Vanity Fair article on Harvard's finances

Rich Harvard, Poor Harvard

by Vanity Fair

June 30, 2009, 6:37 PM

For years, administrators at Harvard University could throw money at anything that tickled their fancy. A new medical school building for $260 million? Sure. A massive, Robert A.M. Stern—designed addition to Harvard Law School? No problem. One of the most sweeping financial aid initiatives ever undertaken? Consider it done.

Of course, that was before the money dried up.

Now, Vanity Fair’s Nina Munk finds America’s oldest university suddenly at risk of not being able to keep the lights on. Over the past year, Harvard’s endowment has collapsed (it lost $8 billion between last July and October), its fundraising has declined, and its construction cranes have been idled. Gripped by the worst economic crisis in its history, Harvard is in trouble, and no one can decide who’s to blame.

Munk exposes the behind-the-scenes finger-pointing and uncertainty that has administrators longing for the gilded age of soaring endowments. Highlights from the article, “Rich Harvard Poor Harvard,” include:

A lone bright spot
• Harvard’s year-end numbers will not be as bad as predicted, Munk learned from a source on the board of Harvard Management Company, the firm responsible for managing the university’s endowment. Although the university’s endowment has shrunk precipitously over the past year, the insider says it will be down 23 to 25 percent, not the 30 percent predicted elsewhere.

Harvard doesn't fire people; it “resizes”
• Budget cuts are not in the Harvard vocabulary—or at least they haven’t been. “I'd rather use the words ‘reduction,’ ‘shifting things around,’ ‘reorganizing’—rather than saying something that says ‘cuts,’ which implies you whack the heads off flowers,” Evelynn Hammonds, the dean of Harvard College, said at a town-hall meeting in May. But there is a lot of whacking that will have to be done. “There are going to be a hell of a lot of layoffs. Courses will be cut. Class sizes will get bigger,” conceded a Harvard insider.

In the real world, people get fired for mismanagement like this
• The Harvard endowment soared from $4.8 billion in 1990 to $36.9 billion as of June 30, 2008, and in the last half-decade or so, the men and women who run Harvard seemed to have convinced themselves that the university’s fund would grow at double-digit rates for, well, eternity. “Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh’s dream—you know, during the seven good years you save for the seven lean years,” says Alan Dershowitz, a professor at Harvard Law School since 1967.

Harvard is desperate
• If Harvard were a serious business facing a liquidity crisis, it would have made drastic changes as its endowment tanked: say, axing senior employees, shuttering departments, and selling real estate. But elite universities don’t like shaking things up. “None of these schools has the ability to cut expenses fast enough” is how a hedge-fund manager who counts Harvard among his investors describes the situation. Munk asked the hedge fund manager to look at Harvard’s finances and assess the extent to which its endowment will be able to keep pace with its immovable costs. The hedge fund manager’s conclusion: “They are completely fucked.”

• In the fall of 2008, Harvard tried to sell off a $1.5 billion chunk of its private-equity portfolio—except no one was willing to pay anywhere near the asking price for those assets. One money manager described a conversation late last year with Jane Mendillo (who in July 2008 became president and C.E.O. of Harvard Management Company) in which he offered to buy back Harvard’s sizable stake in his private fund.

“Here, I think it’s worth—you know, today the [book] value is a dollar, so I’ll pay you 50 cents,” he said.

“Then why would I sell it?” Mendillo responded.

“Well, why are you?” he said. “I don’t know. You’re the one who wants to sell, not me. If you guys want to sell, I’m happy to rip your lungs out… If you are desperate, I’m a buyer.”

“Well,” Mendillo responded, “we’re not desperate.”

Except it’s pretty clear Harvard was desperate. In December, the university sold $2.5 billion worth of bonds, increasing its total debt to just over $6 billion. Servicing that debt alone will cost Harvard an average of $517 million a year through 2038, according to Standard & Poor’s.

A $1 billion mistake
• Harvard sold those bonds because it needed cash, fast, to cover what sources say was an almost unthinkable $1 billion unrealized loss from interest-rate swaps. The swaps were put in place under former Harvard president Larry Summers in the early 2000s to protect the university against rising interest rates on all the money it had borrowed. Instead, interest rates plunged. Yet for reasons no one can seem to explain, the university simply forgot to (or chose not to) cancel its swaps. The result was a $1 billion loss.

The fall of Harvard Management Company
• The longtime head of Harvard Management Company, Jack Meyer, quit to start his own hedge fund in 2005 after growing fed up with criticism over the eight-figure salaries some of his managers were pulling down and with persistent meddling from top Harvard officials. Two particular annoyances were Summers, who had been questioning Meyer’s investment strategies, and Robert Rubin, a member of the Harvard Corporation, who frowned on Meyer’s aggressive strategies and wound up on the “warpath” with Meyer, as one person put it.

• When Meyer left, he took much of Harvard Management Company with him — including 30 portfolio managers and traders, as well as the chief risk officer, chief operating officer, and chief technology officer. The place became “like a Ferrari without the engine,” according to a portfolio manager who arrived after Meyer left. This angered Rubin, according to someone who knows him well: “In Rubin’s opinion, Meyer crippled the institution.”

Rule one about that “resizing”: Don’t talk about it
• Munk became persona non grata in Cambridge, as Harvard refused to cooperate with her on the story. But speaking on the condition of anonymity, administrators and other officials were happy to snipe back and forth. “Were the judgments we made reasonable ones?” asked a former top Harvard administrator. “At the time, I think they were reasonable judgments. It turns out, with the benefit of hindsight, you might have preferred less ambitious plans.” A member of the board of Harvard Management Company doesn’t buy it. “This story is about leadership. It isn’t about money,” the person said.

Vanity Fair’s August issue, which contains the full text of “Rich Harvard, Poor Harvard,” hits newsstands in New York and Los Angeles on July 1, and nationwide on July 7.