More Fallout From Larry Summers' Push for Aggressive Investing at Harvard

Harvard University’s failed bet that interest rates would rise cost the school at least $500 million in payments to escape derivatives that backfired, reports Bloomberg.
Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the school’s annual report said. Harvard said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.

The transactions began losing value last year as central banks slashed benchmark lending rates, forcing the university to post collateral with lenders, said Daniel Shore, Harvard’s chief financial officer. Some agreements require that the parties post collateral if there are significant changes in interest rates.

“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,” Shore said in an interview yesterday. “In evaluating our liquidity position, we wanted to get some stability and some safety.”

Many of the derivative transactions were entered into in 2004, according to Harvard spokeswoman Christine Heenan. Larry Summers, now, director of Obama’s National Economic Council, was the university’s president at the time.