December 24, 2009

Like teachers like bankers!!!

When it comes to criticizing Wall Street investment bankers, there may be few adjectives that have been spared in the last twelve months. However, it seems that the bankers are not the only ones to be blamed. Their alma mater has also got it all wrong when it came to judging risks. 'How to invest profitably' is not a lesson that only the bankers need to learn. The school that produces most of the Wall Street honchos has been one of the biggest victim of poor risk management.

We are referring to one of the most renowned business schools in the world - Harvard Business School. To fund its expansion plans, the school invested in interest swaps. In December 2004, the institution bought swaps on construction bonds worth US$ 2.3 bn. The Fed rates were then 2.25%. With the Fed slashing interest rates to near zero, Harvard University has had to bear losses of a staggering US$ 1 bn.

The crisis has taught some very important lessons. To the bankers and to their teachers!

Source: Equitymaster's 5 min wrapup - 23rd Dec2009