Harvard Risked Its Cash

The Boston Globe‘s Beth Healy writes what looks like another Lawrence Summers bashing Harvard Endowment story–with an extra helping of unnamed Robert Rubin-kicking on the side–when she reveals that Summer fought with Harvard Endowment head Jack Meyers over his decision to add the University’s operating cash account to the general endowment pool. Meyer, and his successor Mohammed El-Erian, both warned that the university’s president was doubling down on the endowment and creating excessive risk. The warnings proved true when the school lost $1.8 billion from that cash account last year.

Certainly, when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say. The cash account grew to $5.1 billion during his tenure, more than the entire endowment of all but a dozen or so colleges and universities.

But Healy goes beyond the easy hit on Summers to show something deeper and scarie. Because, despite Summers’s aggressive posture with the cash and his disastrous swaps strategy, the real fault lies with the school’s leadership after Summers resigned. Healy quotes a friend of Summers:

“In the years after Summers left, market conditions and Harvard’s liquidity changed dramatically. The university’s financial strategies could have and should have changed with them.’’

Healy goes on to explain why they didn’t change. First, the succeeding Harvard Presidents did have Summers’s capacity to engage in the financial decision making. But with the unexpected departure of Summers (he was meant to hold the position for years to come) the university’s leadership was unsettled and responsibility diffused. Second, a group of advisers felt the rewards outweighed the risks. Which leads Healy to quote James F. Rothenberg, Harvard’s treasurer (a part-time job!) who is also the Chairman of Capital Research and Management Co.

Even with the losses, Rothenberg said, the cash strategy has earned Harvard returns averaging 8.9 percent over the past 10 years. He and other university officials say the cash pool is still ahead of where it would have been, if invested more conservatively all along. But no one could be specific about what that net gain has been.


Harvard Ignored Warnings About Investments
Boston Globe; November 29, 2009

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