Universities using Endowment Funds to Gamble in “Shadow Banking” System

By TRB

Most people would think Harvard University would be smart with its endowment money. They would be wrong. They would also be wrong in the case of Dartmouth College in New Hampshire, or Boston University; even MIT. All of these tax free institutions and others, got caught up in the Randian hustle created by Wall Street in the late '80s. Boston University even got entangled in the web of Goldman Sachs, who, according to Matt Taibbi, author of GRIFTOPIA ( 2010, Spiegel & Grau, NYC, NY) was responsible for some of Wall Street's more heinous sucker schemes. Goldman Sachs, according to Taibbi who is an editor with Rolling Stone, actually "bundled" countless numbers of bad mortgages together, pawning them off on unsuspecting investors as AAA investments. Then Goldman turned around and bet against the same investments, holding a short position, knowing the investor would lose money and Goldman Sachs would make money both when they sold investors on the idea of buying them, and when those same investors lost their shirts. This seems like securities fraud. But no one has stepped forward to go up against Wall Street. Hell, our president has hired a Wall Street executive to be his Chief of Staff, and some of our greatest universities are still being scammed by Wall Street to this very day. Or are they being scammed? Some would argue that the executives who run our academic institutions have fallen in love with risk. Endowments have become just another stream of capital with which to gamble. The real losses, as usual are felt in the university communities and towns, where cutbacks in university jobs and construction projects have cost entire regions more than a billion dollars. Lower paid university workers have suffered greatly, many losing their jobs when the latest bubble burst, while the salaries of college executives have exploded upwards over the past decade. For years universities handled their endowment funds with care and prudence. But those days are gone. Today, universities hire executives who specialize in the trading practices of the shadow banking industry. Financial risk is the cocaine of the times, and universities can't get enough. And why not? Most of it is at the public's expense. Recently Harvard had to borrow from the state of Massachusetts, just to meet its obligations. Are these universities or are these casinos?

On North Harvard Avenue in Allston, literally down the street from the campus of Harvard University, Harvard's real estate people have been buying up land for decades in a practice known as "land banking" or "property warehousing." This is a relatively inexpensive endeavor when you consider that with its tax-exempt status, Harvard could purchase property all day and all night for the next several months before it began to notice any of its funds missing. Even after the near depression of last year, Harvard was still holding many billions in endowment money. But what did it want with all this land in working-class Allston? And, more mysteriously, why was it buying it up and doing nothing with it? This was land that had contained viable businesses, where there were jobs for people in the community. Now it was just being "warehoused" or maybe "land banked."

It seems that Harvard had announced plans for this land several years ago. The plan was to extend Harvard across the Charles River - where the football stadium and business school exist - but much farther into Allston. There would be a whole series of athletic facilities and various admin and academic buildings. Many, probably hundreds of local people would be employed. As many as 500 construction workers would be needed.

But Harvard's "Allston Campus" has yet to materialize. Something is different though. Someone has been digging in recent years, maybe installing a foundation for a building. Harvard will probability even complete that building with a recent donation it has received. But the grand idea of a large campus-like installation in Allston has been put on hold for the time being. Suddenly, Harvard can't afford it, can't afford the risk of spending the kind of money that would be needed to accomplish that task. And the reason it can't afford to extend its campus is because in recent years it took on too much risk on Wall Street using investment strategies with its endowment fund that were every bit as risky as betting on a horse race. A horse race it lost.

Harvard, and a number of well-known and well-regarded universities have been using the so-called "Endowment Model of Investment" for a number of years. This is an investment system that encourages risk in favor of greater returns.For many years colleges had followed the "prudent man rule," which encourages the avoidance of speculation in financial matters. Treasury and Corporate bonds were safe and that's what universities bought. By the time of the 1960s things had loosened up a bit to where most universities were using 60 percent of their endowment to purchase stock, and the other 40 percent for bonds.

Then something happened in the eighties. For one thing, Yale University hired an investment officer whose job was to take a little more risk with Yale's endowment fund and see if he could turn a little more profit. He did and he didn't. But the other major universities in the Northeast and in many parts of the country followed suit hiring their own CIOs and entering into what came to be called the "shadow banking industry." This is a world of very high risk financial instruments, credit default swaps, hedge funds, etc. Universities, by involving themselves in questionable investment and banking deals that almost drove the nation into Depression in 2008, lent their credibility to many of those rigged gaming table practices and should be blamed for the significant role they played in the economic troubles of the present day. Just the presence of the universities made it seem like a sure thing to investors who were foolish enough to respect the decisions universities made.

In a study conducted by the Center for Social Philanthropy at the Tellus Institute, study members examined the use of endowment funds in the "shadow banking industry" by six New England schools, Harvard University, M.I.T. Dartmouth College of N.H., Boston University, Boston College and Brandeis University between the years 2008 - 2009. All six were then using the "Endowment Model of Investment," which means making risky investments in the shadow banking industry.

Between the six institutions they held $40 billion in endowments in 2008, with Harvard holding the most, more than $25 billion and Brandeis holding the least, a little over half a billion dollars. Taken together, these six schools control 12 percent of the roughly $310 billion in university and college endowment funds in all of the U.S. today. When the housing bubble burst in 2008, and the universities learned that a significant amount of their holdings were trash, so-called AAA bonds "securitized" for suckers and pawned off as profit-making financial instruments, they almost immediately laid off workers and cut back construction projects planned for their communities. So their gaming losses on Wall Street had an immediate negative impact on the communities where they reside. This, coupled with the terrible state of the national economy destroyed many people's livelihoods, costing millions in uncollected taxes and causing businesses to accrue large losses. Harvard lost the most, an entire 30 percent of its endowment. Dartmouth lost 23 percent. Brandeis 22. Boston University, 22. MIT 21 and Boston College 18 percent.

It is difficult to discover exactly how much they lost, because they won't make it public. The information that many in journalism pick up routinely from other non-profit institutions is not available from colleges and universities. It is safe to say, however, that they, and other universities lost billions when the bubble burst. Their losses wouldn't normally be the business of the communities in which they are found, except for one thing - they have a lot to do with the financial welfare of the residents living around them. In large part, this is why local governments across the nation allow colleges and universities a tax exemption - because they are normally a profitable member of the community. They build projects, expand, allow local students to pay less tuition, and more important, hire local workers and use local businesses. So when universities are speculating in high risk shadow banking ventures that could result in the loss of billions of their endowment funds, it seems only right that the average citizen, worker, businessman who lives nearby, who lives in the same community as the institution and whose life could be changed drastically by the university's financial risk, should have a right to know about it.

For example, it is believed that the combined losses of these universities in the shadow banking system can be estimated at $1.3 billion in total, over the next three years in the communities in which they reside. Allston, Mass will experience a loss of more than $800 million over the next three years related to the Harvard losses and it's decision to put off building the "Allson Initiative." Boston alone will experience $135 million in annual economic loss.

The endowment model of investment as practiced by the universities seems to represent a threat to the communities where they are found. This system has other weaknesses as well. The finance executives that the universities have hired can make as much as one million dollars a year. Unfair pay disparity exists at all the universities mentioned. Further, in recent years, the boards that control decisions about the use of endowment funds are seeing an increasing number of investment bankers in their ranks. Perhaps to "steer" their investments?

Yes, the universities have been allowed to trade on the stock market with endowment funds for many years. But what has also injected itself into the endowment fund system is an almost Randian cult of investment specialists, who sincerely believe that risk equals profit. While that might be a fine philosophy in other businesses, it does not belong in the university system. Local government has given the university more leeway when it comes to expansion . It does not collect taxes from the university. The university receives these benefits through what it gives back to the community. If gambling with tax-exempt endowment money and losing on Wall Street is going to upset that contract, then perhaps it is time for it to be re-written.

At MIT many clerical workers and senior staff have lost their jobs. MIT doesn't want to talk about it. No one wants to talk about universities. The tuition continues to go up, the pay of the average university worker is stagnant. But there is another element here, one that does not belong. That is the relationship universities have with the shadow banking system.

Someone said this a long time ago. Someone who probably didn't graduate from Harvard or MIT. If you can't afford to lose, you can't afford to gamble.