Low Rate Mortgage

I thought Harvard was filled with smart people. Or is it filled with real dummies?

Harvard?s Bet on Interest Rate Rise Cost $500 Million to Exit By John Lauerman and Michael McDonald Oct. 17 Bloomberg - Harvard University?s failed bet that interest rates would rise cost the world?s richest school at least $500 million in payments to escape derivatives that backfired. 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. The university in Cambridge, M achusetts, 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. ? Harvard sold $2. 5 billion in bonds in the fiscal year, in part to pay for the swap exit, even as the school?s endowment recorded its biggest loss in 40 years, the report released yesterday said. This is the first time the university has detailed the cost of exiting its swaps. Further Pressure ?Substantial losses? in Harvard?s General Operating Account, a pool of cash from which bills are paid, further put pressure on the school, the report said. The net et value of the account fell to $3. 7 billion from $6. 6 billion during the fiscal year, according to the report. Harvard has typically invested a large portion of this operating account alongside the endowment, generating ?significant positive investment results, ? the report said. This year, the endowment?s losses hurt Harvard?s cash, according to the report. Swaps are a type of derivative where two parties agree to exchange payments tied to a financing, typically receiving a variable - rate for a fixed - rate payment. The terminated contracts include three tied to $431. 7 million of bonds the university sold in 2005 and 2007, the annual report said. Unwinding Swaps From New York to San Francisco Bay, tax - exempt issuers have paid hundreds of millions of dollars to unwind bond - and - swap transactions officials initially said would cut borrowing costs. The deals fell apart when municipal - bond insurers, who backed much of the underlying debt, lost their AAA ratings in 2008 and interest rates, instead of climbing, plunged to record lows in the worst credit crisis since the Great Depression. The swaps are often pegged to Securities Industry and Financial Markets ociation lending benchmarks or the three - month dollar London - Interbank Offered Rate, known as Libor. Libor closed yesterday at 0. 28 percent, from a 10 - year high of 6. 89 percent on June 1, 2000. Yale University in New Haven, Connecticut; Georgetown University in Washington and Rockefeller University in New York have reported losses related to interest - rate swaps, in some cases prompting the schools to pay termination fees to end the contracts. Lawrence Summers The annual report provides new details on Harvard?s derivative - related losses. Many were entered into in 2004, said Harvard spokeswoman Christine Heenan. Lawrence Summers, director of President Barack Obama?s National Economic Council, was the university?s president at the time. White House spokesman Matthew Vogel declined to comment. Harvard Management Co. , which administers the endowment, has been run since July 2008 by Jane Mendillo, former chief investment officer of nearby Wellesley College. She took over from Mohamed El - Erian, now chief executive officer of Pacific Investment Management Co. , which oversees the world?s largest bond fund from Newport Beach, California. He succeeded Jack Meyer, who ran it for 15 years, in February 2006. Harvard?s 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, ? said Robert Doty, a municipal finance adviser at American Governmental Services in Sacramento, California. ?It shows that with these products that are so highly complex, people are a long way from knowing as much about these products as they think they do, ? he said. Financing Construction The Harvard swaps involved bonds sold to finance a medical research building, graduate housing, parking and a Center for Government and International Studies, according to reports from Moody?s Investors Service. They were also used to lock in rates for future bond sales for an expansion of the campus across the Charles River in Boston that has since b