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Interest-Rate Swaps Cost Harvard More Than $1.47 Billion

In: BRAZEN Big Banks, Swap Mania and the Fallout

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  • A. Rashad Abdel-khalik

Abstract

At Harvard you can find some of the most intelligent and skilled people in the institutions of higher learning. Among these highly regarded people are professors who invented and taught some of the mathematical models used for the valuation of financial derivatives. There are also professors who were actually active in affecting the federal government rules that governed, or more accurately failed to govern, Over-the-Counter (OTC) market for financial derivatives. Also at Harvard you find the largest university endowment. In 2008, the university’s total endowment was valued at $36 billion, but for a variety of reasons, including the slump in the economy, the value of the endowment dropped to about $26.03 billion by the end of 2009. Of that drop, at least $1.176 billion was due to losses on swap contracts: $497 million of it was paid out in cash and $768 million was recorded as a liability representing the fair value of long-term obligations — the amount of money that must be paid at that time to terminate the swaps…

Suggested Citation

  • A. Rashad Abdel-khalik, 2019. "Interest-Rate Swaps Cost Harvard More Than $1.47 Billion," World Scientific Book Chapters, in: BRAZEN Big Banks, Swap Mania and the Fallout, chapter 18, pages 253-259, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813275577_0018
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    Keywords

    Swaps; Interest Rate Swap; Unconscionable Contracting; Termination Penalties; Embedded Costs; Paying for Nothing; Gambling; ISDA; Master Agreement; Deceit; Inadequate Disclosure; Hidden Costs; Zero Sum Game; Wealth Transfer; Paper Chasing Paper; Floating Rate; Synthetic Rate; Credit Risk; Demonstrations; Water Shut Off; Union Class Action Suit; The LIBOR Scandal; Non-Profit;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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