Yale Daily News

8 Billion?!

At first I thought this was a joke...

In case we needed another reminded that Universities are little more than glorified corporations:

"Harvard is already mulling budget cuts in response to the financial meltdown. The endowment supplies 35 percent of Harvard’s operating budget, so as other revenue streams including tuition, gifts and grants likewise fall, Faust and Forst said the school needs to “take a more fundamental look at how to align our spending with revenues that will be significantly reduced from what we had imagined just a few months ago.” "

The primary reason given for HAVING (tax-free) endowments is to provide an income to universities when the going gets rough. It is to ensure that drastic budget cuts DO NOT occur because of acute financial crises.

But Harvard's (and one expects Yale's possibly) reaction will be to preserve the endowment "for the future" by scaling back now. For what?

I am not suggesting risking the entire investment, but one hopes that along side the cuts there is the recognition that endowments are also meant to be used.

That 22% number and Harvard's 30% "just in case" total expected annual decline are both probably nonsense. At least a 40% loss - but likely more than 50% - seems far more realistic. Harvard here seems to be taking one step in what Wall Street calls "walking the numbers down."

Just do the math. Harvard admits its endowment was down 22% as of October, just 2% shy of the S&P's 24% decline. But the S&P is down 12% since October. That post-October decline likely means the corresponding liquid portion of the Harvard endowment is down at least another 10%. That's more than 30% to date already.

But that more-than-30% loss is calculated without taking into account private equity and other illiquid assets. Private equity, especially, has done far worse than the S&P. The WSJ reports that "Harvard has sought to offload about $1.5 billion in investments with private-equity firms... If the Harvard portfolio trades, the transaction would be one of the largest-ever sales of a private-equity stake." But the transaction has NOT gone through, which, together with Harvard's plan to issue "substantial" amounts of taxable debt, strongly suggests that the prices Harvard has been offered for that private equity slug have come in very low (even worse than they thought they would get when they put the equity out for bid). Borrowing "substantial" amounts of money in a declining market is very risky. But sometimes one has to, if one is desperate. So it's probable that Harvard is also in a liquidity crunch and really needs the cash ... but nevertheless can't bear to accept what are probably terrible private equity bids (in other words, terrible declines in the value of the offered equity, which is still in the Harvard endowment).

Putting all that together, the 30% "just in case" decline Harvard is assuming for planning purposes seems far short of a clear-eyed understanding of the actual scope of the debacle. By year's end, Harvard is looking at losing at least 40% and more likely losing over 50%, perhaps well over. Of course, maybe Harvard is "planning" on a big market recovery by June!

A detail: Can it really be a coincidence that the Harvard letter bearing all this bad news is not a president's letter, but a joint letter by ex-Goldman banker Forst and mini-president Faust that bears letterhead from the "Office of the President?" Is there a more graphic way of Faust signaling that she is in way over her head? Shouldn't the president have sent the letter under her own name, and just informed its readers that she had been advised by her capable staff - including Mr. Forst? Sadly, she hasn't the gravitas to do that. Few could imagine super-egoed-economist Larry Summers packaging such important news in such a format, whatever other faults he and that ego may have. And that's even more bad news for Harvard.

Walk that number down, Drew!

Some further thoughts:

It is possible that Yale's losses approximate Harvard's, but I doubt it. Harvard has had a peculiar recent history that one would expect to destabilize its endowment more than others. I used the term "super-egoed-economist" above to refer to Larry Summers' indisputably huge ego, but that doesn't mean he knows what he's doing as a policy maker or administrator. Summers helped create the bubble in the national economy and came back to Harvard to create bubbles in biomedical research (as though the NIH budget would double indefinitely) and to foist brobdingnagian, unaffordable expansion plans in general. But basic infrastructure, such as House and athletic facilities, were left unrenewed and faculty salaries merely rose with a vague inflation number. Summers has presided over more bubbles than Lawrence Welk, and is a man of a yesterday that never really was. Yale has never had a Summers, and that's a very good thing.

But Robert Rubin has been a bigger source of problems for Harvard than Summers has, much better at evading the consequences of his own incompetence and, most important, HE'S STILL THERE. Rubin was a prime mover in elevating Summers to both Secretary of the Treasury and the Harvard presidency. Once in office, Summers elevated Rubin to the Corporation along with others and the Summers-nominated Corporation, in turn, authorized the University policies that Summers attempted to effect. That attempt brought down his presidency, leaving both Harvard and its endowment company the divided, undermanaged messes they are today. Aside from Summers' replacement, the same Corporation is in office today.

The crowning act of Harvard Corporate incompetence was the appointment of the weightless Drew Faust. At least Summers would not have hidden in Forst's aprons when bringing news of the recent disaster. Good, God, Faust is nattering on about rebuilding the Harvard Houses while she's hocking the endowment to pay the secretaries. The Harvard skyline from the Charles looks like a Potemkin village these days, but perhaps that's enough for a weightless empress floating by on her barge?

The Citigroup Bob Rubin advised over the past 10 years has a big federal bailout and no business plan worthy of the name; DE Shaw, the hedge fund Larry Summers advised since he was kicked out of the Harvard presidency until Obama anointed him, just suspended withdrawals (while claiming to have appreciated this year!); and Harvard is facing the loss of more than half of an endowment managed by Jane Mendillo. She brought a mediocre resume back to Cambridge, but was nevertheless the best Harvard could do after its iterated El-Erian/Meyers/Summers catastrophes. Yale has not had the likes of those.

By the way, anyone who thinks this debacle was unforeseen by Harvard endowment managers should ponder the facts that El-Erian abruptly left in the middle of the fiscal year after about 18 months on the job, and Mendillo has been marketing herself in the likes of Forbes and the Wall Street Journal as a "star" money manager since the day she walked back in the Harvard door ... exactly what people do when they know they may soon have to find another job. Think they knew more than we didn't?

Back when Yale was making drastic increases in financial aids, I always opposed the move on the ground that existing financial aid policies have long been more than generous. Now that the endowment is likely to be down 30%, can I say: "I told you so."

We'll be lucky to lose less than 30%. I have faith in Yale, but this is not a good sign.

A "joke"?!?!?! WAKE UP!!! We are in the midst of a depression, and those invested heavily in the markets -- including many wealthy Yalies -- have been hit hard. Maybe Yale fared slightly better than Harvard, but the bottom line is that this is an ECONOMIC REVOLUTION and NATIONAL CRISIS. Get out of your bubble!

Bye bye West Campus....

...not to mention many NOT so wealthy Yalies (and parents) have been hit hard, lost their jobs, and no longer have health insurance. I hear the crisis that you are mentioning but I'm deeply disconcerted that your em-dashed appositive was to cry for the wealthy Yalies over those who are facing layoffs and foreclosures.

Apologies if this was not what was meant.

#2- I would hardly call an $8b loss an "acute financial crisis."

I love how Swensen and Levin keep on emphasizing all they care out about is the number on June 30. Really, the Yale community is not going to hate them if the endowment lost even more than Harvard because of this economic crisis. They need to just tell us the numbers already so we can stop operating under the impression that we have $22b floating around.

No of course not. My point was that this is global.

Keep your powder dry, people! A main justification for large universities having a structured endowment including substantial volatile assets has ALWAYS BEEN that the university is a very long term investor. Consequently, as long as the volatile component doesn't get so out of hand as to threaten the short term needs of the University, only annual checks of performance are appropropriate. That seems to be what Swensen is still saying, and (as usual with Swensen) it all seems perfectly sound and conservative. There is (yet) no sign that the Yale endowment has moved outside this range. That Swensen and Levin appear to be planning some kind of announcement soon appears to be driven by extraordinary announcements by other universities and general anxiety - not Yale endowment problems outside the range of its structuring. (Obviously, the Yale endowment is likely affected to some degree.)

In contrast, the Wall Street Journal is reporting that the Harvard endowment yesterday issued $1.5 Billion dollars in taxable bonds ("proceeds earmarked to repay short-term debt and to terminate certain interest-rate swap agreements, among other purposes") and will soon issue an additional $600 Million tax exempt bonds ("to redeem debt such as short-term variable-demand obligations as well as to close out interest-rate swap contracts"). When Harvard needs to effect apparently unplanned borrowings totalling $2.1 Billion, its endowment has very likely ceased to meet the needs of that university and extraordinary measures and reports to the public are in order.

In short, in my opinion it is unwise to assume Yale and Harvard have had similar endowment experiences until reports from the Yale change dramatically. In particular, Swensen and Levin have a long history of open disclosure and it is (in my opinion) very unwise to assume that the they are dissembling or concealing anything out of any concern that the "Yale community is ... going to hate them if the endowment lost even more than Harvard."

#10, By acute financial crisis, I did not mean that I think this crisis will be over quick. I should have been more all encompassing: the endowment should be used during ANY financial crisis. It's not just there to save for a kinda-bad-but-not-really-really-terrible crisis.

For example, let's say that Yale has lost $10 billion, which hopefully is on the extreme side of the guesstimate. Now we have about $12 billion. We have recently been using ~ 4% of 20-ish billion, ie somewhat less than 1 billion/year. Let's further assume that for the next five years it will be impossible to do any better than to break even. The question is whether we should spend the same as we have been spending over the next five years, perhaps lowering our endowment to $6-8 billion, plus new donations.

I say yes. It's an ethical judgement, but one that might mean moving some of the money from capital projects to more financial aid.

Hopefully, then, middle-class students can still afford to come here even as the waters stay rough and dangerous.

A risk? Certainly, ie the possibility that after five years things don't get better, they stay bad, lets say for 10-15 ... now we start running out of endowment.

You know, I'm actually not that concerned, mostly because I don't think the University's priorities should be making money when the rest of the economy is going under. Think muscicians on the Titanic charging for their performances — and then blasting off into the sky with jet packs, parachuting back down to land on the next cruise ship.

Did someone just suggest that Yale's mission to increase financial aid, and therefore expand the opportunities of working and middle-class Yalies after graduation was a bad thing? Debt's bad. Debt for the working class and middle class is especially bad. Financial aid is good. If anything, this economic climate shows that generous financial aid and the recent financial aid increases are a god-send: students won't be entering a harsh economy in debt and thus, will be able to take the risks necessary to any flourishing economy.

Devastating review of Drew Gilpin Faust! I guess those who installed her were just hoping/assuming smooth sailing would continue.

How is it even remotely possible to construe this as being Drew Gilpin Faust's fault?

I don't think anyone's saying "this" is Faust's "fault" in the sense that she caused the Harvard endowment losses. The question is whether there is any good reason to think she is capable of handling the crisis or whether she has already signaled that she isn't.

There hasn't been a whole lot of leadership or a constructive approach coming out of Cambridge. The Faust/Forst letter seems to deny or ignore the extent of Harvard's problem, and Fausts's continuing talk of campus building programs seems strangely out of touch, almost delusional.

Most schools would kill to have Yale and Harvard's financial problems. Even after these steep market declines, they are very, very wealthy schools.

That's not to downplay that there will have to be prudent and unpleasant management decisions. But I think it's important to keep things in perspective. Endowments in the billions are hard to come by.