Bloomberg’s Michael McDonald, John Lauerman and Gillian Wee weigh in with a massive investigation into Harvard’s interest-rate swaps that warms this journalist’s heart.

(Bloomberg being about the only news organization that can still afford to conduct long-term investigative journalism.)

Bloomberg’s thesis:

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances.

The piece begins with a terrific scene as a desperate Harvard asks a Massachusetts state authority for hasty approval to borrow money—a lot of money.

It’s worth quoting at length:

Dec. 18 (Bloomberg) — Anne Phillips Ogilby, a bond attorney at one of Boston’s oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away.

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them.

How many alumni gifts went up in smoke to pay that off?

The Bloomberg reporters obtained a copy of that interest-rate swap agreement with JP Morgan (while rather acidly noting that JP Morgan boss Jamie Dimon, an HBS grad, really stuck it to his graduate alma mater). The agreement was originally a cause for celebration.

Harvard and JPMorgan celebrated the bond issue by hosting a cocktails-and-dinner party at the French restaurant Mistral, in Boston’s South End neighborhood, where appetizers start at $15 and entrees cost about $40, according to e-mails obtained from the state finance agency. JPMorgan invoiced the agency $388.78 for three employees who attended: Caswell, Marietta Joseph and Danielle Manning.

[Note to the Amalie Benjamin generation: That is some hot-s*** reporting.]

The reporters also found that Harvard tried to hide its financial tracks. Again, the relevant section is worth quoting at length [emphasis added]:

Harvard needed cash to pay bills, refinance outstanding debt and break its money-losing swap agreements, according to a series of e-mails beginning on Oct. 31 last year between [Harvard’s Ropes & Gray bond lawyer] Ogilby and staff members of the state authority that were obtained by Bloomberg News. School officials asked whether the agency could omit from a public hearing that some of the bonds would finance swap termination payments.

“There is some sensitivity at Harvard about not specifically flagging the swap interest unwind payments,” Ogilby wrote on Nov. 12 to Deborah Boyce, an analyst at the authority. “They still would like the ability to finance them, but would prefer to delete those references if they can do so.”

Benson Caswell, the bond authority’s executive director responded Nov. 13 that the swap agreements would have to be identified and that the authority needed “timely, accurate and unfiltered information, including a balanced presentation,” from issuers.

Six of the seven Corporation members from the time declined to comment. (Oh, Bob Rubin, where has the mystique gone?) To his credit, Jamie Jim Rothenberg seems to have done his best to describe what happened.

Rothenberg implicitly suggests that the swaps were not primarily the work of Larry Summers, as has previously been reported.

The financing plan using the swaps was developed by the university’s financial team and discussed with the Debt Asset Management Committee, an oversight group, according to James Rothenberg, a member of the President and Fellows of Harvard College, or Harvard Corp., and the school’s treasurer, a board position.

The swaps plan was then approved by Harvard Corp. and implemented and monitored by the financial team, Rothenberg said in an e-mail.

Drew Faust is quoted in a way that makes her sound like a scared little rabbit.

Drew Faust, Harvard’s president since 2007, said she experienced some of her darkest days as she watched the collapse of U.S. markets that deepened the school’s losses.

“Someone would say that this happened, that had happened, they were going to bail out AIG or Lehman is failing,” Faust recalled in an interview, referring to the September 2008 bankruptcy of Lehman Brothers Holdings Inc. in New York and the subsequent government bailout of American International Group Inc. in New York. “We were wondering what was going to happen tomorrow.”

To be fair to Faust, this quote sounds like it might have been taken out of context—it’s not exactly on point, and she’s not quoted anywhere else. I’m going to venture that it came from an interview on a number of subjects and not specifically this interest rate swap, and if that’s true, I’m not sure it’s fair to have used the quote here.

Harry Lewis reinforces his argument that the Corporation needs to change—or be changed.

They have a structural problem,” Lewis said in a telephone interview. “There’s something systemically wrong with Harvard Corp. It’s too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking.”

There’s much more, but I’d like to hear your comments.