How is Harvard like Lehman Brothers?

As I read Bernard Condon and Nathan Vardi’s fascinating recent article in Forbes, it would seem that Harvard and Lehman had rather similar investment philosophies - and ended up with similar results.

Harvard, in its search for ever higher returns and a conviction that the good times would roll forever, had as of last July managed to become more than fully invested - it had a 105% long position.  But then the economy began to turn, and leverage started to work against them. Condon and Vardi report:

Harvard had derivatives that gave it exposure to $7.2 billion in commodities and foreign stocks. With prices of both crashing, the university was getting margin calls--demands from counterparties (among them, JPMorgan Chase  and Goldman Sachs  for more collateral. Another bunch of derivatives burdened Harvard with a multibillion-dollar bet on interest rates that went against it.( Interest rate swaps that Larry Summers authorized as President.)

Unfortunately for Harvard, the 105% leveraging meant that Harvard University had no cash on hand to meet the margin calls.  So they had to do what we see so many investment firms had to do - begin to sell stocks into a falling market.  In addition, they had their own version of mortgage backed securities sitting in their portfolio. These were private equity partnerships, which are not only hard to price to market, but also typically commit the owner to significant future additional purchases.  Pretty illiquid, especially in a falling market.  Harvard has tried to sell these, but purchasers are hard to find.  So:

Now, in the last phase of the cash-raising panic, the university is borrowing money, much like a homeowner who takes out a second mortgage in order to pay off credit card bills. Since December, Harvard has raised $2.5 billion by selling IOUs in the bond market. Roughly a third of these Harvard bonds are tax exempt and carry interest rates of 3.2% to 5.8%. The rest are taxable, with rates of 5% to 6.5%.

It doesn't feel good to be borrowing at 6% while holding assets with negative returns. Harvard has oversize positions in emerging-market stocks and private equity partnerships, both disaster areas in the past eight months.

Andrew Rosenfield, also writing in Forbes, says

Harvard is the world's best-financed university with an endowment today worth well over $25 billion, more than 20 times the size of its endowment in 1970. Yet the Harvard endowment may have lost as much as $12 billion in 2008. (It had $37 billion as recently as 12 months ago.)

It is likely that Harvard lost more in 2008 than the total amount of the endowments of each of Cambridge, Chicago, Columbia, Duke, MIT and Oxford. In fact, it seems Harvard lost more last year than the total value of every other university endowment in the world with the exception of Yale, Princeton and Stanford. 

So now we understand why Harvard decided to go for a 3.5% tuition increase when the CPI showed a 0% increase.  Like so many of the investment houses, they need a bail-out. Unfortunately, TARP does not seem to be written to include cases like this, so Harvard has had to turn again to students and their families for their bail-out.