Drew Gilpin Faust and the Incredible Shrinking Harvard

By Richard Bradley | Boston Magazine |

Meyer left in 2005 amid controversy over the multimillion-dollar bonuses paid to some of his money managers. Rumors also swirled that he had clashed with Larry Summers over control of HMC. It’s hard to know: Neither man is talking. Still, there is no question that Summers took a much more active role in Harvard’s money management than his predecessors.

After Meyer stepped down, he was replaced by Mohamed El-Erian, a managing director at the bond giant Pimco, who lasted just under two years in the post. He was followed by Jane Mendillo, who had been managing Wellesley College’s endowment, and whose assumption of the job last July would become the very definition of bad timing.

The turnover may have hurt, because last fall’s stock market meltdown seemed to catch HMC asleep at the wheel. As of June 30, 2008, the Harvard endowment was 105 percent invested: HMC had borrowed above the endowment’s value in order to make additional bets. With the vast majority of its money tied up in holdings from which it could not easily be extracted, the university was ill prepared when the tanking Dow spurred anxious counterparties to call in their chits. Those margin calls forced Harvard to put up collateral—cash that it did not have. And it couldn’t unload its illiquid investments to come up with that money, because their value had fallen so precipitously that no one had any idea what they were really worth.

Further squeezing Harvard was a transaction Summers had pushed it into in 2004, when he successfully argued that the university should engage in a multibillion-dollar interest rate swap with Goldman Sachs and other large banks. Under the terms of the deal, Harvard would pay Goldman a long-term fixed rate while Goldman paid Harvard the Federal Reserve rate. The main goal was to lock in a low rate for future debt, and if the Fed had raised rates, Harvard would have made hundreds of millions. But when the Fed slashed rates to historic lows to try to goose stalled credit markets, the deal turned equally sour for Harvard: By last November, the value of the swaps had fallen to negative $570 million. The university found itself needing to post more collateral to guarantee those swaps, and would ultimately buy its way out of them at an undisclosed cost.

HMC "took the university right to the edge of the abyss," one alumnus, a financier who is privy to details of the university’s balance sheet, told me. I asked what he meant. "Meaning, you’re out of cash.

"That," he added, "is the definition of insolvency."

And so last fall HMC had no choice but to sell some $2 billion worth of stock into a plunging market. Harvard also raised an additional $2.5 billion by selling bonds on which—again because of the awful timing—it will pay interest at a significantly greater rate than identically rated corporate debt. As Bloomberg News has reported, the terms of Harvard’s bond sale mean that its interest costs will mushroom to as much as $550 million over three decades. In February, HMC, suddenly not looking so smart anymore, started laying off about a quarter of its staff.

On campus, there has been widespread denial about the severity of this crisis, a deep reluctance to admit that the endowment losses are going to have profound long-term ramifications. And many Harvardians still don’t know or understand exactly what happened, because the people who do know don’t want to talk about it. Some of Faust’s closest advisers actually opposed her initial letter to the Harvard community last November regarding the endowment plunge, essentially saying they could tough it out until the year-end financial report, by which time the markets might have risen.

Though the stock market hemorrhaging appears to be over, Harvard isn’t out of trouble. According to the university’s 2008 financial report, in the next 10 years it must pay various private investors some $11 billion in capital commitments. Where will that money come from if, as seems likely, endowment growth over
those years is minimal or nonexistent, and alumni’s own strained budgets limit their generosity? 

"If you can’t afford to lose the money"—and a university that depends on its endowment to defray operating costs can’t—"don’t play the game," says one Harvard grad, an investor who was once involved in the university’s finances.

"You had very smart people [at HMC] who never had a real answer to the question ‘What would happen if this doesn’t work out your way? What if what the black box is predicting doesn’t occur?’

"The answer would always be ‘That’s impossible,’ or ‘You don’t understand.’
"The arrogance," says this alum, "was palpable."

  • Fearful

    Harvard Law School is in dire financial straits with crushing financial commitments–a tuition-waiving public service initiative, an expensive, perhaps unnecessary building project, and faculty expansion–necessitating a staff layoff in the several dozens this summer, with more to come next year, and slashed budgets. This despite the School's completing a successful, record-breaking fund raising campaign last fall.

  • Lisa

    Faust is not only from Virginia, she is from money in Virginia. In my interactions with her, I got the sense that this background made her quite bored and dismissive when discussions of money came up. I'm talking about mundane things — childcare subsidies, negotiating faculty salaries, etc. For all her commitment to diversity, when any of these issues turned to talk about money, she appeared quite disdainful, as if all this were quite crass and not worthy of Harvard faculty. If my read is correct, she must be incredibly uncomfortable dealing with the current situation — not to mention uniquely unqualified to handle it.

  • Schuyler

    It is insane that Harvard is cutting funding for science and the rest of its campus while granting free tuition to those who are in the middle class and above.

  • danny

    Harvard ought to feel what it's like to suffer. That dumb school deserves this completely. Stupid Harvard, like anyone should give a darn what happens to that dumb school. It's really good to be honest to all you readers there, Harvard stinks and it ought to be. It's undeserving of its fame and it deserves to be poorer than poor. Poorer than the lowest college there is in the country. I hope Harvard burns in hell.

  • Christine

    Thoughtful people are trying to digest the degree to which Harvard was complicit in the financial meltdown in the larger economy, with its graduates enlisting so readily in the group- think of Wall Street that has caused so much human suffering. One is inclined to beleive that Harvard selected a particularly compliant sort of thinker who jumped through all the hoops to present Harvard with a Harvard-eligible resume. With all the emphasis on the status of Harvard, it is not surprising that the next career step would be high-flying Wall Street, where arrogance knew no bounds: the Best and Brightest they claim to be, as though an Ivy League degree were some sort of certification. Harvard has sustained a major hit to its reputation. Obviously, it selects for herd-thinkers and it's undergraduate education does nothing to change that. In the current state of the world I am very grateful for the luster a UC Berkeley College of Engineering degree confers. It's a question of values. Harvard

  • Xi

    The level of bitterness in these comments makes you wonder…

  • Saddiq

    the welcoming ice cream party you spoke of? They ran out of ice cream moments after it started….the crowd was underestimated. Perhaps a metaphor for her presidency.She acknowledges she got the job because she is a woman. At least two people on campus will say it.

  • Christine

    Second Wow. The "luster a blah blah blah degree confers?" Just can't resist a snicker there–it never ceases to amaze me how it's always these types that won’t ever miss an opportunity to grandiloquently name drop whatever school they attended who are the most eager to denounce the name brands located one tier of prestige above their own. Guess their not as lustrous degrees didn't buy them the self awareness to detect the irony in how their petty resume flashing in fact attests to the hold of status symbols like Harvard over the collective consciousness. Which offers insight on another point addressed in the article. Might Harvard have overplayed its hand in its spending ambitions not simply because it was rich and thought it could afford to but because being the anointed holy grail of the aspirational elite means it couldn’t afford not to? Perhaps behind the drive to have it more and bigger than everybody else is the fear that without display of overwhelming dominance, Harva

  • Average

    Wow, you're a jackass. Harvard produces some of the WORLD'S most important science and technology. It employs a huge percentage of people in Boston (hundreds of thousands). Do us all a favor and go kill yourself. You're a useless vestige.

  • Joe

    Harvard made a ridicule of itself by ousting Summers. That points to a deep problem with many on the faculty who made that happen knowing full well that it is not an honest endeavor. Harvard is in for years of trouble independently of the financial situation.

  • Joe

    Larry Summers bankrupted America, he bankrupted Harvard too.

  • Peter

    With City Councilors like Marjorie Decker, who has proposed that Cambridge reduce Harvard's in lieu of tax payments so that 9 janitorial jobs at Harvard can be saved, it would appear that Pres. Faust has already found a sugar daddy.

  • Jeff

    It's not really bitterness, it's just that, when the Emperor has no clothes, people aren't inclined to believe you when you point it out, especially when the Emperor looks so good in Crimson.

  • c

    It's pretty clear that many of the key people who led to the current crisis had Harvard (and other Ivy League) backgrounds. Hopefully our society will get over the fascination with institutional brands and realize that reputational inertia and pedigree cannot be a substitute for performance. Many of these supposedly top notch professionals have proven themselves to be as incompetent as anyone else but the tailwind that Ivy educations provided put them in positions of responsibility for which they were unprepared, the result is before us.

  • Bill

    Why didn't Harvard's auditors note the risk? How come they didn't detect Madoff?Bill Drissel

  • Neeraj

    This author seems lazy. The "common touch" thing Faust does (taking handshakes at the freshmen ice cream social) is an annual tradition that every President does every year — the author could have learned that by speaking to anyone other than a single employee present at the time. The author acknowledges he couldn't get anyone to speak badly of the current president on record, but then didn't critically examine the positive comments. She is a total non-entity on campus — they should have hired Kagan. As for the author's thoughtless knee jerk animosity towards Summers, it has already been said many many times that if you simply google Summers' speech about reasons for the lack of tenured women in sciences then you'll see his comments in context have been mischaracterized by lazy reporters such as this author. In addition, the below is a fun article about Summers. He wasn't such a bad guy, and some people who were on campus at the same time he was remember him fondly.http://www

  • mike

    Beware of anyone who begins a sentence with the word "might:"
    Might Harvard have overplayed its hand in its spending ambitions not simply because it was rich and thought it could afford to but because being the anointed holy grail of the aspirational elite means it couldn’t afford not to?
    …and then doesn't know how to end it.
    Christine, I take it, is a graduate of the Great University.

  • Dwight

    Since most major universities depend on endowment funds, and all investments were hurt by the recent recession, why should the quality of Harvard decline any further than any other comparable institution? Why should the relative ranking of universities change at all as the sinking tide lowers all boats?

    The Harvard I knew as an undergraduate in the seventies was anything but an institution cultivating a 'herd mentality,' as some posters believe. I have been associated with five other universities since then, and I never enjoyed greater freedom of thought than at Harvard.