And Yale too.
It’s been known for some time that Harvard, Yale, and other
elite educational institutions would
report large endowment losses this year. For example, Harvard disclosed in mid-September that its
endowment fell by almost 30 percent this fiscal year, largely due to its
private equity and hedge fund portfolios.
Around the same time, Yale estimated about a 30 percent drop in its endowment,
to about $16 billion.
There has also been talk since the summer of Harvard’s interest
rate swap losses, along with debate about the possible role in these losses of former
Harvard President Lawrence Summers (see, for example, here,
here,
and here).
Harvard University’s annual
financial report, released last week, reveals that for the fiscal year
ended June 30 2009, the University terminated interest rate exchange agreements
with a notional value of $1.1 billion, realizing a loss of $497.6 million. According
to Bloomberg, Harvard “also agreed to pay $425 million over 30 to 40 years
to offset an additional $764 million in swaps.”
From page 6 of the Annual Financial Report:
Harvard, like many other institutions with large capital
programs, uses interest rate exchange agreements as an element of our overall
debt management strategy. This strategy is intended to create a more stable
budgetary environment, by reducing Harvard’s exposure to rising interest rates.
. . .
In fall 2008, interest rates fell with an unprecedented
swiftness and trajectory. These declines caused Harvard’s interest rate
exchange agreements to incur sudden and precipitous declines in value, which in
turn led to significant increases in associated collateral pledged to
counterparties, creating liquidity pressures on the University. In response,
Harvard terminated certain of these agreements at a cash cost of approximately
$500 million.
Bloomberg reports that:
Harvard paid “a large termination fee, but within the range
that we’ve heard about over the last year,” Matt Fabian, the senior analyst and
managing director of Municipal Market Advisors in Westport, Connecticut, said
in an e-mail. “There is a reason why, regardless of the issuer’s
sophistication, there should be limits to their exposure to derivatives and
variable rate bonds.”
In her Message from the President,
Drew Faust writes (Report, page 2):
Our investment returns were negative 27.3 percent for the
fiscal year ending June 30. Subtracting disbursements for operations, net of
new gifts, the endowment as of June 30 totaled $26.0 billion—down from $36.9
billion a year earlier.
We have taken important steps, as a result, to realign the
University’s cost base and capital structure. . . . We have aggressively slowed both new hiring and the filling of vacant
positions; we offered voluntary retirement incentives for long-serving
staff; we undertook a painful but
important round of reductions in force, affecting
more than 275 of our colleagues, many of whom had served Harvard ably for
years; and we held salaries
flat for both faculty and exempt staff. At the same time, we have slowed
our ambitious capital plans—most obviously, with regard to our long-term
aspirations in Allston. Overall, we
expect to reduce by roughly half the capital spending we had originally
anticipated for the next several years. (emphasis
mine)
The same Bloomberg article reports that Yale and Georgetown
Universities have also disclosed interest-rate swap related losses.
For prior
Lounge coverage see Rich
Harvard, Poor Harvard
See also Dealbook