He is Peter Conti-Brown of Stanford law school, and he’s being quoted in my headline by Felix Salmon, who has a blog at Reuters.

Conti-Brown provides the hard numbers:

From 2003 through 2008, Harvard’s annual budget grew an average of 7% per year, starting at $2.43 billion in 2003 and ending at $3.46 billion. Including an estimated 30% loss to the endowment in 2008, the endowment grew an average of 10.15%, from $16.24 billion to $25.59 billion. In absolute terms, while the budget grew annually at an average of $206 million, the endowment grew an annual average of $1.56 billion. More strikingly, Harvard’s payout rates during this period remained a steady 4.4%, an average of more than 5.5% less than endowment growth. Far from spending like “drunken sailors,” universities were, if anything, not spending enough.

You already know all of this if you read University Diaries from ’03 to ’08. You also know that Harvard did spend like a drunken sailor on one thing: hedge fund employee compensation. (It didn’t need to spend like a drunken sailor on President Lawrence Summers’ salary because, at the same time he was running Harvard, he was a hedge fund manager. As Frank Rich at the New York Times puts it, he was “moonlighting in the money racket while running the entire university.”)

Salmon concludes, as does Conti-Brown that

If these institutions aren’t going to spend the money in their [ultra-bloated] endowments on providing educational services, they should pay tax on it.

***********************

UD is particularly intrigued by Conti-Brown’s suggestion that the awesome, anally hoarded university endowment has finally transmogrified and hardened into a physical object, like a fantastic yacht, or Ezra Merkin’s Rothko room…. A commenter on the Salmon thread (all of the comments are worth a read) gets at something like this when he or she writes:

I see top universities with their massive endowments, tax free status, and generally state of the art and connected financial planning as becoming the new Church.

From the dark ages, to the middle ages and somewhat beyond the Church became an ever increasing landholder.

Yale in 2007 bought the nearby 137 acre Bayer Labs Complex which now makes it similar in size to the Vatican City.

Over the next hundred years, I see rich universities hoarding and growing their endowments and then splurging occasionally to buy up properties.

Are there any countervailing forces that will prevent Yale from owning one quarter of Connecticut 100 years from now?

***************************

What if there were a car, the ultimate luxury car, called The Harvard Endowment? What would it look like?

Like this, I guess.

They took that Veyron and rammed it right into a wall.

If our top universities are going to become the new church, they’re going to have to manage their endowments better.

**********************

But hey. Speaking of what you’ve got and how you should spend it… Allow UD, on this her birthday, a moment of payout.

The lesson of the crashed roadster is more than clear to me: Appreciate your assets, and be wise with them.

I’ve got a blog that a lot of smart, witty, and humane people read. It’s the most liquid asset in the world this thing, allowing me immense purchase on pleasure and understanding.

It even, amazingly, lets me do, in a small way, what I said from the start, in my blog’s tagline, I wanted to do: change things.

For this, I thank you.

… the anal fixates at Harvard University.

… That Harvard’s endowment exists to advance education and research is not what an observer would infer from the institution’s behavior. Instead, Harvard appears to have decided to put financial dominance ahead of the current needs of students, families, and citizens — even while the institution remains almost unfathomably wealthy. Taxpayers, who help to support this nonprofit, have reason to ask whether this is the best choice.

Harvard has options, even if its financial gurus find many of them unattractive. The institution’s academic leaders need to remind them that endowment investment and spending decisions must be guided by the twin goals of furthering education and research, not winning the hedge fund Olympics.

And if Harvard’s gurus found it acceptable to follow an investment strategy that could, and did, lose close to 25 percent in a year, then they should certainly deem spending a few tenths of a percent more to hold harmless the operating budget acceptable, too…

Time to remind you of this editorial
cartoon from a few years ago:

Vanity Fair’s at it again.

Last month, an après le déluge article full of insider sniping about vice-presidential candidate Sarah Palin appeared; this month, it’s an après le déluge article full of insider sniping about endowment fuckup Harvard.

McPalin fans can’t complain that VF‘s a tool of liberal elites, singling out their girl for ridicule; even a glance at highlights from the Harvard article tells you that Cambridge — epicenter of the snooty left — is going to take a very big hit.

Some of this stuff you already know — I mean, if you read University Diaries you already know it — but the VF writer runs some blood through the numbers. Like frinstance you know about “the eight-figure salaries some of [the] managers were pulling down” — (That’s eight, as in thirty million dollars a year apiece … Count the zeroes… 30,000,000 … Non-profit work… Good for the conscience… And good for the pocketbook!… ) — but maybe you didn’t know about the personalities raging around the numbers:

The longtime head of Harvard Management Company, Jack Meyer, quit to start his own hedge fund in 2005 after growing fed up with criticism over the eight-figure salaries some of his managers were pulling down and with persistent meddling from top Harvard officials. Two particular annoyances were Summers, who had been questioning Meyer’s investment strategies, and Robert Rubin, a member of the Harvard Corporation, who frowned on Meyer’s aggressive strategies and wound up on the “warpath” with Meyer, as one person put it.

When Meyer left, he took much of Harvard Management Company with him — including 30 portfolio managers and traders, as well as the chief risk officer, chief operating officer, and chief technology officer. The place became “like a Ferrari without the engine,” according to a portfolio manager who arrived after Meyer left. This angered Rubin, according to someone who knows him well: “In Rubin’s opinion, Meyer crippled the institution.”

If only Summers and Rubin, with their I-know-better-than-you personalities, had let things alone! The managers would have been happy with their ever-increasing salaries (Keep in mind that they were graciously taking a cut from what they’d have gotten in the private sector, and Meyer would understandably have wanted to reward them with tens of millions more in pay every year.); one university in the United States would have gone from having the GDP of Bulgaria to, say, the GDP of … the United States? And that would have done wonders for school pride… We’re Number One!… And instead of Meyer deciding that the best thing he could do with this meddling issue was take down his entire operation and destroy a school, he’d still be sitting there, happy as a bug!

Here’s a snippet of sniping:

The Harvard endowment soared from $4.8 billion in 1990 to $36.9 billion as of June 30, 2008, and in the last half-decade or so, the men and women who run Harvard seemed to have convinced themselves that the university’s fund would grow at double-digit rates for, well, eternity. “Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh’s dream—you know, during the seven good years you save for the seven lean years,” says Alan Dershowitz, a professor at Harvard Law School since 1967.

Dershowitz himself, though, doesn’t know much about economizing. He hires far too many people to write his books for him.

Fact is, Harvard — as I’ve suggested on this blog before — is an all ’round out of control drunk. Money and power, you know.

As with the Palin fiasco, when things come crashing down in the sober light of day, Vanity Fair moves in, with its glossy photojournalism and pesky reporters.

***********************

UD thanks Tony.

Besides the obvious question of why managers of a nonprofit educational institution were making hundreds of millions of dollars, perhaps it’s time to ask if this is a rational way to actually fund higher education.

Dollars and Sense

… [B]y December 2008, college endowments had suffered estimated average six-month losses of 24.1 percent. It is now expected that by the end of the fiscal year (June ’09), full-year losses will be even greater. Already the widespread carnage is being rationalized by comparing results to similar or greater losses in the broader equity markets. But the fact remains that epic losses have no precedent in endowment management. For example, Harvard’s endowment actually grew during ’29-’32–the most devastating years of the Great Depression.

Will endowment managers, who in recent years sought to juice returns by leveraging endowment monies into hedge funds and other corners of the shadow banking system now be held accountable? And can we expect them to give back any of the lavish investment-banker level bonuses they were paid during the go-go years?

We’ll surely be waiting a long time for this kind of accountability…

People keep saying that, you know… Universities paid their managers tens of millions of dollars in bonuses, and now that the shit’s hit the fan because of their arrant fiscal disregard, they should return the bonuses. But no one’s doing anything toward that end.

So… Let’s start here:

In the fiscal year ended June 2004, the two top paid managers at Harvard Management, David Mittelman and Maurice Samuels, each received about $25 million. In the prior year they earned more than $35 million each.

Write to David and Maurice. I think they both still work here, at Convexity Capital Management:

200 Clarendon Street
Boston MA 02116

There’s a phone number and a company email address on the Convexity home page too.

How much should you suggest they give back to Harvard?

Well, think of it this way. Over two years at Harvard (let’s stick with the two years mentioned in this article), each earned over fifty million dollars in bonuses. Remember – that’s bonuses, on top of their salary. Both have been making similar – higher? – bonuses since their time, and probably before their time, at Harvard.

So let’s put anxiety about their grocery budgets aside as we think about a reasonable figure to suggest to David and Maurice, okay?

Of course it’s up to you what you suggest to Mittelman and Samuels.

UD‘s thinking 45 million apiece.

Outrageous sums of money, and protesters.

Three years ago, a Harvard professor confessed to David White, his mentor, that he fabricated “as much as half of the data he used on a Harvard study of sleep apnea.”

Harvard’s investigation, says White, “moved glacially.”

Well, yes. Here we are 2009, and the Crimson is finally able to describe the paltry consequences of this man’s behavior.

First, he’s in a far better place now. Merck.

Second, for three years he can’t advise the Public Health Service, and they’ll supervise his research.

That’s it.

A Harvard medical school spokesman “declined to comment on the investigation.”

Right. You wouldn’t a spokesman to talk to the press about an associate professor at the university, the co-director of a Harvard-affiliated program in sleep medicine, whose lying precipitated what White calls a “massive investigation,” involving many retracted papers, etc.

I mean, the results of the investigation have just come out. Give the spokesman another three years to gather his thoughts.

Treasury Secretary Timothy Geithner announced on Wednesday that the investment assets of Harvard University had been seized in order to restore stability to the global financial system. Treasury officials reported that the total amount taken under federal control was just over $30 billion despite losses which accrued to the Harvard endowment during the ongoing financial crisis. In exchange for the seized assets, the Treasury has issued 10-year Treasury Bonds to the University maturing at a value of $36.57 billion in 2019, an annual interest rate of two percent. To magnify the benefit created by the seizure, the Fed has structured the transaction, through fractional reserve banking, to leverage the assets into over $3 trillion in bonds for sale to foreign governments that are holding U.S. dollars in reserve. “Since these bonds are backed by the Harvard name, the Chinese are going to be clamoring to reinvest their money in the United States,” said Fed Chairman Ben Bernanke. Members of the G20 expressed relief at the news of a concrete plan to support the value of the U.S. dollar.

Harvard President Drew Gilpin Faust expressed deep concern about the news, and warned that it will likely necessitate further staff layoffs and tuition hikes. “Professors and students will have to come to terms with the fact that there is no such thing as a free lunch. The loss of endowment dividends, which contributed almost thirty-four percent of our annual budget, will force us to scale back our generous extra-curricular dining opportunities, which are currently consuming almost a quarter of the University’s gross annual revenues. In addition, we will most likely be unable to continue expansion of innovative departments like sub-Saharan social anthropology and nanophotonic synthetic bioengineering. Nonetheless, she admitted that, “Given the current economic gloom, the rate of return on these illiquid bonds will probably be much better than any other investment during the next decade.”

President Obama praised Treasury Secretary Geithner’s plan. “This venerable institution of scholarship, much like the troubled financial and automotive firms, is simply too big to fail. It is for this reason that we are confident this plan is in the best interests of the American taxpayers and the stability of the world economy.” The Dow Jones Industrial average was up 372 points, or 6% on the announcement. Former Harvard University President Larry Summers was credited with having crafted the plan to prop up the faltering Treasury. “With the bravado emanating from the Chinese putting the stability of the dollar in question and Peter Schiff detailing the inevitability of a currency crisis on YouTube, it was unavoidable that we make some immediate announcement to reestablish the security and stability of Treasury Bonds. The real danger was that our intervention would be too small or too slow.”

President Obama saluted the patriotism displayed by Drew Gilpin Faust in her graceful acceptance of the U.S. Government’s plan. “Harvard’s President has shown us that we are all going to have to make certain changes in order to make a real commitment to responsibility and reaffirm the enduring promise of America.” Faust, for her part, was somewhat skeptical as to the University’s ability to oppose the government’s actions. “Last week, Carl M. Loeb University Professor Laurence Tribe wrote an op-ed in the Wall Street Journal saying that this sort of asset seizure would probably be constitutional even if subject to strict scrutiny under the Fourteenth Amendment. That statement has put the kibosh on any litigation we might have pursued.”

Acting Dean Howell Jackson assured HLS students that the University’s changing financial circumstances would in no way affect the law school’s public service initiative or summer public interest funding. “Our legendary fundraising machine has been hard at work this year, and has already raised over $100 million, which will go to extending protection for LIPP, SPIF, JIFFY, PEP, and all our other public interest programs.” He also noted that, although there would be some belt-tightening in the funding for student activities, HLS students will continue to enjoy some of their traditional perks. “We will be continuing to provide morning coffee three days a week, but on Tuesdays and Thursdays we will have to switch to Sanka.”

Harvard Law Record

… for Harvard’s outrageous mismanagement of its endowment, but Alex Beam (one of UD‘s favorite writers) doesn’t really have enough evidence for what he’s trying to pin on him here.

Harvard gets a Grassley letter.

… when under his watch, in 2003, two Harvard money managers each took home $35 million in bonuses?

I mean, now, sure, he’s tossing the word around like confetti. But where was outrageous then?

… a New York Times reporter interviews its latest money manager.

The writer describes a recent bit of history quite unfairly:

[Jack] Meyer racked up a stellar record running [Harvard’s] endowment, putting [its] returns second only to Yale’s. But complaints about the size of managers’ pay packages, relative to the academics’ pay, ultimately prompted Mr. Meyer and many of his acolytes to leave in 2005.

The people who protested the thirty million dollar a year salaries of Meyer and his boys were mainly alumni, not faculty. Their argument was not a comparative but an absolute one. No one human being should take away thirty million dollars a year from a job. The word they used was obscene, not relative.

This was not a pay equity case, with professors lusting after their own thirty million. This was a case of a group of alumni whose protest prevailed (Harvard management salaries have been lowered) as soon as the managers’ tens of millions hit the New York Times. Public outrage sealed the deal.

———————————-

UPDATE: From Forbes.

Meyer built a Wall Street-like trading operation and managed most of HMC’s money in-house. It looked like a giant hedge fund, and it had paychecks to match. A high-level HMC manager would make as much as $35 million in good years. Those sums triggered what became an annual Harvard tradition: first, the disclosure (compelled by tax laws applying to nonprofits) of the HMC bonuses, followed by an outcry led by the late William Strauss and a group of Harvard alumni from his class of 1969.

What a tangled fuckup we weave, when first we practice to make a university a trading operation… Okay, UD‘s going to help Harvard out here.

Here’s what you do. Figure Meyer plus four other guys each took home … let’s low-ball it… twenty million dollars a year. So… 100 million altogether? Figure they did this for five years… Five years of that and you’re talking about a serious rainy-day fund.

So what you do is ask these people to return as much of this money as seems to them appropriate. No doubt, since they care more about Harvard than personal greed, these people have already approached the university asking what they can do. It’s just a matter of Harvard formalizing the process.

It’s an awkward way of putting it, to be sure, but this Harvard professor, representing a group of alumni calling for the refund of this year’s money managers’ bonuses — they earned $21 million for losing $8 billion of Harvard’s endowment — is certainly correct.

The bonuses – paid out over time and subject to so-called clawback provisions if future performance is below market benchmarks – reflect industry standards, said John Longbrake, university spokesman.

Actually, they don’t. The bonuses are lower than industry standards because this same group of alumni, a few years ago, generated so much outrage over the $35 million in bonuses sometimes earned by individual managers (that’s the industry standard) that Harvard lowered the amount its people could make.

But they still earn an awful lot, don’t they? Especially given the fact that they’re running the endowment into the ground?

The group of alumni has proposed that no employee should be paid in excess of what the university president earns; [Larry] Summers was paid $611,000 during his last year, the latest presidential salary available.

LOL. You expect money managers to work for less than, say, five million a year? Sure, we all have to tighten our belts. But these people need to eat…

… another form of betting, in these troubled times, involves estimating how much money various universities have really lost from their endowments.

Harvard’s money managers are widely considered some of the best in the business, and still this year they reportedly may lose up to 30% of the university’s endowment.

Harvard’s own estimate is in the twenties; here you’ve got thirty… Let’s see what Edward Jay Epstein says in Slate:

[Harvard’s] recent loss of $8.1 billion from July 1 to Oct. 31, 2008, came as a stunning blow. Yet this huge loss, as staggering as it sounds, might be only the tip of the iceberg of illiquid investments. According to a source close to the Harvard Management Co., the damage, if the fund’s illiquid investments are realistically appraised, may be closer to $18 billion—or more than twice the amount previously reported.

Exotic, esoteric, risky, volatile — These are the words Epstein uses to describes Harvard’s “playing for high-stakes in the casino economy.” An insider friend of his “finds the claim by Harvard’s money managers that the fund lost only 22 percent at best ‘purely Pollyannaish.'”

You know how they could have saved a little awhile back… Before the totally predictable change in the economic climate… They could, back in casino days, have paid their money managers a little less than 25 million dollars a year. Each. Remember? When people got upset about those salaries (They were even higher than that on occasion. One year, they got 35 million.), Harvard cut back on them by a few million, and the money managers immediately quit. As who wouldn’t.

Ah. Grand days.