- Feb 8, 2001
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Rich Harvard, Poor Harvard - By Nina Munk - Vanity Fair, August 2009
I just read this fascinating article at Vanity Fair. You know, the magazine that published the hit piece on Sarah Palin?
As a finance guy I found myself empathizing with the money managers at America's elite university. (Disclaimer: I took some graduate level business management classes at Harvard in the 80's. Did not find them worth the time or the money it took.)
I kept thinking, "THIS is the place where all of the finance guys in Washington come from."
It is a long article, well worth reading, and here are a few extracts to whet your appetite.
I found it fun to replace the word "Harvard" with "Washington" when I read the article a second time.
"The recession has been hard on most Americans. We know that. At Harvard, however, adjusting to the end of the gilded age, the champagne age, is proving especially wrenching: the university?s endowment has collapsed, donations are down, budgets are overstretched. With so many enormous fixed costs?and with much of its endowment restricted by the narrowly defined wishes of donors?there?s almost no room left to maneuver."
?Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh?s dream?you know, during the seven good years you save for the seven lean years,? remarked Alan Dershowitz, a professor at Harvard Law School since 1967. ?And now they?re coming hat in hand, pleading to the faculty and students to bear the burden of cutbacks. It?s a scandal! It?s an absolute scandal, the way Harvard has handled this financial crisis.?
"If Harvard were a serious business facing a liquidity crisis, it would have done something drastic by now: fired senior employees, closed departments, sold off real estate. But Harvard, like most other leading universities, is stubborn and inflexible. ?None of these schools has the ability to cut expenses fast enough? is how a hedge-fund manager who counts Harvard among his investors explained the problem. Running the numbers for me, proving how impossible it is for a shrinking endowment to keep up with the university?s bloated, immovable costs, the hedge-fund manager concluded, ?They are completely fucked.?
"A money manager I spoke to described his meeting late last year with Jane Mendillo, who in July 2008 became president and chief executive officer of Harvard Management Company. Knowing that Mendillo was trying to unload assets, he offered to buy back Harvard?s sizable stake in his private fund. As he recalls, the surreal dialogue went something like this:
He: ?Hey, look, I?ll buy it back from you. I?ll buy my interest back.?
She: ?Great.?
He: ?Here, I think it?s worth?you know, today the [book] value is a dollar, so I?ll pay you 50 cents.?
She: ?Then why would I sell it??
He: ?Well, why are you? I don?t know. You?re the one who wants to sell, not me. If you guys want to sell, I?m happy to rip your lungs out If you are desperate, I?m a buyer.?
She: ?Well, we?re not desperate.?
"Between fiscal 1990 and 2008, Harvard?s endowment boasted an average annual growth rate of 14.3 percent. That?s a spectacular performance. The Wilshire tucs index, which tracks the performance of 1,200 U.S. foundations and endowments, grew by a median annual rate of only 9.7 percent over that same time frame.
For all that, the long-term performance of Harvard?s endowment doesn?t tell us the whole story. What really happened is that somewhere along the line, around the year 2000 by most accounts, Harvard Management Company, like the university itself, lost its way.
In droves, the best portfolio managers started to leave Harvard Management Company. For most of them, the issue was money, pure and simple. Under Meyer, what Harvard paid his people was based on performance?in most cases, about 10 percent of what they made for the university. As the endowment got bigger, their incentive bonuses got bigger, too. And before long, the (mostly) men at Harvard Management Company were by far out-earning any administrator or professor at the university they were working for.
Jon Jacobson, aged 34, was Harvard?s top earner in 1995. He made $6 million that year, roughly 25 times more than the university?s then president, Neil Rudenstine. Two years later, in 1997, Jacobson, a former trader at Shearson Lehman Brothers, made $7.6 million. By 1998, Jacobson was making $10.2 million."
"Complaints about excessive compensation at Harvard Management Company gathered force, like an avalanche or a mudslide. By the early 2000s, Harvard?s top moneymen were making as much as $30 million to $40 million a year."
"One day, desperate for someone in authority to talk on the record, I caught up with Michael Smith, dean of the Faculty of Arts and Sciences, as he was leaving the town-hall meeting of undergraduates at Boylston Hall. Unaware that I was persona non grata on the Harvard campus, he talked openly to me.
I walked with him from the meeting to his car. How did the university get into this mess? I asked as we cut across Harvard Yard. Smith stopped. ?First of all,? he remarked, reinforcing what I already knew, ?the endowment growth did not keep up with the expenses. We hired faculty faster than we really should have We put up buildings based on debt financings?not fund-raising. And we decided the right thing to do was this financial-aid package, even though, again, we didn?t have new finances behind it to actually do it.?
A popular professor with an undergraduate degree from Princeton and a Ph.D. from Stanford, an expert in computer architecture, and co-founder of a data-security company called Liquid Machines, Smith, 47, is a driven and dedicated man. Yet even he conceded that his current job has been taxing. He?s held the position for less than two years; still, as he remarked to me, it ?seems like forever.?
We were in the parking lot, Michael Smith and I. The sun had set. Smith looked tired. It can?t be easy to be charged with cost-cutting at a university that refuses to use the term ?cost-cutting? and instead goes on about ?alignments? and ?resizements.? He added: ?The hope was that the endowment would continue to increase, and we could get some support from our alumni base to help pay for those changes in the program.?
He paused. ?And then, of course, the bottom fell out of the market.?
Truly a lesson for our times.
I just read this fascinating article at Vanity Fair. You know, the magazine that published the hit piece on Sarah Palin?
As a finance guy I found myself empathizing with the money managers at America's elite university. (Disclaimer: I took some graduate level business management classes at Harvard in the 80's. Did not find them worth the time or the money it took.)
I kept thinking, "THIS is the place where all of the finance guys in Washington come from."
It is a long article, well worth reading, and here are a few extracts to whet your appetite.
I found it fun to replace the word "Harvard" with "Washington" when I read the article a second time.
"The recession has been hard on most Americans. We know that. At Harvard, however, adjusting to the end of the gilded age, the champagne age, is proving especially wrenching: the university?s endowment has collapsed, donations are down, budgets are overstretched. With so many enormous fixed costs?and with much of its endowment restricted by the narrowly defined wishes of donors?there?s almost no room left to maneuver."
?Apparently nobody in our financial office has read the story in Genesis about Joseph interpreting Pharaoh?s dream?you know, during the seven good years you save for the seven lean years,? remarked Alan Dershowitz, a professor at Harvard Law School since 1967. ?And now they?re coming hat in hand, pleading to the faculty and students to bear the burden of cutbacks. It?s a scandal! It?s an absolute scandal, the way Harvard has handled this financial crisis.?
"If Harvard were a serious business facing a liquidity crisis, it would have done something drastic by now: fired senior employees, closed departments, sold off real estate. But Harvard, like most other leading universities, is stubborn and inflexible. ?None of these schools has the ability to cut expenses fast enough? is how a hedge-fund manager who counts Harvard among his investors explained the problem. Running the numbers for me, proving how impossible it is for a shrinking endowment to keep up with the university?s bloated, immovable costs, the hedge-fund manager concluded, ?They are completely fucked.?
"A money manager I spoke to described his meeting late last year with Jane Mendillo, who in July 2008 became president and chief executive officer of Harvard Management Company. Knowing that Mendillo was trying to unload assets, he offered to buy back Harvard?s sizable stake in his private fund. As he recalls, the surreal dialogue went something like this:
He: ?Hey, look, I?ll buy it back from you. I?ll buy my interest back.?
She: ?Great.?
He: ?Here, I think it?s worth?you know, today the [book] value is a dollar, so I?ll pay you 50 cents.?
She: ?Then why would I sell it??
He: ?Well, why are you? I don?t know. You?re the one who wants to sell, not me. If you guys want to sell, I?m happy to rip your lungs out If you are desperate, I?m a buyer.?
She: ?Well, we?re not desperate.?
"Between fiscal 1990 and 2008, Harvard?s endowment boasted an average annual growth rate of 14.3 percent. That?s a spectacular performance. The Wilshire tucs index, which tracks the performance of 1,200 U.S. foundations and endowments, grew by a median annual rate of only 9.7 percent over that same time frame.
For all that, the long-term performance of Harvard?s endowment doesn?t tell us the whole story. What really happened is that somewhere along the line, around the year 2000 by most accounts, Harvard Management Company, like the university itself, lost its way.
In droves, the best portfolio managers started to leave Harvard Management Company. For most of them, the issue was money, pure and simple. Under Meyer, what Harvard paid his people was based on performance?in most cases, about 10 percent of what they made for the university. As the endowment got bigger, their incentive bonuses got bigger, too. And before long, the (mostly) men at Harvard Management Company were by far out-earning any administrator or professor at the university they were working for.
Jon Jacobson, aged 34, was Harvard?s top earner in 1995. He made $6 million that year, roughly 25 times more than the university?s then president, Neil Rudenstine. Two years later, in 1997, Jacobson, a former trader at Shearson Lehman Brothers, made $7.6 million. By 1998, Jacobson was making $10.2 million."
"Complaints about excessive compensation at Harvard Management Company gathered force, like an avalanche or a mudslide. By the early 2000s, Harvard?s top moneymen were making as much as $30 million to $40 million a year."
"One day, desperate for someone in authority to talk on the record, I caught up with Michael Smith, dean of the Faculty of Arts and Sciences, as he was leaving the town-hall meeting of undergraduates at Boylston Hall. Unaware that I was persona non grata on the Harvard campus, he talked openly to me.
I walked with him from the meeting to his car. How did the university get into this mess? I asked as we cut across Harvard Yard. Smith stopped. ?First of all,? he remarked, reinforcing what I already knew, ?the endowment growth did not keep up with the expenses. We hired faculty faster than we really should have We put up buildings based on debt financings?not fund-raising. And we decided the right thing to do was this financial-aid package, even though, again, we didn?t have new finances behind it to actually do it.?
A popular professor with an undergraduate degree from Princeton and a Ph.D. from Stanford, an expert in computer architecture, and co-founder of a data-security company called Liquid Machines, Smith, 47, is a driven and dedicated man. Yet even he conceded that his current job has been taxing. He?s held the position for less than two years; still, as he remarked to me, it ?seems like forever.?
We were in the parking lot, Michael Smith and I. The sun had set. Smith looked tired. It can?t be easy to be charged with cost-cutting at a university that refuses to use the term ?cost-cutting? and instead goes on about ?alignments? and ?resizements.? He added: ?The hope was that the endowment would continue to increase, and we could get some support from our alumni base to help pay for those changes in the program.?
He paused. ?And then, of course, the bottom fell out of the market.?
Truly a lesson for our times.
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