Harvard University boasts a staggering $35.7 billion endowment and touts an impressive 10% average annual rate of return over 20 years. But the elite Ivy League school is less proud of its plummeting performance in recent years, inflicted in part by a big hit that it took in the derivatives market where it suffered huge losses.

Harvard's Bad Bet

Now, Harvard plans to issue $2.5 billion in debt this week to refinance debt it built up after the 2008 financial crisis, which led the university to pay $1.25 billion to banks to back out of derivatives contracts, according to an article in Bloomberg.

Harvard is not the only institution to have ongoing problems from interest-rate swaps, although it has more resources than most to overcome them.

Other Colleges Hurt By Swaps

A June 2016 report from The Roosevelt Institute looked at 84 colleges and universities, and found that over half had put money into interest rate swaps. Historically black Alabama State University, for example, is potentially liable for payments of $3.74 million to exit its swaps deals. The Roosevelt Institute has criticized derivatives as too risky for most colleges.

Harvard's Woes

The story behind Harvard's woes began in 2004, when then-president and former Secretary of the U.S. Treasury Lawrence Summers approved a highly speculative $2.3 billion financing plan for university expansion, which used interest rate swaps to lock in borrowing costs at what were then attractive rates. The 2008 financial crisis then put Harvard into a liquidity crisis. It faced calls for an extra $1 billion of collateral to back these interest rate swaps contracts, while simultaneously suffering an $11 billion hit to the value of its endowment. In the end, Harvard paid heavily to unwind these swaps. Summers had left the Harvard presidency before the crisis hit.

Harvard's Massive Debt

In addition to its monumental endowment, Harvard also has a huge burden of debt. The figure was $5.5 billion as of 2015, including about $2.5 billion incurred in 2008 to unwind those suddenly toxic interest rate swaps contracts. With interest rates at historic lows, this week the university is refinancing a large portion thereof with a new debt issues worth $2.5 billion. Harvard still boasts a AAA credit rating from Moody's, and has reduced its total debt from $6.3 billion in 2010. 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.