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Harvard Quant Claims Dismissal Caused by Blowing Whistle on Derivatives

A mathematics whiz serving with Harvard’s financial management arm claims she was dismissed back in 2002, for trying to alert Harvard’s leadership about the university’s risky strategy in trading in exotic financial instruments. Iris Mack, whom Science Careers profiled in 2004 after she left Harvard, is the subject of a story appearing Tuesday in Harvard’s Crimson newspaper.

Mack, who earned a Ph.D. in mathematics from Harvard in 1986, joined Harvard Management Company (HMC), the division of Harvard University that manages its endowment, in 2002. Before then she worked as an investment analyst for Banque BNP Paribas in London, in the United Kingdom, and Enron Corp. in Houston, Texas. According to the Crimson, on 30 May 2002 Mack sent an e-mail to the chief of staff in the office of Harvard’s president, at the time Lawrence Summers, warning about HMC’s use of exotic financial instruments like derivatives, a practice she called “frightening”. She also criticized HMC’s lack of a portfolio management system, its high staff turnover rate, and lack of productivity among its managers.

Mack told the Crimson  she was assured by Summers’s chief of staff that her e-mail would remain confidential, but on 1 July, she was called into the office of HMC’s chief Jack Meyer and confronted with the e-mail message. The next day, says Mack, she was fired. Mack later took legal action and all parties agreed to an out-of-court settlement. Lawrence Summers has since become a chief economic adviser to President Obama.

HMC’s ability to manage Harvard’s endowment is a hot topic on the Harvard campus because of the recent large drop in the endowment’s value, a condition faced by many American colleges and universities as a result of the slumping stock market. Since July 2008, the value of Harvard’s endowment has dropped 22%, with a 30% decline expected for the entire year. The Crimson says HMC enjoyed double-digit returns in the years leading up to 2008, but since then the use of derivatives seems to have dearly cost the university. The Crimson, using a report from the rating agency Standard and Poors, says the value of one type of derivative alone–interest-rate swaps–used by HMC would have cost the university some $571 million to terminate as of October 2008.

Recent stories in the media have tried to pin the current banking and investment troubles on the quants, as the mathematics experts who devise the complex models used in finance are called. Mack’s story suggests that Wall Street’s management should at least share that responsibility.

Mack told the Crimson, “I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.”
 
Science Careers’s writer Clinton Parks caught up with Mack in August 2004, after she had left Harvard and started her own company, called Phat Math, and written a book that combines entertainment with education to teach about mathematics and finance. Mack’s background includes not only the Ph.D. from Harvard, but an MBA from the London Business School. In addition, she was a semifinalist to become an astronaut for NASA.

Science Careers has also written about employment opportunities for science, engineering, and mathematics graduates in the world of finance as recently as November 2008, when the current economic slump had begun to accelerate.

Hat tip: TalkingPointsMemo.com