Harvard’s Bet on Interest Rate Rise Cost $500 Million to Exit

[divideandconquer]

Harvard’s Bet on Interest Rate Rise Cost $500 Million to Exit

By John Lauerman and Michael McDonald

Oct. 17 (Bloomberg) -- Harvard University’s failed bet that interest rates would rise cost the world’s richest school at least $500 million in payments to escape derivatives that backfired.

Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the school’s annual report said. The university in Cambridge, Massachusetts, said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.

The transactions began losing value last year as central banks slashed benchmark lending rates, forcing the university to post collateral with lenders, said Daniel Shore, Harvard’s chief financial officer. Some agreements require that the parties post collateral if there are significant changes in interest rates.

“When we went into the fall, we had some serious liquidity management issues we were dealing with and the collateral postings on the swaps was one,” Shore said in an interview yesterday. “In evaluating our liquidity position, we wanted to get some stability and some safety.”

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<http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHou7iMlBMN8>

And these are the people that train the people running our economy?

[Orwellian_Ghost]

1. K&R

[frazzled]

2. And that is why they had to cancel the cookies at faculty meetings

Honest to gawd, they did that, as part of cost-cutting measures to make up for this, and for the horrendous dwindling of their endowment to a measly $12 Billion.

The first Faculty meeting of the year kicked off without a regular staple: cookies to complement professors’ tea and coffee.

“This is the first time in modern times with no cookies,” Faculty Council member Harry R. Lewis ’68 said as he held a white mug of tea. “We are sharing the pain with the undergraduates.”

“As part of our cost-cutting efforts, we’re doing our little part here in our Faculty meetings, saving about $500 per meeting for cookies and coffee,” Faculty of Arts and Sciences Dean Michael D. Smith explained during the meeting.

http://www.thecrimson.com/article.aspx?ref=529394

[girl gone mad]

4. They were spending $500 per meeting on cookies and coffee?

What, was Starbucks catering? And they think "sharing the pain" means reducing the snack budget?

These people are so out of touch with reality. It's a wonder their MBA grads didn't destroy the economy even sooner.

[MannyGoldstein]

3. More Financial Wizardry From Larry Summers

I'm so glad he's now in charge of the entire country's financial health, not just Harvard's!