A classic buffoon.
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Boston Globe
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.
So how did one of the world’s great universities err so badly in something so basic? It is a story with many actors, the story of an institution that grew complacent as its endowment soared ever higher - an institution that, when the crunch hit, was operating on financial auto-pilot, with many key players gone, and those remaining inattentive, in retrospect, to the risks ahead.
In the Summers years, from 2001 to 2006, nothing was on auto-pilot. He was the unquestioned commander, a dominating personality with the talent to move a balkanized institution like Harvard, but also a man unafflicted, former colleagues say, with self-doubt in matters of finance.
Certainly, when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say. The cash account grew to $5.1 billion during his tenure, more than the entire endowment of all but a dozen or so colleges and universities.
Summers had a huge influence over Harvard money matters during his tenure, according to several people who worked with him. Known for his love of intellectual debate, he would hear out the opinions of others but ultimately was forceful in his own views. He was more financially sophisticated than most other Harvard presidents, and more deeply involved in decisions, from how to maximize returns on Harvard’s cash to using financial instruments called swaps, to hedge against the risk of rising interest rates - a hedge that would ultimately backfire.
In Harvard’s 2001-2002 financial report, Summers’s opening letter states, “During my first year as President, we took the opportunity to look anew at some of Harvard’s financial procedures to make sure we are making the most of our resources.’’ He closes the letter noting the need for “prudent fiscal management.’’