Harvard Swaps Crisis: Nonprofit “Case Study in What Not to Do,” Mark Williams Tells Media

in Faculty, Finance, Risk Management, SMG Hot Topics
April 13th, 2010

“Clearly, There were major missteps,” Williams says


Mark WilliamsFor coverage of Harvard University’s deep financial woes, caused by their high-risk investment strategies, Bloomberg and WBUR News talk to Mark Williams, executive-in-residence in Boston University School of Management’s Finance department, and BU alumnus (MBA ’93).

WBUR News reports,

Harvard University had to scramble last year to raise $2.5 billion….It turns out the university spent $1 billion just to get out of volatile investments it owned.

Harvard had bought these financial derivatives in 2004.  The university was trying to lock in interest rates for debt — for financing the huge, multi-billion-dollar construction project planned in Allston, which recently was halted. Interest rates were very low at the time. And with a project of that size, if rates go up, costs rise by millions of dollars.

Mark Williams, a risk management expert at Boston University, said not having enough cash on hand was Harvard’s fundamental mistake.

“It’d be the equivalent of you going on vacation and not looking at your tank and making sure it’s full of gas,” Williams said. “And getting out in the middle of the desert, running out of gas, and being forced to sell your car just to buy a bus ticket to get home.”

From the article “New Report Shows Harvard Scrambling After Financial Losses,” by Curt Nickish, WBUR News, December 18, 2009

Bloomberg News reports,

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps….The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

From the article “Harvard Swaps Are So Toxic Even Summers Won’t Explain,” Michael McDonald, John Lauerman and Gillian Wee, Bloomberg News, December 18, 2009