<p>One good thing that has come from Harvard’s financial woes is that it has put an end the occasional posts and threads we used to get on CC saying that Harvard was so drenched in cash that they could/should make the education free for all students</p>
<p>Its fortunate for us that Larry Summers is director of the white house national economic council.</p>
<p>:)…</p>
<p><a href=“https://www.fis.dowjones.com/WebBlogs.aspx?aid=DJFPEA0020090331e5410000b&ProductIDFromApplication=&r=wsjblog&s=djfpea[/url]”>https://www.fis.dowjones.com/WebBlogs.aspx?aid=DJFPEA0020090331e5410000b&ProductIDFromApplication=&r=wsjblog&s=djfpea</a></p>
<p>With so few details it really is impossible to say what happened at Stanford. This article details the kind of terms that buyers of secondaries often demand which could have led to the reason why Stanford decided it wasn’t worth it. My guess is that Stanford still paid a pretty good sum to the consulting firm that orchestrated the secondary sale.</p>
<p>On page c12 of today’s WSJ there is an interesting article titled Funds of Hedge Funds Plummet. In the discussion on why Funds of Hedge Funds have gone from $823B to $440B and why they are performing 8% worse than the overall hedge fund index this interesting statement is made by a principal at investment consultant Mercer"The typical fund of hedge funds performance is much more representative of what investors are actually getting than the overall hedge fund index. In many cases investors are still trying to get their money back from funds that imposed gates"
In other words there is no telling what the real value is of those hedge funds that have imposed gates, and some of the endowments that are the most cash strapped have alot of money in those sorts of funds.</p>
<p>[Some</a> Better News for an Endowment Using Yale Investment Model – Seeking Alpha](<a href=“http://seekingalpha.com/article/178570-some-better-news-for-an-endowment-using-yale-investment-model]Some”>http://seekingalpha.com/article/178570-some-better-news-for-an-endowment-using-yale-investment-model)</p>
<p>I think this guy has it right about Stanford. Also, seems like when Stanford first said they were going to do this that it wasn’t because they had any liquidity problems-they had this $1billion loan sitting in the bank. Now they tell us they aren’t going through with it because they don’t have a liquidity problem. I guess you have to have gone to Stanford to understand the logic here.</p>
<p>I’m glad that Stanford thinks that borrowing $1 billion in taxable debt to meet payroll is “dodging a bullet” on liquidity. There should be board members and investment managers walking the plank at every big endowment school forced to borrow to pay the light bill. The lack of accountability is stunning.</p>
<p>Interesting that Stanford was attempting to sell a $6 billion package of assets that carried an additional cash call commitment of $4.92 billion.</p>
<p>[Harvard</a> Swaps Are So Toxic Even Summers Won?t Explain (Update2) - Bloomberg.com](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)</p>
<p>Comprehensive study on what happened at Harvard–with emphasis on the interest rate swaps.</p>
<p>“Most of the wrong-way bets were made in 2004, when Lawrence Summers led the university”.</p>
<p>That should help America rest easy, we must be on the right track considering he is Barry’s chief economic adviser. Nothing but the best and the brightest.</p>
<p>sm74, thanks for the link.</p>
<p>" Anne Phillips Ogilby, a bond attorney at one of Boston’s oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away.</p>
<p>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."</p>
<p>“You can be very big and very rich and very smart and still get things wrong,” Shapiro said."</p>
<p>Which is why risk control would have been nice.</p>
<p>Excellent Bloomberg article. Thanks.</p>
<p>As I read the article, it appears that Harvard took on $1 billion in debt just to get out from under the rate swap hedges on future Allston borrowing. So instead of borrowing $2.5 to build a new campus over the next 20 years, they borrowed $1 billion for a hole in the ground. It’s just unthinkable that these same people are now in charge of the country’s economy. Where do you even start with that?</p>
<p>I will note that there is a certain irony in quoting Leon Botstein in the article. His college hasn’t made public a year-end financial statement this decade. Its bonds were recently downgraded to speculative grade by Moody’s, it got stung in he Madoff/Merkins scandal by college board member Ezra Merkins, and both Botstein and his chief fianancial officer have together been running the finances uninterrupted for 30 years (a pretty big oversight red flag).</p>
<p>I also am shocked at how slow some of these Universities are at getting out their financial statements. Atleast I do give Harvard credit for getting their statements out and being somewhat transparent. But even though its been 6 months since the end of the fiscal year still nothing, unless im missing it, from Stanford, Princeton, Yale. You look at the Princeton web-site and they have this incredible building the finance department has moved into yet they can’t generate an audited financial statement in 6 months.</p>
<p>About an hour ago Stanford did post their annual report. A couple of observations:</p>
<ul>
<li><p>They do have a high rate of investments in tier 3 assets - 76%. These are the assets they were marketing although in total they have about $10B in tier 3 and I believe they were marketing less than half that.</p></li>
<li><p>Their target allocation for public equities is 37%, but they actually have 11%. I thought the idea behind the sale of tier 3 was to bring their allocations more in line but I guess that was not the intent.</p></li>
<li><p>Major cash flow impacts were almost $600M in capital spending, their investment in limited partnerships increased almost $700M presumably from capital call committments, and almost $1B endowment spending. They still have $5B in capital call committments outstanding.</p></li>
</ul>
<p>Does Stanford have the money to come up with the capital commitments. Those commitments are over a long period of time, right?</p>
<p>sm74:</p>
<p>Although theoretically promising, the Tier 1, 2, and 3 categories have proven to be worthless in reviewing fianciancial reports. For example, Middlebury (and others) have substantially all of their endowments invested in what are basically mutual funds for college endowments run by the management firm down in Charlottesville. The portfolio appears to be pretty conservative with large percentagages in public equities. These are not really Tier 3 assets, but Middlebury has to list its entire endowment as Tier 3 because they rely on outside managers to “price” the stake (even though much of the underlying investments are in pubicly traded assets with Tier 1 pricing).</p>
<p>Likewise Trinity U in Texas has about 40% of its endowment structured as individual estate trusts with Trinity getting 80% (or whatever percentage) of the income and the same percentage of the assets should the trust ever be liquidated. Again, even though these trusts may be invested exclusively in publicly traded assets, Triinity has to list them as 100% Tier 3.</p>
<p>I’ve quit even looking at that section of the financial reports.</p>
<p>
</p>
<p>Dstark: Not necessarily. I’ve seen a couple of financial reports that note the time frames on the cash call commitments. Some of them have significant commitments (like 25% of the total) this year. That can be a lot of cash. I wouldn’t make any assumptions.</p>
<hr>
<p>On the LAC front, all of the top liberal arts colleges have now released their audited year end financial reports except Amherst (not a peep since August) and Pomona which has released a web-based President’s Year in Review which has most of the information, but not actual audited fianancials. In fairness, the colleges that include substantial “management discussion” of the financials tend to release later than those that siimply print the audited financials.</p>
<p>Quite a few schools appear to playing “hide the pea” with fundamental data like the number of enrolled students this fall and the number of faculty – two key numbers that are, in some cases, changing rather substantially to balance budgets.</p>
<p>I’m not making any assumptions. I’m shocked that Stanford got into this mess. And Harvard and the rest…</p>
<p>Someone help me make sense of the article. It seems clear that Harvard should not have invested in the risky swaps. But the article also seems to suggest that Harvard was hasty in spending $1billion to divest itself of the swaps when it did. Or am I reading the article wrong?</p>
<p>Marite:</p>
<p>You are reading the article right. However, I’m not sure that Harvard (and the other schools borrowing operating cash last fall) had any real choice in the timing. When the credit markets froze, they were obligated to start putting up cash reserves immediately or default on their credit agreements. I think quite a few of the big endowment schools were in a situtation where they were not going to be able to meet payroll without freeing up cash. Remember, Harvard had its operating cash (basically its monthly checking account) invested right alongside the endowment. So it took a hit the same day, which wouldn’t have happened if they had it in cash and money markets you normally would. That’s your payroll money. You don’t put that in timber partnerships and hedge funds, locked up for ten years. Defeats the whole purpose.</p>
<p>Harvard’s situtation is even more devastating because most of these interest rate swaps were to hedge rates on future bond issues, i.e. debt that Harvard hadn’t even taken on, but was only planning to take on as Allston was built out. Without the rate swaps, Harvard could have just stopped construction, not issued more bonds, and put the thing on hold. Now, they are paying $1 billion in debt to get out from under the speculative rate swaps and the project is dead. They are basically paying for half the project with nothing to show for it.</p>
<p>Bottom line here is that the reason Harvard’s endowment did so well is that they were borrowing extra money to invest – basically the same as buying stocks on margin. That’s great as long as the market goes up, but it also compounds the losses on the way down. The $1 billion they poured down the drain buying out the rate swaps really should be viewed as additional endowment losses.</p>
<p>The corporate boards of these schools forgot they were managing non-profit educational institutions and, apparently, began to view their role as investment bankers. Alas, when the house of cards crashed, they didn’t get government bailouts like some of the other investment banks.</p>
<p>Thanks, idad. It makes sense.</p>
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</p>
<p>Yes. That’s shocking. Even more shocking, is that nobody on these university boards and presidential suites is being forced to walk the plank. There are people at these schools who should, by any reasonable measure, be slinking off in disgrace. The only resignation from Harvard’s board is a 73 year old guy who’s retiring. Probably getting a gold watch. I’m sure he’s a swell guy and all, but good god…</p>