Karl's Weird News

How Harvard’s Investing Superstars Crashed

Stocks were tumbling last fall as the new school year began, but at Harvard University, it was as if the boom had never ended. Workers were digging across the river from Harvard’s Cambridge, Mass., home, the start of a grand expansion that was to eventually almost double the size of the university. Budgets were plump, and students from middle class families were getting big tuition breaks under an ambitious new financial aid program.

The lavish spending was made possible by the earnings from Harvard’s $36.9 billion endowment, the world’s largest. That pot was supposed to be good for $1.4 billion in annual earnings.

Behind the scenes, though, a different story was unfolding. In a glassed-walled conference room overlooking downtown Boston, traders at Harvard Management Co., the subsidiary that invests the school’s money, were fielding questions from their new boss, Jane Mendillo, about exotic financial instruments that were suddenly backfiring. Harvard had derivatives that gave it exposure to $7.2 billion in commodities and foreign stocks.

With prices of both crashing, the university was getting margin calls–demands from counterparties (among them, JPMorgan Chase and Goldman Sachs for more collateral. Another bunch of derivatives burdened Harvard with a multibillion-dollar bet on interest rates that went against it. It would have been nice to have cash on hand to meet margin calls, but Harvard had next to none.

That was because these supremely self-confident money managers were more than fully invested. As of June 30, they had, thanks to the fancy derivatives, a 105% long position in risky assets. The effect is akin to putting every last dollar of your portfolio to work and then borrowing another 5% to buy more stocks.

On Our Fraudulent Economy

This morning Rick Santelli went nuclear on the entire “fraudulent mortgage” game – the culmination of a series of rants that he has (correctly) launched over the last year.
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 Here’s the point folks, when you get down to it:
* The entire last two decades of so-called “Economic Growth” has been fueled by one fraud after another, starting with the Internet Bubble.

* This fraud has been systematic and the mainstream media has been both an implicit and explicit enabler of these frauds, instead of doing its job, which is to root them out. The looks on the faces of the other CNBC “anchors” was one of abject fear – perhaps parts of “The Fourth Estate” is coming to realize that when the pitchforks and torches come out – and they certainly will if we hold the course we’re on – they might have some trouble explaining why they shouldn’t be near the head of the list of those being “sought”?

* The conflicts of interest in the media, where their advertising dollars come from those who are promulgating and profiting from these frauds means that they must choose between their job of protecting the public (their essential purpose under The First Amendment) and being a willing accomplice in the theft being performed by the prime actors in these frauds.

* With the exception of a few months around 1995 (which roughly coincided with Microsoft’s release of Win/95, the first “consumer” system of wide acceptance that had a dialer built in along with a web browser) the Internet NEVER doubled in size every three months. Yet this was paraded as the statistic to justify all the bubble companies up until the bubble burst in the spring of 2000.

Failure to save East Europe will lead to worldwide meltdown

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a “monetary Stalingrad” in the East.