Larry Summers Gambled Away Harvard Billions

Bloomberg News on Dec. 18 revealed that President Obama's top White House economic advisor, Larry Summers, cost Harvard University billions of dollars, through speculative bets called interest-rate swaps, when he was president of the University from 2001-2006. Things got so bad for Harvard, as the result of those gambles, that Harvard had to borrow $2.5 billion in the form of corporate bonds last year, to buy their way out of the interest-rate swaps, that had gone sour when Federal Reserve Chairman Ben Bernanke drove interest rates down to zero percent. The Harvard endowment had financed a $10 billion construction project to expand the university's science center into the Boston's Allston neighborhood, and had taken out interest-rate swaps, in the belief that interest rates would inevitably rise, due to economic growth. As the result of Summers' bad bet, Harvard was forced to cough up nearly $1 billion in penalty fees, to opt out of their contracts with JP Morgan, Goldman Sachs, Morgan Stanley, and Bank of America.

The Bloomberg News exposÈ came at a moment when Summers has emerged as President Obama's top adviser on monetary and economic policy, in the wake of Treasury Secretary Tim Geithner's widespread discrediting, according to several White House sources. On Sunday, Dec. 13, Summers appeared on nationwide television, to claim that "the recession is over," and normal job expansion will be seen by Spring 2010. Summers' lunatic claims caused Christina Romer, the head of the White House Council of Economic Advisers, to declare exactly the opposite on another Dec. 13 TV appearance, warning that the economy and the financial system is still in deep trouble.

Summers, who served as president of Harvard until he was forced to resign after two no-confidence votes, refused to talk to the Bloomberg News reporters who put the Harvard endowment story together. Bloomberg reported, "Harvard's failed bet helped plunge the school into a liquidity crisis in late 2008. Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later... Its banks, including JPMorgan Chase &Co., headed by James Dimon, were demanding cash collateral payments—ultimately totaling almost $1 billion—that Harvard in 2004 had agreed to pay if the value of the swaps fell... Drew Faust, Harvard's president since 2007, said she experienced some of her darkest days as she watched the collapse of U.S. markets that deepened the school's losses."

- His Own Little Dubai -

The Bloomberg News story portrayed Summers as the architect of an ambitious expansion program, which included construction of a "pedestrian tunnel beneath the water," reminiscent of the kinds of lavish real estate schemes that recently blew out Dubai, forcing the Gulf emirate into near-sovereign default. The Summers' scheme obliterated the industrial and working class neighborhood of Allston, literally tearing down homes, tearing up streets, to pave the way for two 500,000 square-foot science buildings. As Harvard endowment losses piled up, the project was put on indefinite hold early this year.

In a pitch to the Harvard faculty in May 2004, Summers attacked critics of the plan, declaring, "The only real limitation faced by the Faculty was the limit of its imagination," according to official minutes of the session. To finance the scheme, Summers and his fellow Harvard endowment officers, bought an initial $2.3 billion in interest-rate swaps, to lock in borrowing costs that were not even due to begin until 2008. According to Peter Shapiro, a bond trader interviewed by Bloomberg, both the size and the duration of the interest-rate swap contracts was both highly unusual—and highly risky.

Since 2008, the Harvard endowment lost an estimated $11 billion in total value, the university cash accounts lost another $1.8 billion, and the university shelled out another $1 billion to unwind their interest-rate swap contracts at the worst possible moment. According to Harry Lewis, a former dean of Harvard College, "They have a structural problem. There's something systematically wrong with Harvard Corp. It's too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking."

This the legacy of Larry Summers' five years as Harvard's president. And this is the man that President Obama has placed his trust in, to steer the U.S. financial system and the U.S. economy through its most desperate crisis in history?