What Larry Summers Did to Harvard's Finances

Nina Munk’s VF article on Harvard’s endowment isn’t online, but the précis is, and it seems that Larry Summers takes a particular beating, being blamed for $1 billion in losses on interest-rate swaps, as well as for meddling with Harvard Management Company’s investment strategies and ultimately, with Bob Rubin, being responsible for the departure of Jack Meyer. The result?

Munk asked the hedge fund manager to look at Harvard’s finances and assess the extent to which its endowment will be able to keep pace with its immovable costs. The hedge fund manager’s conclusion: “They are completely fucked.”

Is it really as bad as all that? Yes, probably — especially given the way in which both Harvard president Drew Faust and HMC CEO Jane Mendillo seem to be incapable of taking tough decisions. But hey, at least Harvard still has its triple-A credit rating. That must be worth something, right? Er, maybe not:

In December, the university sold $2.5 billion worth of bonds, increasing its total debt to just over $6 billion. Servicing that debt alone will cost Harvard an average of $517 million a year through 2038.

$517 million per year works out at more than $20,000 per student per year. Yikes.

Comments

[Bruce Vande...:]

Forbes magazine, in their March 16, 2009 issue, also had an article on how Larry Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”.

Perhaps the multi-trillion dollar (last figure I saw was $500 T) interest-rate swap market is not as benign as defenders claim. At least tax payers aren't back stopping Harvard.

Jul 03 10:24 AM

[optionsgirl:]

Harvard, like all private colleges and universities in the USA, enjoys tax exempt status. If that isn't back-stopping Harvard, I don't know what is!


On Jul 03 10:24 AM Bruce Vanderveen wrote:

> Forbes magazine, in their March 16, 2009 issue, also had an article
> on how Larry Summers (currently heading the White House’s National
> Economic Council) entered into interest rate swaps at Harvard University
> which “burdened Harvard with a multibillion-dollar bet on interest
> rates that went against it”.
>
> Perhaps the multi-trillion dollar (last figure I saw was $500 T)
> interest-rate swap market is not as benign as defenders claim. At
> least tax payers aren't back stopping Harvard.

Jul 03 10:37 AM

[HBWOW:]

Reading this article now makes sense that Summers would move to
helping government like a lot of the new Obama team's talent.

Jul 03 10:39 AM

[Henry Buttal:]

Having not read the VF article, I can't comment directly. However, if you are selling that volume of bonds, it would seem to be reasonable to use interest swaps. Also, that doesn't seem to be an excessive amount of debt given the school and endowments capital structure.

Finally, no discussion of Harvard's recent problems would be complete without commenting on Mohamed A El-Erian's period of time there. Is he also a victim? It seems unlikely given he departed after Summers. Obviously he would be considered a competent judge of the bond market.

While none of this would excuse Summers meddling, expecially since he was not actually head of the investment company, it would seem to indicate there were a number of cooks in this tasteless outcome.

Jul 03 12:15 PM