By Jeff Harding
The Germans have a way with language. They invent words no one should have thought of. Take “schadenfreude” for example. Who else would have thought up the concept of taking pleasure from someone else’s loss. (Schaden = loss; Freude = pleasure.) It’s a secret pleasure, a gloating where you think the person deserved the bad thing they got but are kind of ashamed to admit it. Admittedly a very German thing.
Harvard Campus
A new article in Vanity Fair, “Rich Harvard, Poor Harvard,” documents Harvard University’s stunning losses in its fabled endowment and the fallout from it. A year ago, it was worth $36.9 billion. Today, Harvard estimates it lost 30% of its portfolio which may be down to $25.8 billion. Others estimate that its portfolio has been halved if its riskiest illiquid investments were properly valued.
This is a terrible thing for Harvard. In addition to curtailing free coffee, rumors are spreading about big layoffs, salary cuts, student financial aid cuts, cancellation of or halting construction projects in order to make up a $220 million deficit. More than one-third of its operating income came from its endowment fund.
They made two major errors. First, they took high risk in order to get spectacular results. Second, they thought the endowment would continue to grow forever and spent and spent.
Harvard has some of the highest paid faculty in the nation. They were generous by allowing students’ a free ride in families earning up to $60,000 per year. In December, 2007, the new President Faust said families earning up to $180,000 would only pay 10% of their income. They went on a building frenzy, adding 6.2 million square feet of new space (about the size of the Pentagon) between 2000 and 2008 at a cost of $.3 billion. In ten years, its operating budget grew 67% from an inflation-adjusted $2.1 billion in 1998 to $3.5 billion in 2008. A former senior administrator said, “At the time, I think they were reasonable judgments.”
Their investment strategy was turned up many notches. According to the article:
Instead of abiding by the old, prosaic rule of 65/35 (whereby 65 percent of your portfolio is invested in U.S. equities and 35 percent in bonds), [head of the endowment Jack] Meyer and his team of portfolio managers moved Harvard’s money into all sorts of things: private equity, real estate, oil, gas, fixed-income arbitrage, timberland, hedge funds, high-tech start-ups, foreign equities, credit-default swaps, interest-rate swaps, cross-currency swaps, commodities, venture-capital funds, junk bonds. As if all those exotic, illiquid investments weren’t enough to amplify the returns, Meyer added a heap of leverage. It was dizzying, Harvard’s portfolio.
They didn’t do well in the Crash of ‘08.
Without trying to gloat over the outcome, I will say that the whole thing is emblematic of what’s wrong with contemporary economics and investing. We are talking about Harvard here, not some backwater college. Harvard is the royal chamber of econometrics and intellectual home to many of the top investment advisers in America. President Obama’s chief economics adviser is Larry Summers, a Harvard grad and former president of the institution when a lot this spending happened. The following are also Harvard graduates: Paul Volker, Hank Paulson, Allen Hubbard, Ben Bernanke, and Robert Rubin.
Once you put into perspective the kind of economics that was (and is) taught at Harvard, you understand their investment result is their intellectual child. The university’s administration was no better. They were either well schooled in econometric theory (Summers) or they were blissfully ignorant of many things, including the basic concepts of epistemology (the science of how you know what you know) which led them to believe that the Endowment would grow forever.
I must keep repeating that this is Harvard. Because of their intellectual prominence, they should be held to a higher standard of care in carrying out their duties to their school. They set intellectual standards for the world because of their prominence. There is a lot of magic in a Harvard degree. Yet it turns out they behaved poorly, if not incompetently.
I believe this says something about Harvard and their brand of thinking. And they are still in control of our world.
