fed, Mr. Andreessen said, “it would be a reasonable statement that he’s leaving money on the table.”
A Toehold in Silicon Valley
Mr. Summers has also made contacts in Silicon Valley. Ms. Sandberg, chief operating officer of Facebook, best-selling author of “Lean In,” and Mr. Summers’s chief of staff at the Treasury, helped introduce Mr. Summers to Silicon Valley, where he is gaining a good reputation, according to Mr. Andreessen, whose venture capital firm has hired Mr. Summers to give advice to companies like Airbnb and Dwolla, a payments company.
Mr. Summers serves on the board of two start-ups. The chief financial officer of one of the companies, Square, a mobile payments company, described Mr. Summers in a statement as “a really important member of our team.”
The other start-up is Lending Club, which facilitates peer-to-peer loans. Prospective debtors post their personal stories online, asking for money for everything from debt consolidation to in-ground pools to wedding parties. Prospective lenders review the solicitations and offer financing.
“He’s been very high-profile for the company,” said Renaud Laplanche, the company’s chief executive.
When Mr. Summers was considering joining the board, he performed due diligence, calling regulators and other board members, Mr. Laplanche said, adding that “he thought what we were doing was good for the consumer.”
Lending Club falls into a tricky space in financial regulation. The company itself is not regulated as a bank. But it has teamed up with a bank in Utah, one of the states that allows banks to charge high interest rates, and that bank is overseen by state regulators and the Federal Deposit Insurance Corporation.
Consumer advocates said Lending Club was so new that they had not yet seen many examples of its loans and collection practices in action. But Sarah Ludwig, the co-director of the New Economy Project, a nonprofit in New York, expressed concern that the company did not verify all borrowers’ income and employment.
“This should be another red flag,” Ms. Ludwig said of Mr. Summers’s involvement. “What is he doing on the board of this company? What is a potential Fed chairman doing on the board of a company that doesn’t check if people can afford loans?”
Of the loans Lending Club has made in 2013, it did not verify income about half of the time, according to data available on its Web site.
Mr. Laplanche said the company had models that dictated when it scrutinizes income and that the company was verifying income on more loans than it did in the past. He said that many other lenders also did not verify employment history and income. He added that Mr. Summers had pushed for strong consumer protection. “He was the most adamant about making sure we were tracing the loan in such a way that we were making sure the people getting the loan had the ability to repay,” he said.
And he said consumers would not be coming to Lending Club if they thought they could get better rates elsewhere.
But some consumer credit experts said Lending Club’s rates on many loans might be higher than what was available at a credit union or other lenders. Of the loans Lending Club has issued in 2013, 12.9 percent of the loans are charging annual percentage rates of 12.4 percent or lower, but 37 percent of the loans are charging annual percentage rates of 19 percent or more, with some as high as 29 percent.
Mr. Summers has been encouraging Lending Club to spend time in Washington to share its story with regulators and policy makers, said John J. Mack, another company board member who was the chief executive of Morgan Stanley during the financial crisis. “The facts are all over the place, but to me, for it to be growing at the rate it is growing, it is serving a need for small consumers,” Mr. Mack said.
On top of all his other jobs, Mr. Summers has continued economic research. He is currently the co-chairman of a study at the Center for American Progress about stagnating wages for the middle class.
“I definitely don’t think of him as a Wall Street guy,” said Neera Tanden, the center’s president. “He runs in the crowd enough to know they’re not always right.”
She added that since hearing about Mr. Summers’s many paid assignments, she was happy with their arrangement. He works, she said, as a volunteer.
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