Shots In The Dark: Larry Summers' Severance

Wednesday, May 16, 2024

Larry Summers' Severance

A poster below suggests that, in its piece on Larry Summers' severance package, the Crimson was implicitly criticizing me for something I wrote in Boston Magazine—I quoted an anonymous source saying that Larry Summers' severance was going to be "breathtaking."

Here's what the Crimson said:

(Sorry, the Crimson's site appears to be down. Maybe later.)

Here's what the M-Bomb wrote in the Globe today (bold mine):

The former Harvard University president, Lawrence H. Summers, received a severance package that could be worth up to $2 million or more, including a $1 million home loan, according to the university's annual Internal Revenue Service filing.

...His severance package includes a year's sabbatical, which presumably would be paid at his presidential salary; "less than one year's salary" in future pay supplements; and the home loan, according to the filing. Summers was also appointed as a university professor at Harvard, the highest rank.

And just for the record, here's what I wrote about Summers' severance deal in 02138 back in September 2006:

Summers would stay until July, after which he would receive a seven-figure severance package, take a year's sabbatical, and return to Harvard as a University Professor.... The value of Summers' severance is said to be in the area of $2 million, which includes continued presidential salary, travel and entertainment expenses, rent for an apartment Summers keeps in Washington, and a small loan towards the purchase of a house.

Yup, yup, yup and yup.

Incidentally, I also reported something that both the Crimson and the Globe ignored....

Finally, [Summers] extracted a promise that his speech at Commencement would be mailed to all Harvard alumni....

Some of you will remember receiving from Harvard in the mail a small pamphlet of Larry Summers' collected works, sent by Jack Reardon of HAA, a month or so after I wrote those words.

I did make one mistake: the loan Summers received, $1 million with no payments until 2010 and then interest-only payments until 2014, is clearly not small. A well-invested one million dollars could easily double between 2006 and 2014, so this is a pretty substantial payoff—it is, conservatively, a million-dollar gift.

(If you're interested, I had been told that the loan was substantial, but couldn't confirm that through real estate records in time for publication; there was on file, however, paperwork showing that Summers had received what is apparently a different loan in the amount of, I believe, $40,000.)

If one were a stickler about such things, one could say that both newspapers should have given 02138 credit for breaking details of Summers' severance.

In any case...is the amount breathtaking?

Well, maybe I'm old-fashioned, but it is to me. Who wouldn't love to get fired from a job—especially at a non-profit—because of failure to perform it well and get a payoff worth, conservatively, $2 million?

¶ 11:35 AM

Comments:

RB: "I did make one mistake: the loan Summers received, $1 million with no payments and interest-free until 2014..."

MB: "According to the filing, Summers's loan, made June 6, 2006, requires interest-only payments between 2010 and 2014. After August 2014, it will require payments of both principal and interest."

Make that two mistakes.

# posted by Warren Goldfarb : May 16, 2024 12:22 PM

Fixed now. The language is still vague, though—does it mean that Summers doesn't have to make any payments at all until 2010? Sounds like that.

# posted by Richard Bradley : May 16, 2024 12:30 PM

Hmmm...The Crimson's take on this seems pretty neutral to me...It depends whether you think $1m loan plus the bonus described is "breathtaking." I do. Harvard's a non-profit, after all....

# posted by Anonymous : May 16, 2024 12:34 PM

A fine post, but I have to quibble with this statement: "A well-invested one million dollars could easily double between 2006 and 2014, so this is a pretty substantial payoff—it is, conservatively, a million-dollar gift."

The last part of that statement -- that this is a substantial payoff -- is without a doubt true (I would love to be paid a million dollars for leaving a job) but the first part is extremely misleading. Yes, a well invested one million dollars could double over 8 years, but it could also double if you hit the trifecta at the horse track, which is about the same thing. Poorly invested, it could also disappear, which is equally likeley.

But in any case, let's do the math: A one million investment would have to return about 10% a year to get to two million. After fees and taxes, that's more like 12-14%. The historic average annual returns of the S&P; 500 is about 11%, meaning you would have to beat the S&P; by 3% over an 8 year period, something that is extremely difficult -- virtually impossible in fact -- to do.

In any case, the standard prediction for the equity risk premium for the next 10 years is 2.5% right now, meaning that predicted annual returns over the next ten years will be 7.5%, well below what you would need to double your money.

In other words, chances are "well investing" the money -- whatever that means -- won't double it. Luck would, and luck makes it equally likely LS would lose his money.

# posted by Anonymous : May 16, 2024 12:34 PM

the globe's guess-timate that summers' package is worth >$2m seems absurd to me.

remember, summers was a tenured member of the ec. dep't. he would've been making at least $200k from that post. so if marcella is right that his salary for fy'07 was $580k (she says it "presumably" was), then his severance for fy'07 was really $380k. (he would've been eligible for a sabbatical at that time anyway, right?) add to that the up-to-$580k that he gets in supplements and we're at $960k, still short of seven-figures. the loan, it seems from both stories, is pretty standard from profs, but even if you count the four years' deferred interest as a payment, at 8.25% prime, then that's $370k for a total of $1.330m (is my math right?) so richard, you stand by $2 million?

# posted by Anonymous : May 16, 2024 12:39 PM

Well, yes. Unless, of course, you have access to a hedge fund, where returns are frequently higher....

And yes, I agree the Crimson's take is pretty neutral—it mentions its own reporting on the severance as "huge," so I think that's actually pretty good and fair journalism.

# posted by Richard Bradley : May 16, 2024 12:39 PM

I have to imagine there's some formula for determining the value of a loan. Any economists (or the commenter above) know anything about that?

# posted by Mass Ave : May 16, 2024 12:40 PM

Not sure I get your math, 12:39. Summers' salaryw as what he was being paid as president—whatever Marcella said it was.

In fact, I don't think he was a tenured member of the econ dep't—he had to resign the position after he decided to stay in Washington. Maybe they gave it back to him when he returned, I don't know. In any case, it's not where his salary came from.

# posted by Richard Bradley : May 16, 2024 12:42 PM

Let's not forget, by the way, the 300k or so salary he gets for being a University Professor, a job in which one does not actually have to do anything. There is no teaching requirement.

# posted by Richard Bradley : May 16, 2024 12:43 PM

Actually, the average hedge fund is now underperforming the S&P; 500.

And $1 million is a lot of money, but not enough for entry into the really good hedge funds, which usually require at least $25 million.

# posted by Anonymous : May 16, 2024 12:45 PM

I was actually UNDERwhelmed. As the Crimson points out such mortgages via Harvard are fairly common and something they do simply because they know tenured professors won't default. I thought Summers would have done a lot better than this package.

# posted by Anonymous : May 16, 2024 12:47 PM

And University Professors have to be paid more than any other (non University Professor) professor at Harvard, which is obviously why he negotiated for that. So redo the math. 12:39.

# posted by Anonymous : May 16, 2024 12:47 PM

I gather housing loans, especially double mortgages, are fairly common for some Harvard faculty to negotiate (and might be for other faculty in areas with tight housing, e.g. MIT), but are such loans "standard"?! (If so, "ouch" for me who got nothing like this at another Ivy.)

In awe at the package and at poster (12:47), who is in a position to underwhelmed.

--Clearly living in a different universe

# posted by Anonymous : May 16, 2024 1:51 PM

Richard, your economic logic is appaling. Whether the severance package was too much or too little can only be determined relative to a counterfactual.

Was is the cost of Harvard of having an ineffective President?

By many standards the package in question was quite reasonable, and a net positive for Harvard. Nothing to be concerned about here.

To put this in perspective. Imagine a managing director of the endowment fund that is losing money. And imagine they have a contract where anything less than an amicable termination could potentially be damaging to Harvard's reputation. Would a package that caused that manager to leave peacefully, and allow the University to replace him with someone that obtained higher returns for the endowment, worth it? You bet. Worth millions.

Larry's severance was very modest and reasonable. He obviously negotiated in good faith and with full intent to show loyalty and appreciation to Harvard.

# posted by Anonymous : May 16, 2024 2:06 PM

*My* logic is appalling? You do realize that the scenario you've just spun out actually creates an economic incentive for bad performance? The worse you do, the more the university is willing to pay to get rid of you.....

# posted by Richard Bradley : May 16, 2024 2:08 PM

Have you noted that, since leaving the Presidency, Larry Summers has been largely silent about Harvard matters?

You have to assume that a former President has information about the institution and many of his now colleagues which could be quite damaging if used inappropriately.

He has acted as expected in these cases, as a gentleman, and the University treated him also with grace. This is the way these things should be done.

# posted by Anonymous : May 16, 2024 2:09 PM

Yes, you are right, of course. It would be best if Presidents had the skills to be effective. But the responsibility for this falls largely on those who hire them.

# posted by Anonymous : May 16, 2024 2:10 PM

Richard, to assess economic transactions you need a clear point of view --whether issuing a mortage on a home is a reasonable decision depends in part on whether you are the bank, and on whether you are the customer.

From Larry's point of view it is pretty clear that his service to Harvard was an extension of his public service. Both 'cost' him money. His appointment in the hedge fund is indicative of what his true earning power is. The years he spent in service were a net loss to him.

If he were fully rationla he probably should have reverted the order in which he chose to pursue these avocations --make money first and do public service later. Which shows that he is at heart a pretty decent guy even if he is not very likable.

# posted by Anonymous : May 16, 2024 2:15 PM

My two cents, not worth anything more than that:

I agree with 2:06 and 2:15 but not necessarily with 2:09.

LS has indeed been a public servant, and rarely such a villain as a cherry-picking of his life story (or, perhaps, yours or mine) might allow him to be portrayed.

This severance seems just a step above peanuts to me -- which actually suggests that Summers traded a good bit of cash on the barrel for that University Professorship. Proving that what he values most is his affiliation with the university and the freedom to do his own work (esp. consulting?).

All speculation.

SE

# posted by Standing Eagle : May 16, 2024 3:04 PM

This was not a severance agreement in the usual sense of the word. Summers's contract with Harvard as president was up after five years, wasn't it? If so, Harvard was not in breach of contract by failing to renew his contract. So any money paid him was purely hush money. I am not sure which is more distasteful: The university using charitable donations for that purpose or Summers accepting them. But the only justification for saying these payments are either reasonable or unreasonable is that this is just the way business is done, not that Harvard owed Summers anything beyond his faculty salary.

# posted by Anonymous : May 16, 2024 3:09 PM

Richard, I think it's time to leave Larry Summers alone. He is no longer the President, there is no reason to be obsessed with him. If he speaks on matters related to the University, beyond what is reasonable for a regular member of the faculty, perhaps he should be news or object of scrutiny. But beyond that let's turn the page on the Presidency --except for historians or others who have a scholarly interest in a post mortem of what went on at Harvard.

The focus of this blog is mostly on current affairs, not on history, so in that sense Summers should not be so central to what is discussed here.

Personally I speculate that he would have been a better Harvard President had he waited to do this in his mid fifties. His personal life would have been well settled there, the challenges of physical separation from his children would be less difficult as they would be older. It is really unfortunate that he did not spend some time in Wall Street, let them get the worst of his temper and personality, and move to public service a more mature and balanced human being.

Perhaps others might learn from his experience.

# posted by Anonymous : May 16, 2024 7:39 PM

Hey 7.39, are you implying that Hillary will be a better president than Bill?

# posted by Anonymous : May 16, 2024 7:47 PM

You bet I believe Hillary Clinton will be a better President than Bill Clinton, if she is elected...

but not just because she will be older and more mature when President, also because she is smarter, has learned from his --and her-- experience, and has higher ethical standards than he does.

keep in mind, however, that she has been in politics all her life, just not taking the credit for a good chunk of it.

# posted by Anonymous : May 16, 2024 7:49 PM

she also has to deal with the emotional wounds of a bad spouse, something Bill did not have to endure.

# posted by Anonymous : May 16, 2024 7:51 PM

Higher ethical standards than Bill Clinton? Talking about setting a low bar... And I'm not even sure she can clear it.

# posted by Anonymous : May 16, 2024 11:03 PM

Bradley,

As you can read in the Crimson Harvard continues to have the higher yield rate of all colleges, including Yale. I hope you can take this well.

See this paper below also, confirming the same fact:

http://post.economics.harvard.edu/faculty/hoxby/papers/revealedprefranking.pdf

Perhaps high school students don't read this blog.

# posted by Anonymous : May 17, 2024 6:44 AM

Richard,

The turtles are taking over. They even have Congress on their side now. See below:

http://www.npr.org/templates/story/story.php?storyId=10219485

# posted by Anonymous : May 17, 2024 11:31 AM

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