Is Larry Summers Doing For America What He Did For Harvard?

December 18, 2009 / 3:07 pm • By Dr. Melissa Clouthier

Bloomberg is reporting this troubling information:

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school suspended work on the building last week.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

And here’s the conclusion:

Pennsylvania State Auditor General Jack Wagner said Nov. 18 that the state should ban local governments from entering into derivative contracts tied to bond issues, a practice he termed “gambling” with taxpayer funds.

Harvard might have considered it a conservative step to lock in rates when they were low, said Shapiro, the New Jersey- based swap adviser.

“You can be very big and very rich and very smart and still get things wrong,” Shapiro said.

We’re supposed to accept that this same guy along with Bernacke and a very few “smart people” will make things better for the economy.

Posted in America • Economy

  • filioscotia

    I’m confused. Harvard is probably the wealthiest private university in the country. Maybe the world. Even after the losses its endowment has taken over the past year. Here’s what the NYTimes had to say about this just four months ago in September.

    “Harvard and Yale disclosed on Thursday just how many billions their endowments had lost in the last year, signaling yet more belt-tightening at the nation’s wealthiest schools.

    Harvard’s endowment tumbled 27.3 percent in its latest fiscal year, largely because of problems with its private equity and hedge fund portfolios, lopping off $10 billion and shrinking its portfolio to $26 billion. Taking into consideration donations and spending, the endowment shrank by nearly 30 percent.

    A year earlier, Harvard’s endowment had approached $37 billion, while Yale’s endowment had been $23 billion.”

    My question is: How is that a school as wealthy as Harvard be “so strapped for cash” that it has to go begging the state for “fast-track approval to borrow $2.5 billion.”

    I’m not an economist, and maybe I don’t understand how endowments work, but seeing Harvard, with $26 billion in the bank, asking permission to borrow money, is like seeing Warren Buffett taking out a payday loan.