Harvard's investment flubs

The university's well-heeled endowment got into big trouble when the economy turned.

By Kim Peterson Nov 30, 2009 1:44PM
Bubble © Kyu Oh/Getty ImagesHarvard has many annual rituals, but most of us didn't know about this one: The top finance guy stomps around the room, screams bloody murder at the amount of cash the school is investing -- and gets roundly ignored.

That happened for years, as the school's head of endowment argued with its president that Harvard should hold on to some cash, according to The Boston Globe.

But Larry Summers -- Harvard's president from 2001 to 2006 -- was extremely aggressive with the school's billions in cash. That risky strategy made oodles of money for the school in the first half of the decade.

It also helped bring the school to its knees in the financial crisis.

Harvard lost $1.8 billion in cash in the fall of 2008. And the school is still covering the losses now, the Globe reports, with big interest payments and deferred expansion plans.

So how did things go so wrong at Harvard, whose endowment was once so revered for its investing prowess?

It all came down to mismanaging cash and taking on too much risk.

Harvard was putting too much money into stocks, bonds, hedge funds and private equity, the Globe reports. That strategy would be fine if you were, say, 30 years old with no kids and no mortgage.

But for Harvard, whose operating budget was relying too heavily on endowment proceeds, big bets like that were entirely too risky.

The Globe story seems to point most of the blame at Summers, whose oversized and aggressive personality -- and deep financial knowledge -- allowed him to pretty much take over Harvard's investing decisions. (Summers left before everything went to hell, and now he's President Obama's top economic adviser.)

And no one was complaining for a while. Harvard's cash ballooned to $5.1 billion in the Summers era.

But blame should also go to Harvard's financial staff and board, who failed to undo the aggressive policies Summers left behind when he resigned in 2006.

Officials finally began cashing out of some investments in early 2008, but it was too late. Harvard paid dearly when the economy soured. Here's but a small tally of the price the school paid, according to the Globe:
  • 27% of the school's $37 billion endowment gone
  • $1.8 billion in general operating cash disappeared
  • $500 million paid to get out of interest-rate swaps
  • $1.5 billion in bonds issued to get some cash
  • $1 billion in additional debt sold
  • Major budget cuts and layoffs
Even the officials at Harvard can learn lessons from time to time. The crash of 2008 taught them plenty about taking on appropriate amounts of risk and liquidity.

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