Harvard loses $US1.25b on debt gamble

Harvard University faced a substantial financial loss due to terminating interest-rate swaps linked to its ambitious expansion plans. The swaps backfired when the university's endowment was losing value, leading to a loss of over $1.25 billion since 2008.

Harvard University experienced a significant financial loss due to terminating interest-rate swaps linked to its debt. These swaps were initially part of an ambitious expansion plan, but the financial crisis and falling interest rates forced the university to unwind these derivatives, resulting in losses exceeding $1.25 billion since 2008.

In the most recent fiscal year, Harvard University lost $345.3 million by terminating interest-rate swaps, adding to its cumulative losses from unwinding debt derivatives.

Harvard's financial strategy backfired when the interest-rate swaps, meant to lock in rates for future debt, required the university to post collateral as rates fell. This, combined with the economic downturn, led to substantial losses and forced Harvard to terminate the swaps to avoid further financial strain.

Harvard University decided to terminate its interest-rate swaps to avoid the obligation of posting millions in collateral as interest rates fell, which was part of a strategy to stabilize its finances.

To stabilize its finances after the losses from interest-rate swaps, Harvard raised cash, reduced its debt, and implemented budget-cutting measures, including reducing some student services. These steps were necessary to manage costs and improve financial stability.

The interest-rate swaps were initially agreed upon to lock in interest rates for Harvard's ambitious expansion plans, including a $1 billion science center in Allston, a Boston neighborhood near the main campus.

Harvard decided to terminate its interest-rate swaps to avoid the obligation of posting millions in collateral as interest rates fell. This decision was part of a broader effort to manage financial risks and stabilize the university's finances during a challenging economic period.

Following the losses, Harvard University has shifted its construction financing strategy from relying on debt to seeking donations, and has also raised cash and cut debt to stabilize its finances.

The financial losses from the interest-rate swaps led Harvard to put its ambitious expansion plans on hold. The university had to reassess its financial strategy and focus on stabilizing its finances before resuming the building projects, which are now being financed through donations instead of debt.

The financial losses forced Harvard to put its expansion plans on hold and take budget-cutting measures, including reducing some student services. However, the building plan has since been resumed.

After the financial losses, Harvard adjusted its construction financing strategy by shifting from debt to donations. This change aims to reduce financial risk and reliance on debt, ensuring more sustainable funding for future projects.

The decision to use interest-rate swaps was made during the tenure of former president Lawrence Summers, who was planning the Allston campus expansion.

Everyday investors can learn the importance of understanding financial instruments like interest-rate swaps and the risks associated with them. Harvard's experience highlights the need for careful risk management and the potential consequences of market volatility on financial strategies.

Harvard has acknowledged that it has exhausted the easiest opportunities for budget improvement and will face increasingly complicated choices to manage costs effectively.

Leadership changes at Harvard, particularly the transition from Lawrence Summers to Drew Faust as president, influenced financial decisions by shifting focus from aggressive expansion to financial stabilization. Under Faust's leadership, the university prioritized managing financial risks and stabilizing its budget.