Harvard Suffers $500 million to Escape Losses on Swaps

In Financials on October 18, 2009 at 11:27

Harvard logoAlthough its popularity and academic credibility may be at the top, its finances aren’t. Harvard was forced to pay $497.6 million on investment banks to exit from interest rate swap positions worth of $1.1 billion. Harvard intended to use these swaps as a hedge against variable-rate debt for capital projects. What is more, the university has agreed to pay $425 million over the next 30-40 years to cover an additional $764 million in swaps.

Interest rate swaps are a type of financial derivatives where the two parties of the deal exchange interest-based cashflows. Typically, one party receives fixed rate for a variable rate payments. Harvard’s position started losing value when Central Banks slashed benchmark interest rates to historically low levels.

Harvard has sold $2.5 billion in bonds to finance the swap pull-out along with some infrastructure spendings. Many of swap positions were taken in 2004 when Lawrence Summers, Obama’s close economic advisor, was the university’s president.

Universities should not be widely exposed on such complex financial instruments, difficult enough to monitor and interpret. Risk-taking should not be on the vocabulary of a university’s finances, but on the other hand, who could have seen the financial  mayhem coming..

by the Self-Seeker

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  1. If Harvard, or the rest of the prestigious universities, doesn’t have the right instruments for managing complex investments, who does??
    I just believe that those investments should be monitored and evaluated by student clubs. First of all, Harvard students must have the skill and educational background to do so more efficiently than the majority of the fund managers or Harvard’s board of directors. Moreover, that would be a really interesting & challenging of implementing the knowledge they receive. A motivation for them would be their investing small amounts of money in the fund. That suggestion is not really innovative though, as Imperial Students have already formed an Investment Club, whose aim is to manage a fund, constructed by student funding.

  2. That does sound an interesting approach to the issue but given the huge amount of money under investment management that all these universities engage in, it would be rather risky and naive to put students in the steering wheel of those funds. Although students may have a greater market sentiment of today’s world than older people, what they lack of is experience and market exposure. Universities should simply stay out of those tricky derivatives.

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