As Harvard President, Top Obama Economics Advisor Larry Summers Approved University Derivatives Purchases That Caused A Billion Dollar Loss For Harvard
gerry
billion in interest-rate swap derivatives while President of Harvard
University, derivatives that were time bombs. These derivatives had
lost almost all their value before Harvard cashed out, a financial
wipeout for the “Harvards.” The minutes of the Harvard board meeting
where Summers heard newly hired endowment chief Mohamed El-Erian
pitch the derivatives should make interesting reading for Harvard
alumni, as the school expects them to come to the rescue for this
investment debacle, the worst single loss in Harvard’s long history.
Larry Summers' approval of the Harvard billion dollar plus gamble on
interest-rate swap derivatives, an almost total loss for Harvard,
shows him to be a self-serving incompetent more interested in helping
out his Wall Street friends market toxic derivatives than anything
else. Within 18 months, Harvard lost over a billion dollars buying
derivatives it did not need and should not have bought. Apparently,
no one at Harvard’s board ever learned anything from taking Economics
101. A fiduciary should not recklessly spend money held in trust.
One big question is why Harvard would even elect to go into this
derivative transaction as the counterparty payer. The deal El-Erian
sold to Harvard was bereft of any “escape hatches,” any stoploss
limitations if the LIBOR rate plunged. Another question is why
Harvard even had to get so much credit “insurance” for building loans
not yet made. At most, if Harvard did not want to self finance the
construction, the school needed $250 million in derivatives.
The answer may lie with Pimco, if that company bought up Harvard
counterparty receiver derivatives from the financial firms that
originally held the Harvard paper. After Harvard fired Mohamed El-
Erian, Pimco hired him as their CEO. Whoever held these Harvard
derivatives as receiver made a billion dollar profit when Harvard paid
to bail out of its foray into the derivative death zone.
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Harvard’s Bet on Interest Rate Rise Cost $500 Million to Exit
By John Lauerman and Michael McDonald
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHou7iMlBMN8
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.”
Harvard sold $2.5 billion in bonds in the fiscal year, in part to pay
for the swap exit, even as the school’s endowment recorded its biggest
loss in 40 years, the report released yesterday said. This is the
first time the university has detailed the cost of exiting its swaps.
Further Pressure
“Substantial losses” in Harvard’s General Operating Account, a pool of
cash from which bills are paid, further put pressure on the school,
the report said. The net asset value of the account fell to $3.7
billion from $6.6 billion during the fiscal year, according to the
report.
Harvard has typically invested a large portion of this operating
account alongside the endowment, generating “significant positive
investment results,” the report said. This year, the endowment’s
losses hurt Harvard’s cash, according to the report.
Swaps are a type of derivative where two parties agree to exchange
payments tied to a financing, typically receiving a variable-rate for
a fixed-rate payment. The terminated contracts include three tied to
$431.7 million of bonds the university sold in 2005 and 2007, the
annual report said.
Unwinding Swaps
From New York to San Francisco Bay, tax-exempt issuers have paid
hundreds of millions of dollars to unwind bond-and-swap transactions
officials initially said would cut borrowing costs. The deals fell
apart when municipal-bond insurers, who backed much of the underlying
debt, lost their AAA ratings in 2008 and interest rates, instead of
climbing, plunged to record lows in the worst credit crisis since the
Great Depression.
The swaps are often pegged to Securities Industry and Financial
Markets Association lending benchmarks or the three- month dollar
London-Interbank Offered Rate, known as Libor. Libor closed yesterday
at 0.28 percent, from a 10-year high of 6.89 percent on June 1, 2000.
Yale University in New Haven, Connecticut; Georgetown University in
Washington and Rockefeller University in New York have reported losses
related to interest-rate swaps, in some cases prompting the schools to
pay termination fees to end the contracts.
Lawrence Summers
The annual report provides new details on Harvard’s derivative-related
losses. Many were entered into in 2004, said Harvard spokeswoman
Christine Heenan. Lawrence Summers, director of President Barack
Obama’s National Economic Council, was the university’s president at
the time. White House spokesman Matthew Vogel declined to comment.
Harvard Management Co., which administers the endowment, has been run
since July 2008 by Jane Mendillo, former chief investment officer of
nearby Wellesley College. She took over from Mohamed El-Erian, now
chief executive officer of Pacific Investment Management Co., which
oversees the world’s largest bond fund from Newport Beach, California.
He succeeded Jack Meyer, who ran it for 15 years, in February 2006.
Harvard’s loss “says that people don’t understand the complexity of
the products they are buying and selling and that doesn’t begin and
end with mortgage securities,” said Robert Doty, a municipal finance
adviser at American Governmental Services in Sacramento, California.
“It shows that with these products that are so highly complex, people
are a long way from knowing as much about these products as they think
they do,” he said.
Financing Construction
The Harvard swaps involved bonds sold to finance a medical research
building, graduate housing, parking and a Center for Government and
International Studies, according to reports from Moody’s Investors
Service. They were also used to lock in rates for future bond sales
for an expansion of the campus across the Charles River in Boston that
has since been scaled back.
Harvard had 19 swap contracts with New York-based Goldman Sachs;
JPMorgan Chase & Co.; Morgan Stanley; Charlotte, North Carolina-based
Bank of America Corp. and other large banks, according to a bond-
ratings report by Standard & Poor’s released on Jan. 18, 2008.
Harvard paid “a large termination fee, but within the range that we’ve
heard about over the last year,” Matt Fabian, the senior analyst and
managing director of Municipal Market Advisors in Westport,
Connecticut, said in an e-mail. “There is a reason why, regardless of
the issuer’s sophistication, there should be limits to their exposure
to derivatives and variable rate bonds.”
Harvard has frozen employee salaries, slowed hiring, cut staff and
offered other workers early retirement as part of a cost-cutting
program to compensate for losses in its endowment. The fund, which
dropped to $26 billion in value over the fiscal year from $36.9
billion, paid 38 percent of the school’s bills during that time, the
report said.
Alumni Request
The Faculty of Arts and Sciences, Harvard’s biggest unit, which
includes its undergraduate school, is asking alumni and donors for
more funds that can be used immediately and without restrictions to
help close a projected $110-million deficit in its 2011 budget, Dean
Michael Smith said in a recent speech. Current-use gifts rose 23
percent to $291 million from $237 million in fiscal 2008, the report
said.
Harvard might have paid less to escape the swaps if it held out for
better terms, Fabian said.
“A lot of issuers don’t have that kind of cash, and so they waited,
and relied on their dealers’ patience and largesse to hold off
terminating,” Fabian said. “If Harvard had waited, the cost of
terminating may well have been lower, but they weren’t willing to take
that risk.”
To contact the reporters on this story: Michael McDonald in Boston at
mmcdo...@bloomberg.net; John Lauerman in Boston at
jlau...@bloomberg.net.
Last Updated: October 17, 2009 00:01 EDT
Emilio Potrazeebie
people get cabinet positions. Others are appointed advisor positions for
demonstrated stupidity, being a homo, a pedophile, a tax cheat, a
terrorist, a Muslim, a Communist, a Metizo, an outright crook, or being
a ballet dancer.