Harvard's losses tied to cash decision

By Beth Healy, Globe Staff

Harvard University last year lost nearly $2 billion in the cash account it uses to pay for daily operations, by investing the money with its endowment fund instead of keeping it in safer, bank-like accounts.

The loss, disclosed today in the university's annual financial report, resulted from Harvard financial executives taking the unusual step of placing a large mount of the university's cash with Harvard Management Co., the entity that runs the school's endowment and invests in stocks, hedge funds and other risky assets.

Typically, companies and institutions manage their cash accounts conservatively in order to have funds readily available, by keeping that money in bank-like accounts and other low-risk investments such as money-market mutual funds.

Harvard, however, said it lets its endowment managers invest the cash in order to get higher returns, a move that paid off in previous years when the stock market was rising, said the university's chief financial officer, Daniel S. Shore. But that turned out to be a disaster when the financial markets collapsed last year, causing huge investment losses. The $26 billion endowment reported a 27 percent loss for its last fiscal year.

Shore would not say exactly how much cash the university had with Harvard Management last year, but it was more than in prior years, he said.

"We were invested fairly heavily with them and that's what led to the losses,'' Shore said in a Globe interview. "The problem as much as anything was we weren't as diversified as we could've been."

The disclosure sheds new light on the cash crunch the university experienced in the fiscal year that ended June 30, and the sudden and urgent warnings that Harvard president Drew Faust sounded last December about the plummeting value of the endowment. A dent in the endowment would mean tighter budgets going forward, and the loss of the $1.8 billion meant a need for other sources of cash. Harvard raised $1.5 billion in a bond offering last January to boost its cash position.

By June, Harvard had laid off staff and offered voluntary retirement to others, and cut expense cuts across the campus.

The $1.8 billion of lost cash, part of Harvard's general operating account, was another blow to the institution in a year of humbling financial lessons. Its endowment, the nation's largest, shed $11 billion in value, ending the year with $26 billion in assets and prompting firings and internal restructuring at Harvard Management to get its risk-taking in check.

University officials are also moving to lower the school's risk taking in financial matters. On top of the cash losses, the school lost $500 million to get out of an investment called interest-rate swaps that backfired. Last summer, the university assembled a 10-member financial management committee, including faculty members and outside investment experts, to advise Shore and other members of the financial staff.

Shore said the losses have caused him and others to place a much greater emphasis on risk. "I think we'll be in a much better position going forward,'' Shore said.

To read a copy of the report click here (pdf file).