Larry Summers' bad bet

By AT Contributor

A couple of days ago, Larry Summers spoke some soothing words about the economy. Learning about his ability to predict the economic future makes me wish he were pessimistic.

Nathan Vardi reports for Forbes:

A few years ago, as Harvard was preparing to issue billions of dollars of debt to finance an ambitious building expansion, the university entered into interest rate swaps to lock in seemingly low interest rates. The swaps were huge, with a notional value of $3.7 billion on June 30, 2005.

Such swaps had the university paying a fixed rate to, and simultaneously receiving a variable rate from, a counterparty. The variable rate is keyed to the London Interbank Offered Rate (Libor). The swaps made sense at the time. Harvard had some variable-rate borrowings, and the derivatives effectively converted those debts into fixed-rate ones. With hindsight, Harvard would have been better off just borrowing in the overnight market and taking its chances.

The university could have easily gotten out of the swaps after Summers left Harvard in 2006. But it did not. Near the end of 2008, Libor rates plummeted, forcing the university to post collateral

Thomas Lifson adds:

I wonder if the "ambitious building plans" will be scaled back? Harvard had bought up a huge amount of land across the Charles River from Cambridge, in the Allston section of the city of Boston, almost doubling the size of its campus. The Business School and Athletic complex were already in Allston, but would be joined by science and technology buildings, as well as the schools of education and public health.

This expansion was Summers' chance to make a dramatic physical mark on the future of Harvard, ensuring him a place among the great presidents of Harvard, such as Charles William Eliot, who took Harvard from a provincial college to the pre-eminent research university. How interesting that Harvard too was leveraging up to invest in real estate during the bubble. Technically, having to post collateral doesn't mean that Harvard is "under water" as they say. But it does mean that it is facing a potential major loss. The huge endowment has taken a hit, and cutbacks will have to be made.

Summers, the guy who ran up debt to invest in real estate, leaving a shaky scheme that's created huge liabilities, now tries to do for America what he did for Harvard.

If the media ignores this story, as I expect, it will provide further evidence of their role as propagandists, not journalists. If a Republican appointed someone who had screwed up this badly to a post where similar kinds of judgment are required, we would hear no end of it.