Word: illiquidity
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Mendillo partly attributed the endowment’s underperformance to “complications” within the portfolio existing before the financial crisis, including “recent over-sized commitments to illiquid asset classes; within asset classes, a larger proportion of strategies with long holding periods; [and] a lack of ready liquidity in the portfolio to meet our obligations along with the needs of the University.” For years, Harvard has been the subject of scrutiny—and idolatry—as its endowment consistently generated double-digit yearly investment returns, largely...
...Geithner and company have accomplished. In addition to the boost in public confidence, they've apparently figured out how to get the banks to support Geithner's other iffy program, the one designed to rid banks of toxic assets. Until now, banks have resisted selling the highly securitized, largely illiquid toxic assets, arguing they're worth more than the current fire-sale prices being offered on the open market. But taking them off the banks' books is key to restarting lending, and the stress tests' mandate to boost capital may be enough to get the process started...
...Meanwhile, the national media has used Harvard as a symbol of the bubble: The endowment that quadrupled since 2000 is now crashing down, producing a hard landing for the Harvard Management Company. Given the illiquid nature of many of the diversified endowment’s assets, the university has had to issue IOUs with comparatively high yields to maintain the liquidity needed to keep functioning...
Before 1970, banks were content to make loans to consumers and business which remained on their books, collecting interest until the principal on the loan was satisfied. This approach made for a relatively illiquid market for the buying and selling of loans. Accordingly, this system insured that lenders were unable to sell their loan portfolios easily. Market illiquidity exposed the lender to the risk that individual loans would default or that rising interest rates would force the lender's interest cost higher than its income on the individual loan...
...Finally, the seemingly unprecedented drop in prices together with increased default rates made it nearly impossible to assign value to MBS. As a consequence, MBS that had some intrinsic value were illiquid, and banks were forced to keep the toxic assets on their balance sheets...