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
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