Harvard University has already paid out $497.6 million and will ultimately pay out another $425 million for betting incorrectly that interest rates would rise.
It doled out the first sum during the year ended June 30 to escape $1.1 billion of interest-rate swaps that were supposed to hedge against the variable-rate debt it took on for its capital projects, according to Harvard’s annual report.
It also agreed to fork over the additional $425 million over the next 30 to 40 years to get out of another $764 million in swaps.
The trades fell under water last year, when central banks cut interest rates around the world, forcing Harvard to post collateral with lenders, Daniel Shore, the university’s chief financial officer told Bloomberg.
“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,” he said.
“In evaluating our liquidity position, we wanted to get some stability and some safety.”
Harvard took on too much risk, experts say.
Its loss “says that people don’t understand the complexity of the products they are buying and selling, and that doesn’t begin and end with mortgage securities,” Robert Doty, a municipal finance adviser at American Governmental Services, told Bloomberg.
Harvard isn’t the only prestigious university sucking wind on its investments.
Stanford is trying to recoup $1 billion by selling its troubled private equity positions, according to The New York Times.
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