Harvard Confirms Swap, Real Estate Losses

(October 22, 2009) – Harvard University has confirmed massive losses stemming from bad interest-rate swaps and poor real estate deals, and also has revealed that it was investing, alongside its more illiquid endowment, much of the cash needed for day-to-day operations.

Although the University’s losses of 27% have been known since early September, Harvard, with the release of its annual report, has confirmed many suspicions regarding its unprecedented fall from grace, chronicled in ai5000’s inaugural edition in June. According to the report, the endowment was caught off guard by the “unprecedented” fall in interest rates last year, causing them to terminate—for a cash payment of $500 million—$1.38 billion in interest-rate swaps bought into years earlier, reportedly at the behest of then-University President Larry Summers. As a hedge against further drawdowns, Harvard also entered into new swap agreements in fiscal 2009 in order to offset other such agreements, locking in further unrealized losses of $425 million.

The report also reveals that Harvard was investing much of its General Operating Account—essentially the cash on hand used to cover the school’s bills—alongside its endowment. Invested in a separate account but still managed by the Harvard Management Company—the entity that looks after the school’s $26 billion endowment—the university was looking for growth above and beyond traditional money market returns for this cash pool.

"We were invested fairly heavily with them and that's what led to the losses,'' Harvard's Chief Financial Officer, Daniel Shore, said in an interview with The Boston Globe. "The problem, as much as anything, was we weren't as diversified as we could have been."

Harvard’s real-estate portfolio also suffered substantial losses, upward of 50%, according to the report.

The report can be found here .