What Do They Know That We Don't?
Even as he talks up the stock market, a Daily Beast exclusive shows the president's top economic advisor trounced the indexes (and Tim Geithner) by putting most of his millions into municipal bonds.
Lawrence Summers’ bullish economic sentiments helped send markets soaring at the end of last week. But even after assuming his role as the president’s top economic adviser in January, Summers seemed far more skeptical that the markets would recover any time soon, as evidenced by the only metric that really counts—his own personal cash. Specifically, in 2008 through early 2009, Summers stashed most of his liquid assets in tax-free municipal bonds—between $5 million and $25 million worth—leaving himself relatively little exposure to the stock market, a Daily Beast analysis of his recently released financial-disclosure report reveals.
Geithner’s investing style is plain-vanilla, straight out of every personal-finance book and magazine ever created: diversify, diversify, diversify. And TARP conspiracy theorists, take note: He has his savings and checking accounts at Citibank.
More than merely saving himself hundreds of thousands of dollars, Summers’ surprisingly bearish maneuvers also gave him bragging rights over his economic co-architect, Treasury Secretary Timothy Geithner. Given President Obama’s declaration that he was assembling “ the best minds in America” upon announcing that Summers and Geithner would head his economic team, The Daily Beast checked that thesis by comparing both men’s personal portfolios for 2008 to see if they were indeed any better with their money than the average American—or each other. Summers’ multimillion-dollar portfolio finished down about 7.5 percent, based on our calculation, compared with an 18.6 percent loss for the more conventional Geithner.
This exercise required some assumptions. Because federal disclosure forms only classify assets in ranges (“$50,000 - $100,000,” etc.), we used the logical midpoint value of each holding. We assumed that any asset held at the end of 2008 had been held the entire year. And while there’s no way to know how many investing decisions were actively theirs, versus recommendations from advisers, spouses, or friends, we took as a given that the folks figuring out how to save the American economy were up to the challenge of allocating their own loot.
Some overall observations: As expected for guys aware that nosy reporters might soon be snooping around their portfolios for conflicts of interest, the pair eschewed individual stocks. Summers had none, while Geithner’s sole holding seemed to be, oddly, a few dozen shares of IBM. Also, Geithner, likely mindful of his role heading the Federal Reserve Bank of New York, completely avoided investing in hedge funds or private-equity funds. Summers, meanwhile, dabbled in both (including his seven-figure windfall from D.E. Shaw, where he was a one-day-a-week managing director), as well as funneling money into a credit-card start-up spearheaded by AOL founder Steve Case.
So overall numbers aside, how did the pair fare? Let’s start with Geithner. Having spent his career in the public sector, the secretary’s stake is a relatively modest (compared with Summers) $655,000, the vast majority of it in retirement accounts, with IRAs spread across eight funds, and 401(k)s spread across four. For his all his unconventional proposals to prop up the U.S. economy, Geithner’s investing style is plain-vanilla, straight out of every personal-finance book and magazine ever created: diversify, diversify, diversify. Geithner owns domestic stock funds, international stock funds, bond funds, junk-bond funds, government bond funds, with especially heavy emphasis on index funds designed to match their respective markets rather than beat them. (And TARP conspiracy theorists, take note: He has his savings and checking accounts at Citibank.)
By design, diversification protects an investor if one type of investment—say, stocks in 2008—falls off a cliff. Accordingly, while the S&P dropped 38.5 percent in 2008 and the Dow Jones Industrial Average dropped 33.8 percent, Geinther “only” lost $122,000, or 18.6 percent of his savings. Pitiful, but less pitiful than a lot of us.
Summers, meanwhile, has the investment holdings of a wealthy man: Hedge funds, real-estate-specific private-equity funds, venture-capital investments, as well as holdings in more than 50 mutual funds. But his largest holding, by far, is more fit for a snow-haired grandmother: that tax-free government-bond fund, run by Bank of America’s Columbia Funds unit (somewhere in the $5 million to $25 million range, compared with about $3.1 million for his 50 other stock and bond funds combined).
While there’s no way to measure Summers’ return from the hedge funds, private equity, and venture capital, from that $3.1 million in stocks and bonds, Summers lost about $698,000, or 22.4 percent, in 2008. But his huge municipal-bond stake—the economist version of putting cash into a mattress—returned a positive 1.76 percent.
The federal financial-disclosure forms suggest that much of this investment in government bonds likely came recently, perhaps including proceeds from his much-discussed $5.2 million D.E. Shaw windfall—interesting given his publicly bullish outlook. For purposes of our 2008 comparisons, if he had held even the lowest number of the range, $5 million, throughout last year, his overall portfolio performance would have been a negative 7.5 percent—highly impressive (sadly) for 2008, and a hell of a lot better than his colleague, Geithner.
There’s comfort in the fact that both of these men proved better investors than most last year. For 2009, however, they have a lot more active influence in market performance—hopefully, for all our sakes, Summers is putting his own money where his mouth is, and trading his municipal bonds for stocks.
Kara Cutruzzula contributed reporting to this article.
Randall Lane is the former editor in chief of Trader Monthly, Dealmaker and P.O.V. Magazines, and the former Washington bureau chief of Forbes.