Emails Show Credit Default Swaps Led to Harvard Loss, Goldman Gain

The nation's oldest and richest university entered the $500 million credit default swap market.

(April 30, 2010) — According to emails released by a Senate committee, credit default swaps with Goldman Sachs were part of the Harvard Management Company’s investment strategy in 2007 that exposed the University to losses.

Harvard entered the $500 million credit default swap with Goldman paying about 100 basis points, or $5 million, per year for protection against defaults, the university newspaper, The Harvard Crimson, reported. As the real estate market tumbled, credit default swap rates increased to 200 basis points. While Harvard suffered losses, Goldman Sachs positioned itself to profit.

This trade was part of an investment strategy that is “no longer pursued” at Harvard Management Company, which invests the University’s endowment, said university spokesman John D. Longbrake, according to the article. It is unclear the amount Harvard lost.

The emails released follow the Securities and Exchange Commission’s fraud suit against Goldman Sachs. The government has accused the Wall Street giant of failing to disclose conflicts in mortgage securities, which cost investors more than $1 billion and fueled the worst financial crisis since the Great Depression. Goldman profited by betting against the mortgage investments it marketed to its customers while the housing market crumbed. Goldman has denied wrongdoing.

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