There’s a lengthy article in Boston Magazine about how Harvard has been hemmoraging money (the endowment has lost $11 billion, bringing it down to 2005′s mere $25 bill, due in no small part to Harvard Management Company, which one alum privy to the details of the school’s balance sheet told the author, “took the university right to the edge of the abyss…Meaning, you’re out of cash. That…is the definition of insolvency.”) Very few insiders would speak on or off the record, as Harvard is attempting to downplay the perception that its people are soiling themselves in fear, but one brave fool soul did offer this absolutely harrowing take:
While the failed presidency of Lawrence Summers generated more headlines, this quiet crisis is actually a greater threat to Harvard. The university has been so rich for so long that most of its denizens can’t remember a time when money was a concern. While Harvard officials are doing their public-face best to downplay the problem, the numbers don’t lie, and this economic crunch will leave the school a profoundly changed place. Harvard will have to become smaller and academically more modest, and as it does it will chafe at having grand plans without the resources to fund them. For the first time in decades, it will worry about merely paying its bills. The university will have to decide: If it is no longer so rich that it doesn’t have to make choices, what does it really value? What are its priorities? It won’t be a comfortable debate.
“We are in trouble,” says one Crimson professor. In the aftermath of deep and damaging cuts, “there is a real chance that Harvard will no longer be considered the best there is.”
This is also good:
Further squeezing Harvard was a transaction Summers had pushed it into in 2004, when he successfully argued that the university should engage in a multibillion-dollar interest rate swap with Goldman Sachs and other large banks. Under the terms of the deal, Harvard would pay Goldman a long-term fixed rate while Goldman paid Harvard the Federal Reserve rate. The main goal was to lock in a low rate for future debt, and if the Fed had raised rates, Harvard would have made hundreds of millions. But when the Fed slashed rates to historic lows to try to goose stalled credit markets, the deal turned equally sour for Harvard: By last November, the value of the swaps had fallen to negative $570 million.
Drew Gilpin Faust and the Incredible Shrinking Harvard [Boston Magazine via The Atlantic]
Has anyone heard from Muffie? I’m really concerned for her right now.
“Further squeezing Harvard was a transaction Summers had pushed it into in 2004, when he successfully argued that the university should engage in a multibillion-dollar interest rate swap with Goldman Sachs and other large banks. Under the terms of the deal, Harvard would pay Goldman a long-term fixed rate while Goldman paid Harvard the Federal Reserve rate. The main goal was to lock in a low rate for future debt, and if the Fed had raised rates, Harvard would have made hundreds of millions. But when the Fed slashed rates to historic lows to try to goose stalled credit markets, the deal turned equally sour for Harvard: By last November, the value of the swaps had fallen to negative $570 million.”
nice work, Chubbs
Harvard traders don’t lose money. Stupid effing markets that won’t do what the “models” say they will do lose money.
Hey Tommy, where’s your shine box?
HAHA Harvard trying to f*ck Goldman and vice versa, man, that’s rich…
Also, their endowment is still at $25bn and they’re whining like little b*tching about being poor? Is this a joke?
Harvard kids are generally of the racist homosexual ilk. You should really just feel sorry for them.
“Meaning, you’re out of cash. That…is the definition of insolvency.”
Uh, no it isn’t. Did someone check his ID card? Was that really an alum?
EP,
Well, considering the recent record of Ivy League CEOs, Is it so crazy that some grads might not understand what insolvency is?
Or he could be a liberal arts major.
Meh. Harvard is nothing but a second-rate Oxford for the colonials, anyway.
EP – Out of cash (not able to service debt) is “a” condition of insolvency if not “the” condition. Is that the point you were trying to make or was there no point?
@2 why would you blame Summers for not exiting a trade when he no longer worked there?
@10 the problem is liquidity not solvency
Let’s see -
A. $25 billion endowment value, but I think we can all agree as a point in time snapshot that it’s a generous value at best b/c:
1. a good chunk (is it 30% or even higher?) of the portfolio is in private equity
2. no private equity funds that I’m aware of came even CLOSE to marking their portfolios to reflect the magnitude of the stock markets decline
B. $2.5 billion of debt against it in the form of last falls issuance to make capital/margin/general funding requirements.
C. Finally, they have $11 billion of contractually obligated private equity capital calls in the future
Put this mosaic together, and I see why it’s a potentially much more dire picture than it seems on the surface.
If the stock markets and economy don’t rebound smartly so that valuations and cash flows improve, you might get out 3-5 years and have some significant and permanent private equity capital losses on your hands while at the same time being forced to sell other assets to meet new capital calls. One could conceive a picture where the bulk of HMC portfolio is in private equity.
Though I’m guessing if there are significant losses, it might absolve the HMC from some of their capital calls (in the loss making P/E funds, anyways).
Insolvency v. illiquidity, cash flow insolvency v. balance sheet insolvency . . .
Cry havoc and let loose the dogs of semantics!
The burning question remains: What does this all mean for Strayer University’s criminal justice program?
@13 is right
The first sign of insolvency is someone saying that they are illiquid.
@14
Harvard should sell naming rights to Strayer University so that it can become the Harvard Distance Learning University.
I always wanted a Harvard University Associates Degree in criminal jusitce.
There probably isn’t any company or organization that has the financial reserves and pricing power of Harvard, and yet you all, in your gayness, want to sit around hyperventilating about Harvard’s financial health. More proof that WS and academia alike have been taken over by the idiot corps.
@17
It is just schadenfreude. Hell that’s the only reason why I come to this web site. (I work for the government).
About a month ago the Boston Globe reported that the new MD of the endowment’s $3.5 billion real estate group will be Daniel Cummings, cofounder of Matapeake Partners in Washington DC. From 2000 to 2007, he was with the Carlyle Group.
I agree, one-word posts are too glib, but one word comes to mind: Gotterdammerung.
@18 Tim! Get back to work!
-Barry
@21
Well played.
Do you see what happens Larry?
The current CEO of Harvard Management Company is a woman. According to Larry women just aren’t good at math…