Larry Summers’s hedge fund days

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Louise Story has a story in today’s NYT about Larry Summers’s two years at hedge fund giant D.E. Shaw. The topic of what the heck Larry was doing at Shaw came up in this blog not long after he joined. After initially mocking him, I eventually came around to the idea that he might be there for more than just window dressing. By Story’s account there was definitely some window dressing—meetings with clients, speeches, etc.—but also actual investing work.

At Shaw, Mr. Summers, the professor, was often the student. The arrogant personal style that turned off some Harvard colleagues seemed to evaporate, Shaw traders say. Mr. Summers immersed himself in dynamic hedging, Libor rates and other financial arcana. …

“We could call or e-mail him anytime,” a former Shaw trader said. “He always asked me more questions than I could ask him. He would dig through my entire way of thinking.”

Last September, Mr. Summers explained to Shaw traders what appeared to be an aberration in a key interest rate, the London interbank offered rate, or Libor, thus helping its traders avoid losses.

I’m thrilled that the top economic adviser to President Obama knows more about dynamic hedging than he used to. But there are two bits of information in the article that, when put together, kind of bothered me:

1) Summers worked one day a week for D.E. Shaw

2) He made $5.2 million there last year

At the time he went to work at D.E. Shaw, Summers had largely given up on the idea of ever occupying a high-level government post again (too controversial). And he wasn’t doing lobbying work for the firm (he’d be a pretty bad lobbyist). So I don’t think there’s anything directly corrupt about this. But it does demonstrate Wall Street’s potential for corrupting political discourse. There just haven’t been any other parts of our economy (that I know of, at least), where a guy like Larry Summers could make $5.2 million a year for working one day a week. It’s sort of like the way foreign aid sometimes terribly skews economic incentives in really poor countries—because the amounts of money being thrown around by aid agencies dwarf what can be made in the domestic economy.