… [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.
April 11th, 2009 at 12:28PM
That is kind of silly… Dave and Maurice made Harvard 100s of millions for the University during those two years. They left when the University Endowment was up and I am sure they are still make a lot of money at Convexity. If they had stayed with the endowmnent who is to say the Endowment would be losing all this money? Maybe they would of changed the way they were investing and made even more money for the college.
Think of it this way… If you owned a very profitable business and your best salesperson was bringing in 100 million in sales profit every year… you may pay him 25 million, right? So this top salesperson leaves and you hire a new sales person to take over all the clients and screws up and ends up losing you all the clients and putting you into bankruptcy. Do you go after the old sales person to give back money because this new guy was horrible and lost you money?
Of course you don’t.
Harvard University has lost millions upon millions of dollars because they hated to pay internal managers a lot of money. They are going to turn the fund into a "fund of funds" and will no longer manage money internally.
This will cost them millions of dollars. Why? Because if you have an internal manager you may pay him 25 million and make 10% net after all expenses including his salary. you give that money to an outside manage you will end up paying him more that that and making 8%. But when you have internal managers the Crimson rails against the pay, with external manager, the Crimson has no clue about the pay.
For a supposedly "smart" school, we have made a number of dumb decisions about our money management.
April 11th, 2009 at 2:00PM
Well, TR, you and I have different notions of silly.
Silly for me means a business that sets its salary scale for individual employees in the tens of millions of dollars. I know you believe, TR, just as all those defenders of university football coaches who make in the multiple millions believe, that Life is an Infinitely Expandable Market, and if you want good help you’ve got to pay the going rate, however high that gets.
But even if we go with that silly, greedy, socially destructive notion, let’s consider whether these guys were good help.
You say they made oodles of money for Harvard and the new guys messed up and the original guys are so clever that they’d probably have seen the way the wind was going and changed direction and saved the day. Um.
For a short time they did make oodles, and of course they made their enormous bonuses right away, knowing as most everyone did that those amazing returns wouldn’t last and eventually they’d wind up with shit on their faces, which is what’s happened. So they grabbed their bonuses while the getting was good and went away. In this sense you’re certainly right that these guys are prescient.
Whose fault was the loss? Surely the fault lies with these same original hotshot managers who invested so riskily. Everyone who has commented on the set of events here agrees with that, TR. Except for you. And I guess Maurice and what’s his name. Oh, and Jack. The guy who brought them on board. THEY didn’t fuck up. They left quite a pretty situation at Harvard. It was the other guys. They were worth every penny of their 35 million dollar annual bonuses.
As for your last point about money managers: Plenty of schools pay their managers – internal or external, take your pick — far, far less than Harvard paid its managers. And their returns were often just as good or better. Face it, TR. Harvard is special. It likes to give its money to money managers, and it likes to withhold its money from students.
I mean, I’m surprised you didn’t mention what Harvard did with those enormous billions while these people were generating them for the school. I assume you know that they did almost nothing. They made the money, hoarded it, and have now lost it. As a non-profit, of course, Harvard is supposed to protect much of its endowment, to be sure, but it is primarily supposed to SPEND it on students and professors and buildings and stuff. But as I’m sure you know, while all this money was being made, Harvard students were complaining bitterly about their sordid dormitories, their enormous lecture classes, law professors who never taught, etc. So many good things Harvard could have spent all that money on… But hoarding is just the Harvard way.
April 18th, 2009 at 6:19AM
"As for your last point about money managers: Plenty of schools pay their managers – internal or external, take your pick — far, far less than Harvard paid its managers. And their returns were often just as good or better. Face it, TR. Harvard is special. It likes to give its money to money managers, and it likes to withhold its money from students."
Really? How do you know? The ONLY reason you know how much the HMC money managers made was because they were in house. Most schools out there that invest in hedge funds (and all of the big ones do!) pay their money managers 2 and 20.
As for what Harvard did with the money, I agree with you, they should have been spending it (and from what I have read the endowment does pay for 40% of the operating cost of the university). Should they have spent more, sure, why not… But I truly believe that if the University did not have the internal money managers for the last 25 years, the value of the fund would be much lower today. The cumulative returns over the years put the fund in the top 10% of all endowments (If not #1). Isn’t that what you want?
Tell me… Do you really believe that if over the last 25 years, we used outside managers and had no clue about how much they made, we would be better off today? Do you really think the endowment would be higher?
If you believe that we should not pay them that much on principle, I will not fight you. If you believe the endowment would have been better off today and worth more money today if we used any other method than the one Jack employed, I believe you are wrong.
Let’s say the endowment put only 10% if their money in a hedge fund(s) (3 Billion) That hedge fund goes up 10%, that is 300 million. Harvard would pay 60 million in fees and the school would get an 8% return. The school would be thrilled! "We made 8%!!! Woohoo!!!".
Contrast that to having internal managers managing the 3 Billion, they get the same 10% gross return, pay the money managers 30 million and gets a 9% return. The everyone would be yelling "We paid the managers 30 million!!!"
I do not believe the market is ever expanding. But I do believe you must look at the numbers. If the endowment has 30 Billion dollars, what is the best way to invest that money. What NET return would they make investing the money in house and paying huge salaries, In house as a "class project" paying no salaries, or using outside managers?
I still believe that at the end of the day the endowment is best served having the managers in house and paying the salaries.
August 3rd, 2009 at 11:59AM
[…] million a year — and some staffers got as much as $35 million. [The staffers would be Maurice Samuels and a few […]