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How Harvard Nearly Went Bankrupt After A Rogue Interest Rate Swap Went Very Sour
Zero Hedge ^ | 10/16/09 | Tyler Durden

Posted on 10/18/2009 6:13:00 AM PDT by TigerLikesRooster

How Harvard Nearly Went Bankrupt After A Rogue Interest Rate Swap Went Very Sour

Submitted by Tyler Durden on 10/16/2009 17:45 -0500

The school that epitomizes the dangers of groupthink (especially by very intelligent people) and tends to get caught in both the virtues and vices of its own ingeniosity, saw just how expensive hubris can be in 2009. Harvard's endowment dropped 27.3% in 2009 to $27 after hitting roughly $10 billion higher the year before.

/snip

Yet most notable in the entire report is an interesting story for all those who claim that representing the $200 or so trillion in interest rate swaps on the books of the Big 5 banks is completely irrelevant as the net exposure is just a couple trill here and there. Yeah, that's what Harvard thought too until it had to eat a 45% loss on $1.1 billion in IR swaps. And nearly go tits up in the process.

/snip

This is what Daniel Shore, Harvard CFO had to say about this near death experience:

“When we went into the fall, we had some serious liquidity management issues we were dealing with and the collateral postings on the swaps was one. In evaluating our liquidity position, we wanted to get some stability and some safety.”

Funny how Harvard, one can argue, was in a comparable situation to none other than Lehman itself. Had Harvard's instantaneous liquidity situation gotten even worse, it would probably have spelled doom for the university Larry Summers, in his inimitable wit and wisdom, used to preside over.

(Excerpt) Read more at zerohedge.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: derivative; educationfunding; endowment; harvard; highereducation; interestrateswap; ivyleague; lehman
Hmm... if Harvard had gone under, it would have been on the top of the list to get bailout money from government, and Tea Party folks were bitching about Harvard.
1 posted on 10/18/2009 6:13:03 AM PDT by TigerLikesRooster
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To: TigerLikesRooster; PAR35; AndyJackson; Thane_Banquo; nicksaunt; MadLibDisease; happygrl; ...

Ping!


2 posted on 10/18/2009 6:13:53 AM PDT by TigerLikesRooster (LUV DIC -- L,U,V-shaped recession, Depression, Inflation, Collapse)
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To: TigerLikesRooster

What happened to the 10 million dollar fund that they don’t touch?


3 posted on 10/18/2009 6:14:23 AM PDT by bmwcyle (We need more Joe Wilson's. OBAMA is ACORN ACORN is OBAMA)
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To: TigerLikesRooster

Can’t help but think of all the liberal alumni who are giving thousands of dollars a year back to the school all scratching their collective head, all realizing that their real contribution is dwarfed (and negated) by the silly money games people play on Wall St.


4 posted on 10/18/2009 6:17:30 AM PDT by krb (Obama is a miserable failure.)
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To: TigerLikesRooster

I just like the term “group think” I think it succinctly nails liberalism among the elites.


5 posted on 10/18/2009 6:18:45 AM PDT by IrishCatholic (No local Communist or Socialist Party Chapter? Join the Democrats, it's the same thing!)
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To: TigerLikesRooster

“Nearly Went Bankrupt” is so very, very tantalizing.

It would have been sweet indeed if the headquarters of democrat party corrupt elitism went under.


6 posted on 10/18/2009 6:18:49 AM PDT by FormerACLUmember (When the past no longer illuminates the future, the spirit walks in darkness.)
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To: TigerLikesRooster

is Pug still wheeling and dealing Harvard?
http://www.google.com/search?q=Pug+harvard+enron&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a


7 posted on 10/18/2009 6:19:18 AM PDT by Vn_survivor_67-68 (CALL CONGRESSCRITTERS TOLL-FREE @ 1-800-965-4701)
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To: TigerLikesRooster

Harvard’s Bet on Interest Rate Rise Cost $500 Million to exit

Oct. 17 — Harvard University’s failed bet that interest rates would rise cost the world’s richest school at least $500 million in payments to escape derivatives that backfired.

Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the school’s annual report said. The university in Cambridge, Massachusetts, said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.


8 posted on 10/18/2009 6:26:44 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: krb

It’s a good point - but if those contributions end up getting junior into Harvard - then it could be argued that the “benefactor” is still happy with the net result.


9 posted on 10/18/2009 6:27:07 AM PDT by 2 Kool 2 Be 4-Gotten
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To: TigerLikesRooster

Another source of Harvard’s woes is they went on a real estate binge just like many “commoner” type Americans. Harvard was building and buying at breakneck speed. They have left a one quarter complected arts&sciences building. It is a pit... a foundation with a lot of concrete poured


10 posted on 10/18/2009 6:28:43 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: dennisw
agreed to pay $425 million over 30 to 40 years

I fear future Harvard students will be shivering, attending their class in a classroom heated by a lone charcoal stove.:-)

11 posted on 10/18/2009 6:30:54 AM PDT by TigerLikesRooster (LUV DIC -- L,U,V-shaped recession, Depression, Inflation, Collapse)
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To: TigerLikesRooster

Hmmmm....let me just think about this for a minute....

HARVARD GOING BANKRUPT....

I must have been dreaming because I had a grin on my face.


12 posted on 10/18/2009 6:32:05 AM PDT by Daisyjane69 (Michael Reagan: "Welcome back, Dad, even if you're wearing a dress and bearing children this time)
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To: 2 Kool 2 Be 4-Gotten

Great point. I guess building the “legacy” is what it’s really about.


13 posted on 10/18/2009 6:33:31 AM PDT by krb (Obama is a miserable failure.)
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To: Daisyjane69

Harvard gave us this president. Paybacks are hell


14 posted on 10/18/2009 6:35:39 AM PDT by oldironsides
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To: 2 Kool 2 Be 4-Gotten
The benefactor must have had a near heart attack when he learned that his junior may not have a college to graduate from, thanks to a wild derivative bet gone south.:-)
15 posted on 10/18/2009 6:36:25 AM PDT by TigerLikesRooster (LUV DIC -- L,U,V-shaped recession, Depression, Inflation, Collapse)
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To: TigerLikesRooster

The comments at zero hedge are witty


16 posted on 10/18/2009 6:37:29 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: dennisw
From Zero Hedge


17 posted on 10/18/2009 6:53:02 AM PDT by HangnJudge
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To: TigerLikesRooster
Anyone who still believes Harvard has anyone smart still attending it needs to get their head examined.

When you admit people based on skin color and not excellence, this is what happens.

18 posted on 10/18/2009 7:00:35 AM PDT by TexasFreeper2009 (Obama lied, the economy died)
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To: HangnJudge

Even with these losses Harvard endowment has done better that others. btw... You sliced that out of the pdf....well done

Yale endowment sank even more...so they say


19 posted on 10/18/2009 7:02:55 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: TigerLikesRooster

The blunder was made on the watch of LARRY SUMMERS, who now is advising the Messiah (PBUH) on how to destroy what’s left of our economy.


20 posted on 10/18/2009 7:09:01 AM PDT by NativeNewYorker (Freepin' Jew Boy)
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To: TigerLikesRooster

Gosh, seems like they were underpricing the risk they were taking on. Geniuses.


21 posted on 10/18/2009 7:24:23 AM PDT by glorgau
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To: TigerLikesRooster

It is a shame they did not blow up Harvard with this trade. The slimy phony admissions process that admits people who are not qualified, offspring of prior graduates and fellow travellers with the same leftist politics.


22 posted on 10/18/2009 7:47:44 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: FormerACLUmember

LOL! It would ahve been a riot seeing then sell off the Kennedy School of “government” for a condo conversion. Naming a school of govvernment after the Kennedys is like naming a school of ethics and honesty for Al Capone. Actually Al was probably more honest and ethical than the Kennedys.


23 posted on 10/18/2009 7:50:44 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: dennisw

So they actually lost close to $1 billion? $497.6 million + $425 milion?

So to escape the $1.1 billion swap they paid $497.6 to make it go away and then $425 to unload the $764 million? I guess they could not just sell it it. I guess the swap is a contract that is there and you have to pay someone to take the bag of s**t off your hands.

Stinking liberals.


24 posted on 10/18/2009 7:55:09 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: TexasFreeper2009
It is worse than that. They admit people not just by skin color but idiot children and grandchildren of prior graduates, people with the same politics, foreigners with radical politics or any other group with a leftist political agenda, sexual orientation grievanceor whatever I may have left out.
25 posted on 10/18/2009 7:59:21 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: Frantzie
$1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects

bag #1 of crap to make go away cost Harvard $497.6 million

it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.

bag #2 of crap to make go away cost 425 million

Thus Harvard spends 925 million to make 1864 million in crap disappear

26 posted on 10/18/2009 8:24:26 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: Frantzie

Hmmmm.... you got it exactly right. My previous post was unnecessary


27 posted on 10/18/2009 8:25:52 AM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: TigerLikesRooster

The question is how much Harvard saved using variable rate financing on its capital projets since the rate they are paying must of dropped significantly. You see this with other companies that have assets whose value is infleunced by short term rates so to hedge they take a swap or similiar derivative to counteract it. Say the value of the asset goes up because of the short term movement they lose money on the hedge so overall its a net zero.


28 posted on 10/18/2009 8:29:25 AM PDT by C19fan
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To: TigerLikesRooster
Harvard's endowment dropped 27.3% in 2009 to $27...

Now that had to hurt. They don't have enough left for lunch.

29 posted on 10/18/2009 8:37:41 AM PDT by MARTIAL MONK (I'm waiting for the POP!)
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To: TigerLikesRooster

My favorite comment:

Ivy League safety school going tits up is right. And anyone who knows Harvard can tell you they have some ugly tits at that place.


30 posted on 10/18/2009 8:51:50 AM PDT by razorback-bert (We used to call them astronomical numbers. Now we should call them economical numbers.)
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To: TigerLikesRooster

I suspect that a lot of unis. pension funds and cities and ststes were playing this risky game with public funds to, but we’ll never know for sure.


31 posted on 10/18/2009 9:34:36 AM PDT by Waco (Kiss an illegal aliens' axx and buckle yer seat belt, it's the law.)
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To: Frantzie

good point.


32 posted on 10/18/2009 9:56:24 AM PDT by TexasFreeper2009 (Obama lied, the economy died)
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To: dennisw
"Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, "

This is the kind of deal that should have been available to the Feds when they were bailing out every institution. 45 cents a buck or less depending on volume.

yitbos

33 posted on 10/18/2009 1:10:39 PM PDT by bruinbirdman ("Those who control language control minds.")
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To: razorback-bert

LOL
I saw that comment and LOLed`


34 posted on 10/18/2009 1:33:26 PM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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To: bruinbirdman

Exactly especially Goldman Sachs should been forced in penury and allowed to work their way up


35 posted on 10/18/2009 1:35:14 PM PDT by dennisw (Ir's not the Wheel, It's the Carousel)
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