Larry Summers and Harvard

As I’ve repeatedly pointed out over the years, during the last decade or so Harvard University had basically become a gigantic hedge-fund, with some sort of little school or whatever attached to one side.

For example, I think I once saw that the annual Harvard income from its investment portfolio was nearly an order-of-magnitude larger than the actual operating expenses of the College. I also think that in some years individual Harvard investment managers earned almost 200x the annual salary of full Harvard professors.

So far so good. Unfortunately, gigantic hedge-funds have a notorious tendency to “blow up”, and this seems to have happened to the one sitting on the banks of the Charles River. Apparently, Harvard has legal commitments to provide $11B(!) in additional capital contributions to various private investors over the next decade.

Problem is, Harvard has currently exhausted nearly all its liquidity, and although its massive Endowment is theoretically valued at $25B, the bulk is in extremely non-liquid assets, whose market value ranges from the “unclear” to the “doubtful”. Didn’t Lehman officially have tens of billions in net assets just a few months before it went bankrupt?

Offhand, I’d think that if Harvard had to liquidate its $25B at current fire-sale prices, there’s a pretty fair chance it might not cover the $11B in cash it legally owes. Major problem!

That’s the reason Harvard borrowed $1.5B from the bond markets a few months ago, but with the continuing financial crisis, this only buys a little time. Therefore, Harvard has now also declared a complete hiring freeze for junior faculty members and is even considering mandatory layoffs for tenured senior professors.

Pretty much all of these financial engineerings were put into place during the recent Harvard presidency of a brilliant economic theorist, whose name I can’t quite remember.

But I do seem to recall that he recently got another important job, as chief economic advisor to some silly country somewhere. I pity whichever poor Third World dictator was such a fool as to hire him. We’ll have to watch the international bankruptcy headlines closely to see whether he ended up destroying the financial system of Gabon or perhaps Burundi.

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