How Harvard University Almost Destroyed Itself

Boston Magazine has a long, shocking piece about how the people running the world's greatest university almost bankrupted the school through a series of very dumb financial decisions after a decade of unbelievable growth in the endowment. Reading the litany of horror -- making bad decisions in the stock market, paying for buildings they couldn't afford, learning to hate Goldman Sachs -- it occurred to me that Harvard has never seemed more like average Americans.

First the scary big numbers. Harvard University's endowment has lost $11 billion. Don't cry for Crimson yet -- it's still got more than $25 billion in the coffers, about the same as it had in 2005. But in the interim, double digit returns on the endowment made administrators think it would be a good idea to increase the Arts and Science budget by 50%, from $812 million to $1.2 billion. Spending all over the school got a little wacky: $800 million* alone went toward building new labs, and Harvard's debt doubled to $1.2 billion.


What happened? Harvard has long managed its endowment like an investment banker's portfolio. In fact, the school's nifty money manager Jack Meyer had more than quintupled the endowment (from $4 to $22 billion) when his 15 years ended in 2005. That was great during the boom years, but by the market crash, the school was doubled down like a Financial District titan. Three months after Bear Sterns went under, the endowment was still 105 percent invested. Today's it's looking down the barrel of another $11 billion in capital commitments. In three years, the endowment went from very overachieving to very overleveraged.

There's also this revelation, which certainly isn't helping Larry Summers' case for becoming Not Least Popular Person in Cambridge Ever:

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.

What happens now? Harvard President Drew Gilpin Faust isn't mincing words when she says the do-everything university might consider "do less--less research, less teaching, at a lesser level of quality." Harvard's expansion might slow, but even if the endowment simply stopped growing, the school could continue spending at its current levels for another 20 years. And Faust's quote certainly seems like the thing I would say if I knew my school had a legions of million- and billionaires on my alumni phonebank Rolodex. Harvard will still be the world's greatest research university. It's time to start researching new investment strategies.

*Thanks msully.