Harvard University, one of the world's richest educational institutions, stumbled into its financial crisis in part by breaking one of the most basic rules of corporate or family finance: Don't gamble with the money you need to pay the daily bills.
The university disclosed yesterday that it had lost $1.8 billion in cash - money it relies on for the school's everyday expenses - by investing it with its endowment fund, instead of keeping it in safe, bank-like accounts. The disclosure was made in the school's annual report for the fiscal year that ended June 30.
Typically, companies and big institutions manage their cash conservatively in order to have it readily available, by keeping the money in such low-risk investments as money-market mutual funds.
But Harvard placed a large portion of its cash with Harvard Management Co., the entity that runs the university's endowment and invests in stocks, hedge funds, and other risky assets. It has been widely reported that Harvard Management's endowment investments were battered in the market crash - down 27 percent in its last fiscal year. Not revealed until yesterday was that the school's basic cash portfolio had also been caught in the undertow.
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