How Harvard Nearly Went Bankrupt After A Rogue Interest Rate Swap Went Very Sour

Zero Hedge ^ | 10/16/09 | Tyler Durden

[TigerLikesRooster]

How Harvard Nearly Went Bankrupt After A Rogue Interest Rate Swap Went Very Sour

Submitted by Tyler Durden on 10/16/2009 17:45 -0500

The school that epitomizes the dangers of groupthink (especially by very intelligent people) and tends to get caught in both the virtues and vices of its own ingeniosity, saw just how expensive hubris can be in 2009. Harvard's endowment dropped 27.3% in 2009 to $27 after hitting roughly $10 billion higher the year before.

/snip

Yet most notable in the entire report is an interesting story for all those who claim that representing the $200 or so trillion in interest rate swaps on the books of the Big 5 banks is completely irrelevant as the net exposure is just a couple trill here and there. Yeah, that's what Harvard thought too until it had to eat a 45% loss on $1.1 billion in IR swaps. And nearly go tits up in the process.

/snip

This is what Daniel Shore, Harvard CFO had to say about this near death experience:

“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. In evaluating our liquidity position, we wanted to get some stability and some safety.”

Funny how Harvard, one can argue, was in a comparable situation to none other than Lehman itself. Had Harvard's instantaneous liquidity situation gotten even worse, it would probably have spelled doom for the university Larry Summers, in his inimitable wit and wisdom, used to preside over.

[TigerLikesRooster]

Hmm... if Harvard had gone under, it would have been on the top of the list to get bailout money from government, and Tea Party folks were bitching about Harvard.

[TigerLikesRooster]

Ping!

[bmwcyle]

What happened to the 10 million dollar fund that they don’t touch?

[krb]

Can’t help but think of all the liberal alumni who are giving thousands of dollars a year back to the school all scratching their collective head, all realizing that their real contribution is dwarfed (and negated) by the silly money games people play on Wall St.

[IrishCatholic]

I just like the term “group think” I think it succinctly nails liberalism among the elites.

[FormerACLUmember]

“Nearly Went Bankrupt” is so very, very tantalizing.

It would have been sweet indeed if the headquarters of democrat party corrupt elitism went under.

[Vn_survivor_67-68]

is Pug still wheeling and dealing Harvard?
http://www.google.com/search?q=Pug+harvard+enron&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

[dennisw]

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

Oct. 17 — 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.

[2 Kool 2 Be 4-Gotten]

It’s a good point - but if those contributions end up getting junior into Harvard - then it could be argued that the “benefactor” is still happy with the net result.

[dennisw]

Another source of Harvard’s woes is they went on a real estate binge just like many “commoner” type Americans. Harvard was building and buying at breakneck speed. They have left a one quarter complected arts&sciences building. It is a pit... a foundation with a lot of concrete poured

[TigerLikesRooster]

agreed to pay $425 million over 30 to 40 years

I fear future Harvard students will be shivering, attending their class in a classroom heated by a lone charcoal stove.:-)

[Daisyjane69]

Hmmmm....let me just think about this for a minute....

HARVARD GOING BANKRUPT....

I must have been dreaming because I had a grin on my face.

[krb]

Great point. I guess building the “legacy” is what it’s really about.

[oldironsides]

Harvard gave us this president. Paybacks are hell

[TigerLikesRooster]

The benefactor must have had a near heart attack when he learned that his junior may not have a college to graduate from, thanks to a wild derivative bet gone south.:-)

[dennisw]

The comments at zero hedge are witty

[HangnJudge]

From Zero Hedge

[TexasFreeper2009]

Anyone who still believes Harvard has anyone smart still attending it needs to get their head examined.

When you admit people based on skin color and not excellence, this is what happens.

[dennisw]

Even with these losses Harvard endowment has done better that others. btw... You sliced that out of the pdf....well done

Yale endowment sank even more...so they say

[NativeNewYorker]

The blunder was made on the watch of LARRY SUMMERS, who now is advising the Messiah (PBUH) on how to destroy what’s left of our economy.