Harvard ignored warnings about investments

Boston Globe ^ | 11/29/2009 | Beth Healy

[Saije]

It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing - or mismanaging - its basic operating funds.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.

So how did one of the world’s great universities err so badly in something so basic? It is a story with many actors, the story of an institution that grew complacent as its endowment soared ever higher - an institution that, when the crunch hit, was operating on financial auto-pilot, with many key players gone, and those remaining inattentive, in retrospect, to the risks ahead.

[Saije]

And now Larry Summers gets to practice his magic on the rest of us as well.

[Red in Blue PA]

Wish I could be as smart as the people at Harvard/s

[Pearls Before Swine]

OK, Harvard lost 27%. That’s better than most institutions did. Maybe they should have held the cash account separate, but I don’t get the big finger pointing aspect of the article. In a growth investing program with multiple managers, there will always be some who are right in retrospect because they were cautious, and some who are right in retrospect because they were more aggressive. Hindsight is 20-20.

There was a problem in that the decision making became decoupled from the experts, so the head didn’t know what the body was doing, but overall, Harvard did OK.

[hennie pennie]

I think that Harvard Business School should be closed, and that anyone holding an MBA from HBS should be sent to a serious RE-Education Camp.

Philip D. Broughton wrote a book called AHEAD OF THE CURVE about his two years at Harvard Business School and it is a fascinating read.

Ahead of the Curve: Two Years at Harvard Business School
by Philip Delves Broughton.

I got my copy from the local public library.

[Brugmansian]

So how much did Summers and his cronies make on the investments Harvard lost money on?

[hoosier hick]

Part of the problem at Harvard, which I didn’t see in this story (other than a passing reference to issues in compensation) is that Harvard began to pay their investment team like an investment bank— if you want to make big money for yourself, you must take huge risks with someone else’s money. I have read in other stories that there wasn’t any balance in their investing strategy, because the investment officers would have to work for peanuts in order to protect the University’s position....

hh

[silverleaf]

Now Larry Summers gets to do to the entire US economy what he did to Harvard’s endowmment fund. What a swell guy with such a wonderful legacy of “wisdom” to show for his miserable life sucking up to the liberal power elites

mazel tov

[9YearLurker]

One should sooner hire a poet to manage one’s money than an economist.

[Leisler]

"I think that Harvard Business School should be closed, and that anyone holding an MBA from HBS should be sent to a serious RE-Education Camp."

Here's one Harvard MBA( and law ) for starters...

[Leisler]

Well, you could direct pay and keep them, but Harvard wouldn’t do that. Basically, they got cheep.

[The Comedian]

And yet during the same period, my portfolio was up over 130%, and nobody has approched me about running the country.

Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

[hennie pennie]

OMG...

LOL

I forgot all about him....

[Pearls Before Swine]

Part of the problem at Harvard, which I didn’t see in this story (other than a passing reference to issues in compensation) is that Harvard began to pay their investment team like an investment bank...

Interesting point. Compensation aside--which may have lead to the evolution of a default position that had more risk than is currently thought appopriate--it was the heads of the investment team which warned Summers and Bok that it was time to throttle back risk.

The main fuss in this article isn't about the size of the loss (like I said, 27% overall wasn't bad, considering), but the size of the loss in the cash account. Unless the non-cash account was exceedingly non-liquid (in which case its remaining valuation is suspect), they had and have plenty of money. Are they back to their position of 3 or possibly 4 years ago, when Harvard was still by far the best-endowed university?

[Indy Pendance]

I got my little old MBA from UW-Milwaukee, but, I was in the executive program..... I’ll bet I learned more real stuff from my degree than getting the pedigree from some overpriced hodie todie school that can’t manage its’ finances. Irony, isn’t it? Have you ever noticed, purebred dogs have a lot of genetic flaws, just saying......