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The Nightly Newsletter


Go Broke the Ivy League Way: GS, JPM, MS, BAC

July 21, 2009


By: Jonathan Yates

Contributor, Stock Traders Daily

Risk control:  Control your risk and realize opportunities regardless of market direction or economic conditions, and do it without sacrificing time or lifestyle.  Trend Tracker.  This is the most powerful tool on the Market.  It allows individual investors to take advantage of their competitive advantages.  We can control our risk better than institutional investors ever could, and Trend tracker gives us the opportunity to do it without making mistakes.

(La Jolla, CA) In mid-2008, the endowment for Harvard University stood at $36.9 billion, the richest for any school in history.  Investment declines now have Harvard, in the words of one recent article, in danger of   “…not being able to keep its lights on.”  There are lessons for all in this stunning reversal.

The first is that Harvard lived beyond its means, counting on investment gains to cover one-third of its $3 billion annual operating budget.  Like day trading tech stocks in the 1990s and flipping houses in the 2000s, Harvard is paying the price for its greed in foolishly relying on investments for fixed expenses.  Others, like Dartmouth, rely on investment income to cover even more of its operating costs.

Next, Harvard invested where there was a lack of liquidity and transparency.  While $36.5 billion is impressive, it is smaller than the Vanguard 500 Index Fund and could have easily been invested through trading programs and investing options with complete access to capital, full transparency, unique features and a proven track record.  Harvard instead chose to invest billions in private equity, hedge funds and commercial real estate ventures. 

Due to the lack of transparency, Harvard has no idea how much is lost and the value of its endowment, now estimated around $25 billion.  Harvard has warned, however, that it has fallen another 30%.  But others put the loss at 50%.  As private equity groups and hedge funds are not publicly traded, portfolio value is set by the management of the groups on a quarterly basis.  While the value of its endowment is uncertain one thing is definite: Harvard lacked in risk control, “the most powerful tool in the Market,” according to Tom Kee, President and Founder of Stock Traders Daily.

From here, the lack of liquidity is further devastating Harvard’s endowment.  The only buyers for private equity assets are, oftentimes, other private equity investors.  Knowing of Harvard’s predicament, only low ball offers are being made.  Harvard is now in the position that Tom Kee has cautioned about, when fear and greed prevail, “…and investors stop paying attention and let emotions take over.”  One never wants to find themselves like Harvard, having to sell to the entity that sets both the “bid” and “ask.”

Harvard had to float $2.5 billion in bonds in December 2008 to meet operating costs.  The yearly interest for its debt of over $6 billion is $517 million through 2038, with the credit market now valuing Harvard’s creditworthiness as “junk” (about 7 points over Treasuries).   Now Harvard’s endowment has to produce over $1.5 billion annually to meet its share of the operating budget and interest expenses.  If the endowment is $15-20 billion, as some have reported, almost a 10% return is needed to just break even.

Not only is Harvard unaware of its endowment size and unable to sell assets, it is obligated for $11 billion in unfunded commitments to private equity groups, hedge funds and real estate concerns.  Like Goldman Sachs (NYSE: GS) and JP Morgan (NYSE: JPM), Harvard is also looking at billions in commercial real estate losses.  Unlike Goldman, JP Morgan, Morgan Stanley (NYSE: MS) and Bank of America (NYSE: BAC), however, Harvard will not receive a taxpayer bailout to allow it to return to prosperity.





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