UPDATE: There is more to the story of Harvard’s losses here. MOre of the same but the amount seems to have been even greater.
Obama attended three universities in his mysterious academic career. The last was Harvard, specifically Harvard Law School. Some of us have wondered where he learned economics. For example, he was famously asked by Charlie Gibson in one of the Presidential Debates last year, would he still raise capital gains taxes if the result would less revenue from the tax ? He answered yes, he would, for “fairness.” Where would he get such an idea ?
Only a year ago, Harvard had a $36.9 billion endowment, the largest in academia. Now that endowment has imploded, and the university faces the worst financial crisis in its 373-year history. Could the same lethal mix of uncurbed expansion, colossal debt, arrogance, and mismanagement that ravaged Wall Street bring down America’s most famous university?
How could this happen ?
Harvard, it seems, had no choice. Unwilling to sell its assets at fire-sale prices, it needed immediate cash to cover, among other things, what my sources say was approximately a $1 billion unrealized loss from interest-rate swaps. That’s a staggering figure: $1 billion, roughly a third of the university’s entire operating budget for last year.
Those swaps, put in place under Harvard’s then president, Lawrence “Larry” Summers, in the early 2000s, were intended to protect, or hedge, the university against rising interest rates on all the money it had borrowed. The idea was simple: if interest rates went up, the swaps would bring in enough money to cover Harvard’s higher debt payments.
Instead, interest rates went down. And for reasons no one can explain to me, even as interest rates were plunging in 2007 and 2008, the university simply forgot, or neglected, or chose not to cancel its swaps—with the result that Harvard wound up facing that $1 billion loss! Whose responsibility was that? Where were Harvard’s chief financial officer and treasurer while all this was going on?
He was advising candidate Barack Obama.
During the boom years, it was assumed without question that the value of Harvard’s endowment would keep rising. Trusting in that false certainty, the already profligate university went wild, increasing its annual operating budget by 67 percent, from an inflation-adjusted $2.1 billion in 1998 to $3.5 billion in 2008—this, even as the number of students remained constant.
Does that sound familiar ?
Officially, the university charges $48,868 a year for undergraduate tuition, room, and board—that’s an increase of 50 percent over the last 10 years—but only a small number of students actually pays that much. Back in 2004, under growing pressure from Washington, and in response to outsiders who accused the school of (a) elitism and (b) hoarding its immense wealth, Larry Summers shook up the world of higher education by announcing that students whose parents earned $40,000 a year or less would be able to attend Harvard gratis. Two years later, that cutoff was increased to $60,000, a figure well above the median U.S. household income.
Does that sound familiar ?
What really happened is that somewhere along the line, around the year 2000 by most accounts, Harvard Management Company, like the university itself, lost its way.
In droves, the best portfolio managers started to leave Harvard Management Company. For most of them, the issue was money, pure and simple. Under Meyer, what Harvard paid his people was based on performance—in most cases, about 10 percent of what they made for the university. As the endowment got bigger, their incentive bonuses got bigger, too. And before long, the (mostly) men at Harvard Management Company were by far out-earning any administrator or professor at the university they were working for.
Jon Jacobson, aged 34, was Harvard’s top earner in 1995. He made $6 million that year, roughly 25 times more than the university’s then president, Neil Rudenstine. Two years later, in 1997, Jacobson, a former trader at Shearson Lehman Brothers, made $7.6 million. By 1998, Jacobson was making $10.2 million.
Resentment followed. At first, articles criticizing Harvard’s well-paid or overpaid money managers were limited to The Harvard Crimson and The Boston Globe. Then The Wall Street Journal got its hands on the story. Soon after that, in 1998, and backed by $500 million of seed capital from Harvard’s endowment, Jacobson quit to start his own hedge fund; no one had to know how much money he was earning.
Complaints about excessive compensation at Harvard Management Company gathered force, like an avalanche or a mudslide. By the early 2000s, Harvard’s top moneymen were making as much as $30 million to $40 million a year. Finally, in 2003, seven members of Harvard’s class of 1969 wrote a strong letter of protest to the university’s president, Larry Summers. They spoke out loudly, publicly, informing any member of the media who would listen that compensation at Harvard Management Company was “obscene.”
This is sounding more and more like the Obama Administration.
In response to the growing protests about “obscene” compensation, Meyer tried to reason with the Harvard community. If Harvard were to outsource its portfolio to various hedge funds, instead of managing its money in-house, he argued, the fees would amount to at least twice what he paid his traders. The end justified the means: consider the billions of dollars that his team was earning for the university!
Meyer’s pragmatic line of reasoning was ignored. Meanwhile, more of his best people left in disgust. “You get to the point where you just don’t want the ugly calls or the press coverage,” I was told by one of Meyer’s former portfolio managers. “I just said enough’s enough.”
Yes, I think Harvard is where Obama learned economics.
Q-“Where did Obama learn his economics ?”
A-He didn’t.