Lean times at Harvard

Northstarmom · October 10, 2009, 11:12pm

"CAMBRIDGE, Mass. Gone are the hot breakfasts in most dorms and the pastries at Widener Library. Varsity athletes are no longer guaranteed free sweat suits, and just this week came the jarring news that professors will go without cookies at faculty meetings.

Cuts have also affected athletic clubs, which share space at Malkin Athletic Center.
By Harvard standards, these are hard times. Not Dickensian hard times, but with the value of its endowment down by almost 30 percent, the worlds richest university is learning to live with less.

The Faculty of Arts and Sciences, Harvards largest division, has cut about $75 million from its budget in recent months and is planning more. With the cuts extending beyond hiring and salary freezes to measures that affect what students eat, where they study and other parts of their daily routine, the euphoria of fall in Harvard Yard is dampened.

The Faculty of Arts and Sciences anticipates a deficit of $130 million over the next two years and is awaiting recommendations from groups of faculty members and students who have been weighing the options.

Everyone is worried, said George Hayward, a junior who lives on a part of campus, the Quad, that lost its library to the cuts. It could be anything next; nobody really knows…

Harvards endowment was $26 billion in June 2009, down from $36.9 billion in June 2008, a 27 percent decrease. The loss is especially hard on the Faculty of Arts and Science, which includes Harvard College, the Graduate School of Arts and Sciences and the School of Engineering, because the endowment provides half of its budget.

Though faculty jobs have so far been protected, the university laid off 250 staff members this summer, said Jeff Neal, a Harvard spokesman. He said it was too soon to know whether future cuts would affect students…"

<a href=“http://www.nytimes.com/2009/10/09/education/09harvard.html?hpw[/url]”>http://www.nytimes.com/2009/10/09/education/09harvard.html?hpw</a>

Code_H · October 10, 2009, 11:57pm

I love annenberg food. especially the frozen yogurt. so…good. :)

sohaibshaikh · October 10, 2009, 11:59pm

what do you think is a major cause of endowement decrease

JamesChang · October 11, 2009, 12:23am

Was that a serious question?

The economic downturn, maybe?

13mom · October 11, 2009, 8:49am

So far the cuts have not been particularly noticeable to my fortunate freshman who has no basis for comparison and is thrilled with Harvard’s wealth of opportunity, support, and facilities. I just hope this continues to be true all four years!

DocT · October 11, 2009, 11:35am

Yesterday my wife ate at the Quincy dining hall - the food seemed pretty much the same as a year ago.

sohaibshaikh · October 11, 2009, 11:39am

So Im a bit pessimistic about this and lately have been having second thoughts about Harvard. I was originally planning on applying to the Harvard SSP but am now wondering if it worth it at all, should I go for Cornell instead. Or although I am just a sophmore I would like to apply to Harvard or should I just let it go and focuson like Yale or Princeton.

bulletandpima · October 11, 2009, 11:42am

I am sure Yale and Princeton’s endowments are down too, they just have not made official cuts yet, so don’t use that as a reason to focus on either of those schools over Harvard.

13mom · October 11, 2009, 12:07pm

I know for certain that Princeton has made cuts as well!

coureur · October 11, 2009, 12:26pm

Cornell is hurting too. Their endowment dropped 26% - nearly the same as Harvard’s 27% drop. They’ve just been quieter about the inevitable budget cuts.

[C.U</a>. Endowment Begins Climb From 2008 Depths | The Cornell Daily Sun](<a href=“http://cornellsun.com/section/news/content/2009/09/18/cu-endowment-begins-climb-2008-depths]C.U”>http://cornellsun.com/section/news/content/2009/09/18/cu-endowment-begins-climb-2008-depths)

guitars101 · October 11, 2009, 12:59pm

DocT, my son lives in Quincy and he isn’t complaining about the food. He said there is always something on the menu he likes. Maybe your wife ran into my son while dining at Quincy

I wish I was closer to the school to be able to visit him

DocT · October 11, 2009, 1:10pm

The only thing she said was that there was a big line for the tacos so she had just a salad. I’ve eaten there several times and found the food to be quite good.

OdysseyTigger · October 11, 2009, 2:44pm

Major cause?

Not the conventional view, but IMHO - firing Summers.

marite · October 11, 2009, 3:13pm

Summers was responsible for the spending spree that is now being undone: Allston, the building boom in Cambridge, the expansion of the administration and of the faculty. Not to mention the very risky investment strategy to which he acquiesced. Larry Summers on the CEA is not the same Larry who presided over Harvard. He is version 2.0, having learned from the mistakes he made.

The cuts that have been made so far have a fairly minor impact on students’ experiences. More are yet to come. we don’t know what they will be and what impact they will have on students.

sewhappy · October 11, 2009, 9:17pm

^ And I believe Summers plays a rather major role in our Nobel Laureaute President’s economic team . . . comforting.

OdysseyTigger · October 11, 2009, 11:54pm

Marite

Obviously I disagree regarding Summers and I disagree about the risk.

He brought in El-Erian. Together they recognized that a $30 Billion plus endowment is illiquid no matter what it invests in.

So they hedged.

In particular, Summers hedged the Allston construction against inflation. After he and El-Erian left, when the concern changed from inflation to deflation, no one took the hedges off while it could be done without cost.

El-Erian left 9/12/07

Medillo hired 6/1/08

Not exactly the best time in the world to leave more than $30 billion unmanaged.
That was a risky proposition.

marite · October 12, 2009, 12:21am

How did Summers hedge Allston construction against inflation? Right now it’s a big eyesore.
Meanwhile, FAS (which is responsible for both the College and GSAS) was levied a tax to fund the construction. Summers greatly expanded the faculty and now Faust is shrinking it. Summers expanded the administration and now Faust is shrinking it. Unfortunately, the shrinking of both is random rather than planned, depending on who was willing to take early retirement.
Summers is not the only one responsible for the recklessness. The Corporation, with Rubin at its head, surely must bear a lot of the blame for that investment strategy., perhaps more than Summers. But to say that the main cause of the financial crisis at Harvard is the firing of Summers is dead wrong.

As for Medillo coming on board six months after El Erian left. What do you expect? Instant capacity to hire someone off the street? As it is, Medillo was already managing some Harvard funds, and had previously worked for Harvard management. I remember hearing unease about how committed El Erian was to Harvard.

OdysseyTigger · October 12, 2009, 12:59am

Marite

We disagree.

I expect that someone should be minding a 30 billion dollar store. This was not a set and forget portfolio. They needed to have someone in place before El-Erian left. Somebody needed to be familiar with the portfolio positions and rationales - and how to hedge them!!! El-Erian did not leave without notice. It is unforgivable that the powers that be allowed the endowment to go almost 9 months without an investment manager in charge.

Such would have not happened had Summers still been there, nor likely would El-Erian have left.

From Seeking Alpha:

"El-Erian is the kind of money manager who has a very active and hands-on investment strategy. He’s constantly on top of his positions, and when they get too risky, he’s quick to hedge:

Fearing all markets could soon fall, El-Erian injected what he referred to as “Armageddon insurance” into HMC’s portfolio for the first time by buying interest rate floors, or a wager that rates would fall, and betting, via credit default swaps, that companies could soon struggle to pay their debts.
For the following year, through June 2008, Harvard gained 8.6%, versus a 13% fall in the S&P. El-Erian’s insurance accounted for much of HMC’s outperformance.

After El-Erian left, it seems that his riskier investments were simply held on to, while his hedges were allowed to expire. And a similar thing was happening with positions put on by Larry Summers:

A few years ago, as Harvard was preparing to issue billions of dollars of debt to finance an ambitious building expansion, the university entered into interest rate swaps to lock in seemingly low interest rates. The swaps were huge, with a notional value of $3.7 billion on June 30, 2005…
The university could have easily gotten out of the swaps after Summers left Harvard in 2006. But it did not. Near the end of 2008, Libor rates plummeted, forcing the university to post collateral.

Once again, all of this made sense at the time. Summers was very worried about America’s twin deficits, and the risk of a sharp spike in interest rates; the likes of Nouriel Roubini shared those concerns. Locking in low interest rates seemed like a good idea. But after Summers left and the housing bubble burst, it became clear to Summers, Roubini, and others that the big rate shock they should be worried about was to the downside, not the upside. Unfortunately, Summers had left Harvard by then – and so had El-Erian – and it seems that no one felt empowered to unwind the swaps (an action which could have been taken at very low cost).

The picture one gets of the Harvard endowment right now is that it’s suffering from a major liquidity crunch: it just doesn’t have the cash on hand that it needs.

Once again, the culprit would seem to be legacy positions from the era of Summers and El-Erian: positions which might well have made perfect sense as part of an actively-managed portfolio which was run by people who were fully aware at all times of potential liquidity needs, but which certainly didn’t make sense as part of a portfolio which became much more passively managed upon El-Erian’s departure, with no one really in charge of making sure that the endowment was able to make good on all its obligations.

It’s hard to know how any of this can be avoided. El-Erian can’t be faulted for making decisions on the basis of his staying at Harvard on a permanent basis – after all, he was hired on just such a basis. Such decisions can’t, by their nature, be easily unwound, which means that he necessarily ended up bequeathing to his successor a portfolio which would have been very difficult to understand and to hedge. El-Erian might well have been able to do it, because he constructed the portfolio in the first place. But it’s not clear that anybody else could.

So did El-Erian’s decision to move back to California from Boston cause billions of dollars in losses for the Harvard endowment? And is there any way for an endowment to hedge against that kind of personnel risk? If El-Erian had been at the Harvard Management Company a bit longer, perhaps he could have endowed it with more of an institutional knowledge base. As it is, he stayed just long enough to implement a large-scale strategy, but not long enough to allow the office to be able to run it without him."

marite · October 12, 2009, 1:09am

You started by saying that the reason for the current problem is the firing of Summers. But now it’s about El Erian. Which is it?

Summers left Harvard in 2007, not 2006. Probably on June 30, 2007.
Jane Mendillo came on board in March 2008, by which time, the economy was generally floundering. Perhaps, some of the losses could have been avoided if a manager had been available right after El Erian left. But my understanding is that those risky investments were/are difficult to unload.
Hiring the portfolio manager is the job of the Corporation, I believe.
What I can see is that, between them, Summers and the Corporation embarked on a program that has been disastrous for Harvard. Summers for having too ambitious a vision based on overoptimistic forecasts and the Corporation for allowing incredibly risky investments. It seems to have believed that 20+% increases were becoming the norm rather than the exception.

OdysseyTigger · October 12, 2009, 3:02am

1) “You started by saying that the reason for the current problem is the firing of Summers. But now it’s about El Erian. Which is it?”

They go together. Had Summers not been fired, I do not believe El-Erian would have left. At the very least Summers would have known to buy back his credit swaps and known that a portfolio such as El Erian’s could not be left unmanaged and unhedged.

2) “Summers left Harvard in 2007, not 2006. Probably on June 30, 2007.”

The 2006 date in the Seeking Alpha except above is in a quote from Forbes.

However per Harvard:

Lawrence H. Summers
Term of office: 2001-2006 (b. Nov. 30, 1954). Education: Massachusetts Institute of Technology (B.S. 1975), Harvard University (Ph.D. 1982). Professional background: Economics professor, served in a series of public-policy positions. Immediate past position: Secretary of the Treasury of the United States

3) “Jane Mendillo came on board in March 2008,”

From Harvard Management Company:

Jane Mendillo, President and CEO
Jane Mendillo became President and CEO of Harvard Management Co. as of July 1, 2008.

4) - 'by which time, the economy was generally floundering. Perhaps, some of the losses could have been avoided if a manager had been available right after El Erian left. But my understanding is that those risky investments were/are difficult to unload."

Re-quotes for emphasis:

a) "El-Erian is the kind of money manager who has a very active and hands-on investment strategy. He’s constantly on top of his positions, and when they get too risky, he’s quick to hedge: “Fearing all markets could soon fall, El-Erian injected what he referred to as “Armageddon insurance” into HMC’s portfolio for the first time by buying interest rate floors, or a wager that rates would fall, and betting, via credit default swaps, that companies could soon struggle to pay their debts.”

For the following year, through June 2008, Harvard gained 8.6%, versus a 13% fall in the S&P. El-Erian’s insurance accounted for much of HMC’s outperformance. After El-Erian left, it seems that his riskier investments were simply held on to, while his hedges were allowed to expire."

Even with the “economy generally floundering”, the hedges El-Erian had on when he left in 9/2007 accounted for most of 21.6% by which HMC beat the S&P though 6/2008. Mendillo did not renew El-Erian’s hedges nor did she exit the underlying positions. She also did not unwind Summer’s credit swaps. Had someone been on the ball and in charge they would have had 9 months before 6/2008 to understand and/or overhaul the portfolio to their liking while still protected by El-Erian’s hedges.

b) “… legacy positions from the era of Summers and El-Erian: positions which might well have made perfect sense as part of an actively-managed portfolio which was run by people who were fully aware at all times of potential liquidity needs, but which certainly didn’t make sense as part of a portfolio which became much more passively managed upon El-Erian’s departure, with no one really in charge of making sure that the endowment was able to make good on all its obligations.”

No one was minding the store. No one understood the portfolio. And apparently no one was aware of the cash obligations of the endowment. To think that this did not play a major role in both the investment losses and the cash shortage is magical thinking.

5) “Hiring the portfolio manager is the job of the Corporation, I believe.
What I can see is that, between them, Summers and the Corporation embarked on a program that has been disastrous for Harvard. Summers for having too ambitious a vision based on overoptimistic forecasts and the Corporation for allowing incredibly risky investments.”

Incredibly risky investments? Compared to what? HMC outperformed the S&P by almost 22% in 2007-2008. Even with their 27.3% loss in 2008-2009, they still marginally outperformed the S&P.

Lean times at Harvard

CONNECT WITH US