Harvard Suffered Losses on Real Estate Trades with Goldman Sachs

Credit default swap was part of Harvard Management Company's investment strategy

Harvard University participated in derivatives trades with Goldman Sachs in 2007 that exposed the University to losses as the real estate market collapsed, according to e-mails released by a Senate committee yesterday.

According to the e-mails, Harvard entered the $500 million credit default swap—essentially an insurance policy that would pay off in the case of mortgage defaults—with Goldman paying about 100 basis points, or $5 million, per year for protection against defaults.

As the real estate market soured, credit default swap rates increased to 200 basis points, and Goldman stood to profit from the trade while Harvard, as a counterparty, suffered losses.

University spokesman John D. Longbrake said in an e-mail yesterday that this trade was part of an investment strategy that is "no longer pursued" at Harvard Management Company, which invests the University’s endowment.

It is unclear how much Harvard lost on the trade.

The emails’ release comes just days after Goldman was charged by the Securities and Exchange Commission with misleading investors about a pool of mortgage-backed securities that later lost significant value.

The firm has come under increased scrutiny in light of allegations of acting against its clients’ interests by speculating against the housing market while continuing to structure mortgage-backed securities for investors.

On Feb. 22, 2007, Goldman managers directed traders to close out positions that bet on a decline in the housing market in order to reap large profits for the firm at a time when many investors were suffering huge losses from their exposure to real estate.

"We need to buy back $1 billion single names and $2 billion of the stuff below—today." Daniel L. Sparks, the former head of the firm’s mortgage division, wrote to a group of traders in reference to deals—including the one with Harvard—that would lock in profits from shorting the housing market. "I know that sounds huge, but you can do it—spend bid/offer, pay through the market, whatever to get it done."

"You called the trade right, now monetize a lot of it," he added in the e-mail.

On April 16, the SEC alleged that Goldman misrepresented to investors the involvement of hedge fund manager John A. Paulson—who famously made billions through bearish bets on the housing market in 2007—in assembling a portfolio of mortgage-backed securities that he later bet against.

Goldman has vigorously denied charges of fraud.

But Goldman CEO Lloyd C. Blankfein ’75, who is speaking before a Senate committee today, admitted that the public could perceive the firm’s actions as an example of uncontrolled Wall Street speculation.

"We have to do a better job of striking the balance between what an informed client believes is his or her investing goals and what the public believes is overly complex and risky," Blankfein said in prepared remarks released yesterday.

—Steven J. Stelmach contributed to the research of this story.

—Staff writer Elias J. Groll can be reached at egroll@fas.harvard.edu.

—Staff writer William N. White can be reached at wwhite@fas.harvard.edu.

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