The Boston Globe has a must-read article out on Larry Summer’s role in Harvard’s endowment collapse. I like the lede:
It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing – or mismanaging – its basic operating funds
Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.
“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.
But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.
Though the article doesn’t make this clear, the investments he made actually did pay off in the long run, even after you factor in the market collapse. The problem isn’t so much that the investments failed. The problem is that Summers failed. Maybe he would have withdrawn some of the risky cash investments when the market conditions changed. But the fact is, he failed to inform anyone of this agenda or to create a management system that would outlast his tenure. So Summers (and Jack Meyer, the superstar manager of the fund) leave, Faust doesn’t touch the investments, then the market turns and the bets collapse.
The real story, to me, isn’t the poor investments as such; it’s a story of poorly managed power — Summers was domineering and myopic — and that’s the reason it’s been getting so much play in the media. People have the sense that now that this guy is done managing Harvard’s money, well, he’s gone on to start managing all of ours. That makes people worried. I think they’re justified.
Photo Credit: Wikimedia Commons / China’s Next Global Agenda, World Economic Forum