2009 May 31 Sunday
Harvard Hit By Financial Crisis

Boston Magazine has a great article about Harvard's need to downsize due to endowment investment losses after a huge spending splurge.Bigger brains means bigger mistakes.

The turnover may have hurt, because last fall's stock market meltdown seemed to catch HMC asleep at the wheel. As of June 30, 2008, the Harvard endowment was 105 percent invested: HMC had borrowed above the endowment's value in order to make additional bets. With the vast majority of its money tied up in holdings from which it could not easily be extracted, the university was ill prepared when the tanking Dow spurred anxious counterparties to call in their chits. Those margin calls forced Harvard to put up collateral—cash that it did not have. And it couldn't unload its illiquid investments to come up with that money, because their value had fallen so precipitously that no one had any idea what they were really worth.

Harvard did bad things with complex financial instruments that Warren Buffett calls financial weapons of mass destruction. Harvard had to pay big money to Goldman Sachs when the market drove a big interest rate swap against Harvard.

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. The university found itself needing to post more collateral to guarantee those swaps, and would ultimately buy its way out of them at an undisclosed cost.

The edge of insolvency? The center for the defense of the liberal ascendancy is at the edge of insolvency?

HMC "took the university right to the edge of the abyss," one alumnus, a financier who is privy to details of the university's balance sheet, told me. I asked what he meant. "Meaning, you're out of cash.

"That," he added, "is the definition of insolvency."

Harvard is kinda like the state of California. Living beyond its liberal means. In California the liberal welfare state is getting whacked. Libertarians rejoice.

What we need: More cheap online courses and online tests for certified competencies. Free online accounting training anyone? Charles Murray makes a similar argument in a book entitled Real Education: Four Simple Truths for Bringing America's Schools Back to Reality where Murray makes the case for certified examines to demonstrate subject mastery modeled after the CPA examination.

Share |      By Randall Parker at 2009 May 31 03:07 PM  Education

gcochran said at May 31, 2009 3:21 PM:

Charles Murray is not all that sensible, Randall. You'd do better listening to yourself.

Xenophon Hendrix said at May 31, 2009 4:31 PM:

Dr. Cochran, would you care to explain, or link to somewhere else where you have already explained? Charles Murray has struck me as a national treasure ever since I read Losing Ground a long time ago.

On the other hand, I've read your book The 10,000 Year Explosion and some of your articles, papers, and web comments. You strike me as one of our most brilliant and creative thinkers. So if you have a problem with Dr. Murray, I would very much like to understand what it is.

austin said at May 31, 2009 4:52 PM:

Mohamed El-Erian worked as the investment manager of Harvard Management Company. He quit September 12, 2007. Wonder why?

The Undiscovered Jew said at May 31, 2009 5:53 PM:

What we need: More cheap online courses and online tests for certified competencies.

The entire American higher education system will resist as long as possible giving more online courses because if online courses become widely offered there will be no need for any in class humanities lectures ever again.

In the age of Youtube, Amazon.com, Google Books and the internet, there is nothing in the liberal arts that cannot be taught outside of the classroom - and all of these courses can be learned for less than +$20,000 annual tuition. If all humanities courses can be taught via video or internet, then thousands of granola-head 60's radicals are out of a job.

In coming years, the only remaining college courses that will require face to face instruction will be in the hard sciences, elite level mathematics, medicine, engineering and advanced business courses.

Students and parents were already questioning whether liberal arts degrees were worth the ROE. Tuition is rising so fast that some universities are offering 3 year degrees which skip over a lot of the core curriculum so students can graduate faster and with less debt. The recession will simply accelerate the trend towards more major specific, and more automated forms of learning.

See this article about three year degrees:

Colleges Consider 3-Year Degrees To Save Undergrads Time, Money

Randall Parker said at May 31, 2009 6:16 PM:


Mohamed El-Erian is now CEO of PIMCO in Orange County. Maybe he got offered more money and preferred the much milder weather.

Had he stayed at Harvard would he have avoided some of the losses?

The Undiscovered Jew,

Even a large part of medical school education could be done with video lectures. Look at anatomy. It doesn't change much. Look at what does change. For a course where the info changes quickly one expert could deliver the lectures for a dozen medical schools once per year.

O'Brien said at May 31, 2009 8:35 PM:

Public schools don't seem to be hurting. I'm at a UC and it's all decked out. Super-fast computers and couches in the libraries (yes there's 2 libraries), and a gigantic student center.

austin said at May 31, 2009 10:21 PM:

"Had he stayed at Harvard would he have avoided some of the losses?"
Maybe he wanted safer investments and couldn't persuade the Harvard Management Company to go along.

John Cunningham said at June 1, 2009 8:14 PM:

In the immortal words of "Nelson Muntz, HAH, HAH!" It couldn't happen to a more deserving Leftie paradise. May Harvard follow California down the drain....

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