Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%. No wonder Meyer and El-Erian tried to talk him out of it: the Harvard endowment was never designed as a place to invest sums of cash which might be needed immediately. Instead, it’s designed to invest for the very long term, taking advantage of the higher returns on illiquid investments.
Summers was playing a high-risk carry-trade game with Harvard’s cash:
The aggressive investment of cash accounts is part of how the university has long run its “central bank,’’ an account that holds funds from its various schools and pays them a modest US Treasury rate of return. The “bank,’’ in turn, has invested the lion’s share of that money with the endowment, generating returns that are used to pay for shared needs, like graduate housing and financial aid.
No one had the stones to stand up to Summers when it came to this high-risk strategy of essentially borrowing at Treasury rates and investing the proceeds in an illiquid long-term endowment — certainly not James Rothenberg, Harvard’s part-time, unpaid, California-based treasurer.
After Summers left, sheer inertia took over, and nothing happened — maybe because El-Erian was soon on his way out as well. The result was that the university ended up losing 27% of its $6 billion in “cash”: a whopping $1.8 billion. There’s no indication, of course, of any kind of apology from Summers.