… benddownments. As in bend down (I guess bend over would convey it better) and take it. We already have $32.3 billion, but you still have to pay almost $60,000 tuition and we’re going to dun you for huge donations for the rest of your life, even though

Student tuition at places like Harvard is now almost an afterthought. It runs on a budget of about $4.2 billion a year in spending. Tuition, fees, room and board at the full price of $58,607 for its 6,700 undergraduates would amount to $393 million, or less than 10 percent. And after taking need-based tuition reductions into account, the university collects only about half that projected total from undergrads. So for $200 million a year, Harvard could be totally free to all undergraduate students.

And does it sometimes run through your mind to wonder what just a few … afterthought expenditures from the tens of billions of dollars sitting in Harvard’s funds might do for the… uh… world? Well, shush. It’s all gonna be okay. You’re gonna grow up to be a hedge fund manager with the sort of ego that needs a biz school building at Harvard with your name on it much more than you need to help some obscure village full of suffering people. People who need schools or whatever. Relax.

As international attention pivots to scandalous, junk-status Yeshiva University, UD wants to acknowledge those people – like Andrew Sole – whose concern for the institution as a university rather than a tit for hedgies on the board of trustees prompted them to act on behalf of YU. She wants to acknowledge the three faculty members who, in 2012, wrote an anonymous letter to the campus newspaper (anonymity being required in the corrupt setting of this rapidly dissolving university) voicing their despair at the baffling failure of the university’s endowment — baffling because the cronies on the board of trustees who were high-risk-betting all of the university’s money away were far too arrogant to tell anyone about it. Why weren’t there conflict rules? Why wasn’t someone supervising the trustees and the money managers? Does it bother anyone that, with the exception of storied Yeshiva trustees Bernard Madoff and Ezra Merkin, pretty much the same people whose staggering financial irresponsibility destroyed the school are still on the board?

There’s a pathos, two years later, to reading these faculty members trying to figure out what’s going on:

No one is speaking about what caused the terrible drain on the endowment and when it will stop. In short, there is no transparency… Yeshiva needs to figure out why the endowment is performing so much poorer than the endowment of every other comparable institution in the nation and fix that problem. We do not know what the problem is or how to fix it – but we see that no one else is discussing what really is the problem, in part because of the utter lack of transparency in YU’s finances.

Well, that’s over. Now the whole world is watching as the story of how a school destroys itself through greed, secrecy, and cronyism, plays out in the national and international press. As the Yeshiva University story escalates, this blog will continue to note the people who warned the school that it was killing itself.

… or whatever you call it when hundreds and hundreds of people link to something. I’m delighted. Reuters has also linked to the post.

Why does Yale need to accumulate $20.8 billion?

Things like the Constance Bagley story are one reason. A contract-to-contract business school professor who’s been canned (she was apparently told she’d get another five year appointment if she did okay, and she seems to have done okay) has sued the school and three professors for age and gender discrimination. She’s an impressive person, apparently a good teacher and scholar, and she’ll probably force a large settlement out of the place.

But Yale (which has weathered very high-profile sexual misconduct problems lately) can afford such suits because of that massive endowment.

The bottom line is that whatever programs see themselves protecting (a certain intellectual orientation, a certain culture, whatever) by expelling people who don’t fit in can continue to be protected because the school will pay through the nose when those people sue.

… fewer than ten thousand students that concentrates the mind. The town of Princeton seems sort of amazed, in an ongoing way, about its university’s remarkable tax exempt wealth, and it’s clearly on a campaign to chip away at it.

The latest thing is that a judge has refused Princeton University’s request to throw out a case against it brought by residents and the town in which they claim that a number of buildings on campus should not be tax exempt since they’re non-educational.

Another, broader, charge in the case argues that

the University is not qualified for the tax exemption because it in fact makes money and distributes profits, especially proceeds from patents registered by the University.

Princeton is now lawyering up to defend its exemptions.

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Princeton’s got the same problem Harvard (well on its way to a forty billion dollar endowment) does; maybe their lawyers can work together. As one observer points out:

Viewed purely in terms of economics, Harvard is really a $40 billion tax-free hedge fund with a very large marketing and PR arm called Harvard University that has the job of raising the investment capital and protecting the fund’s preferential tax treatment.

The trick is that this hedge fund can’t remit earnings to investors, and has to keep them in the company’s account, renaming these retained earnings as an “endowment”. So how do the insiders extract value from this business? One way is by giving themselves cushy jobs that pay a ton of dough. Those who manage Harvard’s money are well-paid. The prior investment head, Jack Meyer, left after criticism of a compensation plan that paid some investment management professionals more than $35 million each in a single year...

When tax-advantaged non-profits start to accumulate billions of dollars of cash through investment gains, and the insiders seem to be doing very well, it creates legitimate pressure for some legal changes. There is a broad range of alternatives: capital gains taxes on investment income, directly taxing the endowment, placing limitations on employee compensation, and forcing the distribution of a fixed percentage of the endowment are all obvious choices. Sanctimonious talk about “the mission of the university” is not likely to stop this …

Actually, I think sanctimonious talk, done well, can probably hold the line for a school. UD has always privately felt that the switchover from Lawrence Summers to Drew Faust as Harvard’s president had in part to do with the, uh, incompatibility of Summers and sanctimony.

Big investors are starting to pull out of the fund run by Brown University’s highest-profile trustee, Steven A. Cohen. Too much bad “insider trading” press.

Titan invests for FIU, and has decided to take that university’s money elsewhere.

When your university’s endowment is 32 billion dollars, every penny counts. Anything that might threaten it needs to be resisted.

So you can understand why Harvard Management Company representatives refused to appear on a panel with a person critical of their management of the endowment. What if something that person said discouraged people from giving to Harvard? What would become of Harvard if its endowment sank to 30 billion?

MinnPost.com discusses a recent study of American universities which concludes, among other things, that

Universities [don’t] tap their endowments for more cash in tough times, even though their rules [allow] bigger withdrawals.

“One reason to have an endowment is to smooth over the shocks,” [one of the authors] said. “It’s a rainy-day fund so that when things go bad, they can dip into those reserves. What we found is they deviate from their own policy.”

Among the reasons for this behavior: Endowment managers who are more concerned about the “prestige” of building the endowment’s value and “implicit contracts” with donors to maintain the size of the endowment.

“What our paper shows is that universities are behaving in a way to grow the endowment rather than using it to support the activities of the university,” [he] said. “The point is that if you think endowments exist to smooth over the shocks in bad times, they’re not doing that. … They’re maintaining the value of the endowment for its own sake.”

UD wrote about endowment hoarding here. She featured this Peter Conti-Brown paper and wrote:

UD is particularly intrigued by Conti-Brown’s suggestion that the awesome, anally hoarded university endowment [of some universities] has finally transmogrified and hardened into a physical object, like a fantastic yacht, or Ezra Merkin’s Rothko room….

… things can be pretty swanky.

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.

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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?

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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.

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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.

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

… 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.

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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.

Praise the Lord. I’ve been looking at that endowment and really worrying. Where’s the next fifty billion coming from?

[Derek Bok] said the issue of tackling legacies had become more urgent than when he ran Harvard, because the competition for places had intensified and the evidence for reform had strengthened. He said he was unconvinced that abolition would weaken fundraising efforts, but in any case “there comes a moment when it becomes more important to do the right thing”.

And now that Harvard has a fifty billion dollar endowment, I think it’s time we dipped a toe in the water! Fuck it man! Let’s do the right thing!

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Update: You’ve got 50 bill and hoard it. This poor little widow had only one bill and she made medical school free in perpetuity for all students at Albert Einstein! You could easily do that for some of your schools, but you’re about rich, not poor, people.

Curiouser and curiouser. The title refers to a number of pro-Israel billionaires who recently sponsored a fund-raiser for the North Carolina Republican leading the federal harassment of Ivy League universities for their purported anti-semitism.

These same lads – shockingly – are going after the manifold tax breaks that make it possible for Harvard University both to be designated a non-profit organization AND be worth around eighty billion dollars … or something like that number… I mean, there’s the endowment, whose amount we know; but there’s also real estate, about which we don’t know — so this is UD‘s probably pretty lame estimate of Harvard’s pile of dough…

… What the fuck make it a hundred billion. There are other assets. Make it five hundred billion. Who the fuck knows.

Anyway, a lot of these pro-Israel billionaire guys are working against their own interests, cuz they’re the very moneybags who have over the years given SOOOO much of their loot to Ivies like Penn and Harvard that they’re practically running the places, but they couldn’t have given so much and gotten so powerful without the tax breaks against which they’re now militating! Ya falla?