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The Inside Story of Harvard's Finance Meltdown

18 points by Flemlord 18y ago

mkuhn 18y ago
Another article on the same subject: http://www.nytimes.com/2009/02/21/business/economy/21harvard.html?_r=2&src=SkimHP&pagewanted=all http://www.nytimes.com/2009/02/21/business/economy/21harvard... I found the one from the NYT the better read.
markessien 18y ago
This just seems distasteful. A university should not be a business, because businesses will always default to whatever makes the most money. And sometimes, this is not the same as what is best for the students.
- neilc 18y ago
  What goal do you think the endowment folks should have followed, if not trying to make the most money (at an acceptable level of risk)?
- sho 18y ago
  I agree. What kind of "non-profit" organisation is paying its money managers $35m/yr to push its earnings to 20+%? That's not an educational endowment, that's a hedge fund, and an out-of-control one at that. Oh well, seems like they've learned their lesson now. Eleven billion lessons, in fact.
  - neilc 18y ago
    That's not an educational endowment, that's a hedge fund Would you prefer if Harvard invested their endowment in a collection of outside hedge funds, the managers of which might easily be making $35m/yr? It's just a question of outsourcing vs. insourcing -- either way, Harvard wants to generate income from their endowment, and compensating the people with the skills to maximize endowment income is a perfectly rational thing to do. seems like they've learned their lesson now Not really; they just invested unwisely. The basic principle of trying to maximize endowment income via professional money managers is one that I'm sure Harvard would continue to embrace, as would any university with a large endowment, or any number of pension funds and non-profits with investment portfolios.
    - gojomo 18y ago
      they just invested unwisely From what I've read, it looks like the biggest problem was one of continuity: they fumbled transitions between managers. To some extent, this is the fault of the next level of management -- they should have understood the risk of the insourcing and transitions. I think it also falls on the outgoing manager(s) (Jack R. Meyer and Mohamed El-Erian) somewhat -- if you've been paid that much you have a residual duty to protect your exotic, aggressive bets from exploding early on the next watch. (Perhaps they gave guidance that was ignored; it might take lawsuits to know for sure.)
    - sho 18y ago
      I disagree. The point of a non-profit is not to seek to increase its net worth by aggresive market speculation. In fact, that seems like the very definition of for-profit! I am hardly an expert on such things but I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims, not as chips on a fund manager's gambling table. This is why people give to non-profits! Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. Otherwise they should stay out of aggresive wealth maximisation. It's not their money. And if it is their money, they should be taxed on their income like any other enterprise.
      - neilc 18y ago
        I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims Naturally -- what else do you think the endowment is for? Like any big university, Harvard takes endowment money, and invests it in such a way as to maximize returns. Some of those returns are reinvested in the endowment, and the rest are used to support the university. A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims. Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. You don't seem to understand the basic idea behind an endowment. If Harvard didn't earn a reasonable rate of interest on their endowment, they would quickly exhaust it at their current rate of spending. Simply "counteracting inflation" but not seeking a competitive return on their endowment would be grossly irresponsible, not to mention wasting a vast amount of capital that could be put to better use. As for the taxation question, I'm not sure how much tax Harvard has to pay. But they do have to comply with various legal requirements on how much money they pay out from their endowment each year vs. reinvesting it.
  - andylei 18y ago
    why should an educational endowment act any different than a hedge fund? hedge funds are designed to maximize return for some level of risk. if you think the level of risk they pursued was too high, that's another issue, but hedge funds aren't necessarily high risk
- mkuhn 18y ago
  Yes, it may seem so, but in my opinion Harvard did the right thing. They created a new separate entity which handled the business side. They created a new venture whose sole responsibility was to manage the Universities endowment. That this organisation wasn't controlled enough and didn't know where to stop is another story. I think that maximising the profits (within a risk scope) is in the interest of the students as long as it doesn't distract Harvard from being an excellent University, and I believe that wasn't the case.

18 points by Flemlord 18y ago

mkuhn 18y ago

Another article on the same subject: http://www.nytimes.com/2009/02/21/business/economy/21harvard.html?_r=2&src=SkimHP&pagewanted=all http://www.nytimes.com/2009/02/21/business/economy/21harvard... I found the one from the NYT the better read.

markessien 18y ago

This just seems distasteful. A university should not be a business, because businesses will always default to whatever makes the most money. And sometimes, this is not the same as what is best for the students.

neilc 18y ago
What goal do you think the endowment folks should have followed, if not trying to make the most money (at an acceptable level of risk)?
sho 18y ago
I agree. What kind of "non-profit" organisation is paying its money managers $35m/yr to push its earnings to 20+%? That's not an educational endowment, that's a hedge fund, and an out-of-control one at that. Oh well, seems like they've learned their lesson now. Eleven billion lessons, in fact.
- neilc 18y ago
  That's not an educational endowment, that's a hedge fund Would you prefer if Harvard invested their endowment in a collection of outside hedge funds, the managers of which might easily be making $35m/yr? It's just a question of outsourcing vs. insourcing -- either way, Harvard wants to generate income from their endowment, and compensating the people with the skills to maximize endowment income is a perfectly rational thing to do. seems like they've learned their lesson now Not really; they just invested unwisely. The basic principle of trying to maximize endowment income via professional money managers is one that I'm sure Harvard would continue to embrace, as would any university with a large endowment, or any number of pension funds and non-profits with investment portfolios.
  - gojomo 18y ago
    they just invested unwisely From what I've read, it looks like the biggest problem was one of continuity: they fumbled transitions between managers. To some extent, this is the fault of the next level of management -- they should have understood the risk of the insourcing and transitions. I think it also falls on the outgoing manager(s) (Jack R. Meyer and Mohamed El-Erian) somewhat -- if you've been paid that much you have a residual duty to protect your exotic, aggressive bets from exploding early on the next watch. (Perhaps they gave guidance that was ignored; it might take lawsuits to know for sure.)
  - sho 18y ago
    I disagree. The point of a non-profit is not to seek to increase its net worth by aggresive market speculation. In fact, that seems like the very definition of for-profit! I am hardly an expert on such things but I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims, not as chips on a fund manager's gambling table. This is why people give to non-profits! Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. Otherwise they should stay out of aggresive wealth maximisation. It's not their money. And if it is their money, they should be taxed on their income like any other enterprise.
    - neilc 18y ago
      I would presume that the donors over the years to the Harvard Endowment might have had some expectation that their donations would be put to use futhering the university's academic aims Naturally -- what else do you think the endowment is for? Like any big university, Harvard takes endowment money, and invests it in such a way as to maximize returns. Some of those returns are reinvested in the endowment, and the rest are used to support the university. A higher rate of return on the endowment fund is directly and obviously connected to higher spending on the university's academic aims. Some gain is necessary to counteract inflation, of course, but T-bills or straight banking would have sufficed for that. You don't seem to understand the basic idea behind an endowment. If Harvard didn't earn a reasonable rate of interest on their endowment, they would quickly exhaust it at their current rate of spending. Simply "counteracting inflation" but not seeking a competitive return on their endowment would be grossly irresponsible, not to mention wasting a vast amount of capital that could be put to better use. As for the taxation question, I'm not sure how much tax Harvard has to pay. But they do have to comply with various legal requirements on how much money they pay out from their endowment each year vs. reinvesting it.
- andylei 18y ago
  why should an educational endowment act any different than a hedge fund? hedge funds are designed to maximize return for some level of risk. if you think the level of risk they pursued was too high, that's another issue, but hedge funds aren't necessarily high risk
mkuhn 18y ago
Yes, it may seem so, but in my opinion Harvard did the right thing. They created a new separate entity which handled the business side. They created a new venture whose sole responsibility was to manage the Universities endowment. That this organisation wasn't controlled enough and didn't know where to stop is another story. I think that maximising the profits (within a risk scope) is in the interest of the students as long as it doesn't distract Harvard from being an excellent University, and I believe that wasn't the case.