Investing recklessness at Harvard is making ‘the best and the brightest’ look awfully silly — almost as silly as a nation that lets staggering quantities of wealth continue to concentrate.
By Sam Pizzigati
Wild chases after vast riches, last fall’s global meltdown reminded the world, can destroy economies — and corrupt entire societies. Great universities, in theory at least, can serve to slow these chases. They offer a refuge from marketplace passions, a place where sober scholars can reflect thoughtfully on the damage frenzied speculation can do and how that damage can be undone.
America’s greatest university — Harvard — hasn’t enabled much of that reflection lately. The reason? Harvard has been too busy chasing riches.
Now that chasing has left Harvard, the world’s wealthiest university, enveloped in an embarrassing financial debacle [1] that has cost hundreds of university employees their jobs, frozen the salaries of many others, and stopped campus development projects dead in their tracks.
[2]“Harvard’s investment managers played some of the same reckless games as the big banks,” says historian David Kaiser, a Harvard alumnus. “The difference is that Harvard isn’t eligible for a bailout.”
Kaiser and other Harvard grads from the class of 1969 have been critiquing Harvard investment practices since they learned six years ago that officials in the Harvard Management Co., the university office that invests Harvard’s endowment, were pulling in enormous Wall Street-style bonuses. In 2002, just six of these investment managers pocketed [3] a combined $107.5 million.
To go about grabbing those millions, Harvard’s financial managers were investing university endowment dollars in exotic “derivatives” that promised high, double-digit annual returns. The higher the returns, the higher the rewards for the investment managers — and the greater the incentive to keep plowing endowment dollars into even shakier investments.
But the risk taking went beyond endowment dollars. Harvard actually began investing general operating funds in the same risky investments, in the process, observed [1] the Boston Globe, violating “one of the most basic rules of corporate or family finance: Don’t gamble with the money you need to pay the daily bills.”
And what were Harvard’s grown-ups doing while all this was happening? They were looking the other way. In May 2002, a staffer at Harvard Management wrote then Harvard president Lawrence Summers a confidential letter to warn about the investing recklessness she saw all around her. Nothing changed. Two months later, she was fired [4] for making “baseless allegations.”
Summers, a controversial figure at the university in his own right, would leave Harvard in 2006. He resurfaced, after last November, as the director of the new Obama administration’s National Economic Council.
By that time, the global financial industry had collapsed. In the wake of that tumble, Harvard’s celebrated endowment — worth $36.9 billion at its peak two years ago — lost nearly $11 billion [5] in just a year. The Harvard general operating fund lost another $1.8 billion.
More bad news came earlier this month. Harvard officials revealed they had shelled out just under $500 million, in the university’s last fiscal year, to a host of big Wall Street banks to cover [5] a “failed bet that interest rates would rise.”
University officials, notes the Class of 1969 Ad Hoc Committee on Harvard’s Endowment, have responded to some alumni complaints. The university, for instance, significantly increased student financial aid several years ago. But Harvard, alumni critics charge, is still refusing to “acknowledge any fundamental mistakes.”
These alumni now want the university to cap investment manager earnings.
“We continue to believe,” the Class of 1969 committee related in a recent letter to Harvard president Drew Faust, “that no Harvard employee should earn more annually than the president of the university and that multi-million dollar bonuses are inappropriate in nonprofit institutions.”
The alumni critics also want Harvard to report how many university dollars have gone to the outside investment firms that have, in recent years, managed as much as two-thirds [6] of the university’s endowment investing.
Outside investment managers typically receive a flat 2 percent annual fee on the billions they invest and a 20 percent cut of the profits they make buying and selling invested assets.
Absolutely “no one,” adds the alumni letter to Harvard’s president, “should be compensated on such an enormous scale for managing nonprofit funds.”
But the angry alumni are seeking an even broader change. They want Harvard to start acting as a great university should.
The reckless investment moves that have cost the university so dearly, the alumni note, essentially mirror “the practices that in the same period brought down most of our major financial institutions, with enormous short-, medium and long-term costs to the United States and the entire world economy.”
“Surely Harvard,” they note, “can find the intellectual, moral, and financial capital to face this fact squarely and begin a public discussion of the weaknesses of our financial practices, not only for the sake of the institution, but to help the society which it serves.”
In the end, the Harvard financial fiasco helps make clear, financial maneuvers that pump up endowment jackpots — and rewards for endowment investment managers — don’t contribute to academic greatness. They undermine it.
Indeed, the staggering concentration of wealth in the Harvard endowment — from $4.7 billion in 1990 to $36.9 billion in 2007 — has taken place over years that have witnessed the overall deterioration of American higher education.
The public colleges and universities that deliver most of that education have been steadily cutting academic services and raising tuition beyond the means of average working families, in no small part because tax cuts for America’s wealthy — the same wealthy who donate so prodigiously to their elite alma maters — have helped drive down state budget support for higher education.
The total average annual cost of attending a public four-year college, the College Board reported earlier this month, has now hit $15,213.
“The level of debt we’re asking people to undertake,” agonizes [7]Patrick Callan of the National Center for Public Policy and Higher Education, “is unsustainable.”
The lesson in all this? In both academe and society at large, as the most learned Sir Francis Bacon pointed out over four centuries ago, wealth — like manure — only does good when you spread it around.
Sam Pizzigati edits Too Much [8], the online weekly on excess and inequality.