Opinion

Felix Salmon

What Larry Summers did to Harvard’s finances

By Felix Salmon
July 2, 2009

Nina Munk’s VF article on Harvard’s endowment isn’t online, but the prĂ©cis 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
13 comments so far | RSS Comments RSS

“given the way in which both Harvard president Drew Faust and HMC CEO Jane Mendillo seem to be incapable of taking tough decisions”

From what I hear they made the toughest decision in the books – they decided to sell in the first trimester of this year. Doesn’t look, in hindsight, or at least in hindsight on July 2 2009, that it was the best decision. But no one can dispute that deciding to sell in a down market is a tough call.

Harvard has long been a hedge fund masquerading as an educational institute – got to have that non-profit status, I guess.

Posted by a | Report as abusive
 

Perhaps this is a stupid question, but I’ll never understand why an organization with an endowment that large didn’t plow more into investments that offered a small but steady rate of return. Would one to three percent a year really be that awful for the university? If so, why? Inflation? Are costs escalating that quickly?

And if it’s spending so much in paying interest on its debt, why don’t they spend money on simply paying it off?

What am I missing from this?

Posted by Brian J | Report as abusive
 

“Perhaps this is a stupid question, but I’ll never understand why an organization with an endowment that large didn’t plow more into investments that offered a small but steady rate of return.”

To be crude, the U.S. News rankings give a big weighting to endowment. Besides, there’s never such a thing as too much money, since it can buy lots of things, including things that help a university’s mission – more funding for students, better faculty, more time for faculty research, shuttle buses, etc.

“And if it’s spending so much in paying interest on its debt, why don’t they spend money on simply paying it off?”

They don’t have the money or need the money in reserve, e.g. for private equity deals where they can be called on to pay in more.

Posted by a | Report as abusive
 

Assuming their rate of return is greater than their debt service costs, this could be net positive thousands per student.

Posted by Dieselm | Report as abusive
 

This is not exactly news. See article in Boston Magazine from about a month ago.

http://www.bostonmagazine.com/articles/d rew_gilpin_faust_and_the_incredible_shri nking_harvard/

So maybe Summers isn’t so good at swaps, but bloggers are not so great at getting fresh news, either

Posted by G.D. | Report as abusive
 

Yeah, GD, I’m really bad at finding that. So bad I actually blogged it in May.
http://blogs.reuters.com/felix-salmon/20 09/05/31/harvard-datapoint-of-the-day/

Posted by Felix Salmon | Report as abusive
 

$517 million to service just over $6 billion in debt? Unless I’m missing something they’re paying interest in the ballpark of 12%! No kidding AAA doesn’t buy you much anymore.

Posted by MichaelB | Report as abusive
 

What Harvard (and many other institutions) forgot as HMC piled up the endowment money is that it is a non profit, and the privileges that come to it are becaue of that status and not because of some innate divinity that elevated it above the rest. I don’t think Summers/Faust et. al realized that the animosity they faced and continue to face(from Grassley on down) came from their own hubris regarding the endowment and the way it was portrayed both by Harvard and by others. Meyer never seemed to realize, or else wasn’t told, that working for a non profit means not having the large salaries that are a tradition in the private sector. And that was a flashpoint as well, and rightly so. All around, Harvard seems to be the non profit equivalent of AIG, with the same arrogance and stupidity that are breathtaking.

Posted by dianeb | Report as abusive
 

I’ll never forget the Jack Meyer witch-hunt and fiasco. The fee structure at HMC was really not well understood or paid much attention to by the Harvard community, in the years leading up to the time Meyer started produces enormous capital gains for the university, and himself. Once he and his team got very successful, that’s when the trouble began.

At most universities, the old 2/20 structure was of course enjoyed by all the hedge fund managers of outsourced capital. It was, imo, appropriate to pay Meyer similarly. Though, that’s not how the community saw it. As I recall, Summers tried to defend Meyers and the fee structure. But an enormous wave of alumni and faculty were outraged by the salaries of Meyer and his team. Meyer was bounced by the community.

G

 

I hope all of these Preppy places go “out of business”. Summers, and everyone of his ilk are cancers.

Posted by rgoalierob | Report as abusive
 

Harvard is placing a big ivy league bet on hyperinflation I think.

Posted by happyfeet | Report as abusive
 

By my calc, MichaelB inverted something, and the service cost is somewhere just above 8.6%.

Which is still =not= representative of a AAA rating.

I assume–without evidence, of course–that they are using the term “debt servicing” as a proxy for both their interest and principal payments.

Otherwise, as MichaelB noted, the market clearly doesn’t believe Harvard has a AAA credit rating. The average coupon for Bloomberg’s current HIGH-YIELD corporate bond rates is 7.44%. The optimistic version of an effective yield of 8.6% in an environment where inv-grade rates average around 5.8% and h-y ones average 11.75 should be somewhere around BBB- or BB+, iirc.

 

All it proves that despite the fancy technical jargon they use, the fancy lifestyle and pay packets they cant spend, it proves that they are bigger morons than we are lead to believe. I am an investment banker for thirty years who lived a very normal life. I left the business believe or not because I saw the tsunami in November 2006 and put all my money in bank deposits.
If you think you got morons working for Harvard come and see our gang in the GCC.

Posted by Abdulaziz S Al-salem | Report as abusive
 

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