Harvard's Stunning Mistakes

Last Updated Oct 19, 2009 5:25 PM EDT

Harvard University has released its annual financial report and it is a dozy.
In reading the report, here is what I found shocking: The braniacs at Harvard decided to ignore one of the chief tenets of personal finance: Don't invest money that you can't afford to lose.

The school decided not to safeguard a large portion of cash that it needed to pay for such things as paper towels, football jerseys, professors' salaries, journals and formaldehyde into super-safe places like money markets or Treasury bills. Instead Harvard got greedy and handed the cash over to the financial gurus at its endowment fund, where the money was placed in risky investments. Thanks to the gamble, Harvard lost $1.8 billion in cash.

Beyond betting the money on an all-night session at a Vegas craps table or investing it in a get-rich-quick infomercial scheme, it would be hard to imagine a more reckless approach to handling money that needed to be protected above all else.

In an interview with The Boston Globe, Harvard's chief financial officer Daniel S. Shore noted that the endowment managers had invested the school's short-term cash in the past and it had worked out. Sure, you can make a killing with a ton of cash when the markets are surging, but what's more important is protecting the downside. If you can't afford to lose money in the short-term don't do anything stupid.

Gambling with the petty cash isn't the only embarrassment that the annual report revealed. Harvard also lost a $498 million bet that interest rates would rise by fooling around with derivatives. That's how much Harvard had to pay to escape $1.1 billion worth of interest rate swaps.

In a Q&A with the Harvard Gazette, Shore was asked how the school's investment strategies square with its responsibility to steward the money that must support the university for generations.

Here was Shore's response: "There does need to be a balance between investing for long-term returns and managing for near-term needs, and we are now more conscious than ever of that balance.."

Gosh, let's hope so.

Further Reading:

Is Harvard Going Broke?
Ivy League Endowment Report Card: "F"
Harvard image by Chaval Brasil. CC 2.0.