It doesn't seem like Harvard was anywhere close to destroying itself. With enough in the bank to fund operations at current levels for another 20 years this headline seems very sensationalistic.
Then consider this quote, which to Harvardites is as bad as it could possibly get:
"We are in trouble," says one Crimson professor. In the aftermath of deep and damaging cuts, "there is a real chance that Harvard will no longer be considered the best there is."
That may not mean "destroy" in the bankruptcy/going out of business sense, but in terms of forever altering their identity.
The numbers are troubling:
$400 million/year deficit in FAS
$100 million/year in debt financing
$100 million/year in Alston maintenance
Sure, $600 million/year into $15 billion isn't a huge deal. What is, however, is how they've had to leverage that reserve to pay existing and new obligations - interest rates, bonds they've offered, etc. "In February, HMC, suddenly not looking so smart anymore, started laying off about a quarter of its staff."
This is a real money crunch that has a real trickle-down effect. "And by the 2011 fiscal year, the university would be cutting FAS's annual infusion of endowment cash by $125 million."
That's scholarships, classes, research facilities, new faculty hires - you name it. When the "best" university in the world is cutting drastically, on it's guiding mission, I'd say folks are legitimately worried about the identity forever changing.
Harvard is a hedge fund whose PR arm has a ~$800 million operating budget to make sure they don't lose their tax exemption, which is the source of most of their competitive advantage over other hedge funds.
You might want to stop saying it, as it really doesn't make much sense, for three reasons:
1. Harvard is hardly alone in having an endowment, nor are they alone in having an internal investment department that funds future operations. By this logic, any organization that operates an investment arm for internal use is an investment fund.
2. Hedge funds exist (ostensibly anyway) to provide a return to their investors. Harvard does not exist to provide a financial return to its investors. Its endowment exists to fund the future operations of the school, not give the donors a good return on their donations.
3. Harvard is known for their educational merits, not their endowment.
Harvard is of a quality virtually unique due to the size of their endowment, their degree of reliance on it, and the way it is managed (for Aggressive Growth). At some point you have to ask if the tail is wagging the dog.
You could fit most universities' endowments in the interest payments Harvard gets from the fixed income allocation of their endowment alone. Don't take my word for that: look at the list of universities in the US with gigantic endowments:
Harvard does not exist to provide a financial return to its investors.
It really does -- Harvard is the sole investor in Harvard, and Harvard went for aggressive growth and a 15% CAGR. (The article talks about a multi-billion interest rate swap which had a speculative payoff in the billions.) The typical behavior of endowments is "We're going to husband this carefully and spend about 4 or 5% a year to supplement our other sources of income."
Harvard is known for their educational merits, not their endowment.
Harvard is not the sole investor in Harvard...the endowment is largely the result of donations by wealthy alumni, none of whom will be getting a return on that investment.
"2. Hedge funds exist (ostensibly anyway) to provide a return to their investors. Harvard does not exist to provide a financial return to its investors."
From the article:
"According to the university's 2008 financial report, in the next 10 years it must pay various private investors some $11 billion in capital commitments."
I agree with patio11. What kind of "endowment" has investors!? Multi-billion dollar interest rate bets with banks? Borrowing money to bet more?
Of course the managers should try to find a decent return on their endowment, but at some point the tail has started wagging the dog here. In a previous article it was mentioned that some of the money managers were being paid bonuses of tens of millions a year; probably a hundred times the highest-paid professor. How you can have crap like that going on and still pretend it's all about the education is beyond me.
Unless I'm completely mistaken, the capital commitments refers to investments the Harvard endowment is making in other funds, not investments being made in its own fund. For example, when a VC firm raises a new fund, they don't take delivery of the entire amount of the fund, they just get commitments that the funds will be available from investors (like Harvard, in this case) when needed. It's not unreasonable for an endowment fund with tens of billions of dollars to commit roughly $1.1 billion per year to various investments over the coming decade.
As far as paying bonuses of tens of millions of dollars to the managers of the endowment, Harvard has to compete for qualified managers, too. If they offered $250k or whatever the professors get paid, it's doubtful that they'd get any qualified applicants.
(And yes, I'm aware that the guy they hired apparently wasn't qualified either, but that's not the point.)
Well, I'm not privy to the Harvard accounts, so you're probably right on that front. Yeah, probably signed up to some deferred payment thing. Well done.
But the other part - the $40m bonus payments (a figure from another article) - that is obscene. Doubly so for a so-called educational institution.
Yeah, capitalism, blah blah. Yeah, market rates, etc. Yeah they "made their money back" etc. Fuck all of that. Paying someone, anyone, $40m a year is obscene.
Seriously - step back for a minute and think about it. Harvard uni. Pays their top professor $250k. Pays their money managers $20m+. What does that say?
I'm not going to answer, fill in your own; but it says something, all right.
> 2. Hedge funds exist (ostensibly anyway) to provide a return to their investors. Harvard does not exist to provide a financial return to its investors. Its endowment exists to fund the future operations of the school, not give the donors a good return on their donations.
The school is the investor.
I don't buy the "Harvard is a hedge fund" argument because it only makes sense if "hedge fund" is extended to include entities that don't have external investors. If Harvard is a hedge fund, it's a self-sufficient/independent hedge fund.
That said, the Harvard "hedge fund" internalized an investor with good tax characteristics. I don't know that the costs of maintaining that investor are less than the tax benefits, but it's at least plausible.
I'd really like someone to investigate how much money the AIG bailout saved Harvard. AIG was in the credit default swap business and Harvard invested heavily in that area. There were a lot of interconnections between Wall St, AIG, Harvard, and the government (Marty Feldstein, Larry Summers, Robert Rubin, etc). Somebody ought to look into this.
Buildings are surprisingly expensive. ~50-75$ million (perhaps even more these days) gets you a pretty basic academic building (like a dorm). Fancy buildings with expensive contents like libraries and labs are substantially spendier.
I don't doubt your numbers. However, a dorm is an apartment building with students living it and maybe a room with some communal computers. You can walk two blocks from almost any $75 million dorm in the country and find an apartment building with students living in it. That apartment building didn't cost $75 million, or indeed anywhere close.
Sometimes excess is just excess.
As she starts her freshman year at the University of Maryland, Alyssa Evans will not be roughing it: She'll have a furnished single room with a double bed, private bathroom, cable and high-speed Internet. Her four-person suite has a full kitchen, a washer and dryer, a dining room table and black leather couches in the living room.
Her high-rise building has a game room with video games, poker and pool tables and flat-screen TVs, a rooftop deck, a pool and -- losing track here -- okay, and a big fitness center.
I am not sure that that's excessive. When I was in college, I shared a tiny room with a roommate. It was constantly loud, and I got nothing done. I ended up dropping out.
Since finding a real place to live (and a real job, of course), I've written a book and have over 100 open source projects in my github. Having a quiet, comfortable place to work probably contributed to that.
Giving people a reasonable place to live and study is not excess -- it should be mandatory. (Also, this stuff isn't that expensive. I live in a high-rise in downtown Chicago, not a cheap market, and facilities like this would not be very expensive when split between 4 people. It's not all that expensive for one person...)
The tanning beds are a bit much, but in general I don't see what's wrong with a nice dorm. Just because most of us put up with crappy living conditions as freshmen doesn't mean there's anything noble about it.
Biomedical buildings, which the new campus is full of, are insanely expense - on the order of $50 million/floor. Almost everything is close to a custom design to insure safety and research fidelity.
