You can learn a lot of things at Harvard, but apparently learning how to invest profitably isn’t one of them.
Harvard had to pay banks almost $1 billion in the heat of the 2008 financial crisis to exit unprofitable interest rate swaps, Bloomberg reports.
Harvard took on the swaps to help finance its expansion to Allston, Mass., from its main campus in Cambridge.
The university entered the swaps during the presidency of Larry Summers, now President Obama’s chief economic adviser.
In December 2004, Harvard established the swaps to lock in what then seemed like attractive interest rates on $2.3 billion of construction bonds.
When the swaps were created, the Federal Reserve’s federal funds rate target was 2.25 percent. But the Fed slashed rates during the financial crisis, pushing the target down to almost zero.
As a result, the value of Harvard’s derivatives contracts plummeted, forcing it to raise more cash.
“For nonprofits, this is going to be written up as a case study of what not to do,” Mark Williams, a Boston University finance professor, tells Bloomberg.
“Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”
At least banks may have learned their lesson from the crisis.
Net current credit exposure, the amount banks risk losing if their counterparties on derivatives trades collapse, fell 13 percent in the third quarter, the Office of the Comptroller of the Currency reports.
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