Harvard Swaps Are So Toxic Even Summers Won’t Explain

[marmar]

Harvard Swaps Are So Toxic Even Summers Won’t Explain (Update2)
By Michael McDonald, John Lauerman and Gillian Wee


Dec. 18 (Bloomberg) -- Anne Phillips Ogilby, a bond attorney at one of Boston’s oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away.

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school suspended work on the building last week.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

Worst Time

Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers because of the size of its bet and the length of time before all its bonds would be sold. ............(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=aHQ2Xh55jI.Q

[DeSwiss]

1. Lawrence Summers, wrong for Harvard.....

...wrong for everyone. Especially the United States government.

- We're not even sure if his mother likes him.

K&R

[SOCALS]

2. I don't understand why

Harvard engaged in these financial speculations in the first place. Their fund managers got multimillion dollar payments when times were good, but they will not be the ones who pay the price when the whole thing collapsed

[Romulox]

4. The entire purpose of Harvard is to propogate the culture of the ruling class, that's why. nt

[JVS]

5. Yes, but they do fund some good scholarship as a fig leaf.

[Romulox]

7. In *some* areas. In others (e.g. law), Harvard has an outsized influence despite the absence

of any objective "scholarship" to back it up.

[JVS]

8. That's true. Of course, professional schools are really not designed to produce scholarship.

[Romulox]

10. Harvard Law's primary influence is NOT as a "professional school". nt

[Duppers]

14. really

so no good research comes out of there, uh?

[DeSwiss]

11. Because Summers would brook no denial....

...and no one questioned him, because he was the "smart guy" and so everyone shut-up and listened to him. On pain of termination, or being sent to hell (e.g.- Cornel West to Princeton), whichever was easiest at the time.

- He's a real asshole, is the short answer.

Harvard ignored warnings about investments
Advisers told Summers, others not to put so much cash in market; losses hit $1.8b

By Beth Healy
Globe Staff / November 29, 2009

It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing - or mismanaging - its basic operating funds. Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk. But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.

So how did one of the world’s great universities err so badly in something so basic? It is a story with many actors, the story of an institution that grew complacent as its endowment soared ever higher - an institution that, when the crunch hit, was operating on financial auto-pilot, with many key players gone, and those remaining inattentive, in retrospect, to the risks ahead. “Investing cash alongside the endowment was a long-held strategy that we didn’t decide to change until early 2008,’’ said James F. Rothenberg, Harvard’s treasurer - a part-time, unpaid role. He said the biggest mistake was not to have taken some of the cash off the table, and placed it in safer accounts, as trouble started brewing in the markets and the economy. “We all can look back now and say we wish we did something different,’’ he said.

In the Summers years, from 2001 to 2006, nothing was on auto-pilot. He was the unquestioned commander, a dominating personality with the talent to move a balkanized institution like Harvard, but also a man unafflicted, former colleagues say, with self-doubt in matters of finance. Certainly, when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say. The cash account grew to $5.1 billion during his tenure, more than the entire endowment of all but a dozen or so colleges and universities.

http://www.boston.com/news/local/massachusetts/articles/2009/11/29/harvard_ignored_warnings_about_investments/?page=full">more

[MUAD_DIB]

13. I believe that the phenomenon is known as GREED.

[EFerrari]

9. And this incompetent sob chased Cornel West out of Harvard.

Make that sexist incompetent sob.

[DeSwiss]

12. Yeah but Cornel got the last laugh.....

...because he forgave him!

"But I do forgive Larry Summers for this reason: that I think we all ought to have joy in life, and you can only have joy when you overcome arrogance and open to your own ignorance, because you end up being smart and brainy, but suffering from spiritual malnutrition, emptiness of soul, you see." ~ http://www.huffingtonpost.com/2009/10/03/cornel-west-interview-don_n_308746.html">Dr. Cornel West, Princeton University

[Liberal_in_LA]

16. lol n.t

[Romulox]

3. Going to prove that America is about the furthest thing from a meritocracy

Massive mediocrities like George W. Bush and Larry Summers run this country, hence we are a mediocre country...

[JVS]

6. Meritocracy is an invention of the bourgeoisie to cover for the fact that they...

are not descended from nobility.

[Hannah Bell]

15. a lot of them are, though; e.g. bush & most presidents.

[Greyhound]

17. K&R.

What are they thinking in DC???

An entire class of idiots failing their way to the top so we can pay for them.
:grr:

[AngryAmish]

18. What a collection of assholes -- our country is in the best of hands

We are so fucked.

We are so fucked.

We are so fucked.