
The Collapse of Harvard’s $36.9 Billion Endowment  - robg
http://www.vanityfair.com/politics/features/2009/08/harvard200908
======
jacoblyles
It baffles me that the first instinct of some students in response to massive
budget deficits is to protest budget cuts and layoffs. They should move to
California when they graduate, they would fit right in. I was on the mailing
list of a few organizations that urged me to fight the state government's
plans to cut back staff positions and hours in response to our multi-billion
dollar hole. What do they think we should do, close our eyes and wish the
deficit away?

~~~
lacker
_What do they think we should do, close our eyes and wish the deficit away?_

No, they think we should raise taxes on people richer than they are. Your
political opponents are not crazy, they just have different goals.

~~~
gaius
Presumably the people poorer than them also feel the same way?

If you look at the numbers - at what percent of people pay what percent of the
total collect from income tax - the inescapable conclusion is that a lot of
people aren't pulling their weight, and those aren't the highest earners...

~~~
pbhjpbhj
You're starting your rebuttal from the wrong point. Those who earn more are
indeed contributing more tax. But why are they earning more? Is it that their
contribution is worth so much more to society? Doubtful. More, perhaps, that
much more, unlikely.

For example in the article the guys earning 30million a year (10% of their
gambling wins) are only able to earn large amounts because they're on a
buoyant market. It's largely random fluctuations - they win for 15 years and
then lose it all (except they don't personally lose of course); others win for
15 days and lose it all.

So, the guys paying the most tax, the investment managers &c. are adding
little to overall productivity (except some lubrication which could be
provided without the ineffecient losses of traders wages) but are creaming off
inordinant amounts of wealth from the top all the time simply because of a
mathematical glitch -- if you waited 100 years and analysed the gains of any
investment firm I'll guess they do marginally better then inflation but
extract far more worth for the traders.

Those doing productive work, even the highly paid Harvard professors are
earning pennies compared to the investment teams.

So are the investment managers pulling their weight in society by creaming off
the wealth by gambling with other peoples money? I don't think so.

Capitalism means the rich get richer, some clever people manage to use other
peoples money to be rich first. The rest of us are being suckered.

~~~
gaius
_You're starting your rebuttal from the wrong point._

No, you are :-) It's not a zero-sum game like a casino. There is value created
by the allocation of resources. That's what Warren Buffett does. OK so it's
not what LTCM did, but that's a flaw in the implementation, not the theory, of
capitalist economics. The gambling metaphor simply doesn't fit.

~~~
pbhjpbhj
Touch/e.

Capitalist economics is pretty useless as a theory, if it doesn't work in
practise then it's no use. Define "work". The purpose of capitalism AFAICT is
to make money for wealthy capitalists and it does a pretty good job at that.
The social fixes added by governments to avoid the capitalists destroying the
workforce (eg social security, min wages, health care) are the only reason it
can continue. And now of course we have the bailouts, without which the
capitalist economy would be dead already rather than groaning in death pains.

I'm pretty /au fait/ with the concept of borrowing to leverage larger sums of
money to optimise efficient growth - floatation works IMO only if those buying
have altruistic reasons as well; everything is too open to abuse from the big
investors. Efficient allocation of resources is not the net effect IMO.

Another example, I can see how you want to mitigate against changes in
currency destroying your profit on a large / long-term cross-border project by
ForEx deals, but this isn't only how ForEx is used.

I don't see how gambling doesn't encompass a naked-short-sell (say) unless you
have opportunity to influence the market by some insider trading, which is
both [normally] immoral and illegal, or predict the market by being privy to
some deals before they are made (as in the recent expose of the NYSE network
being sniffed).

~~~
gaius
Capitalism has no "purpose" other than an optimal allocation of existing
wealth with the objective of creating new wealth. It's an algorithm or a
technology, not an ethical system. This is where many critics of capitalism
stumble.

The bailouts are emphatically _not_ capitalism. Capitalism says let the banks
go bankrupt, let the investors lose their shirts, they knew the risks, they
knew the profits they were making were in return for taking those risks. The
bailouts are _entirely_ political (oh shit! we need those Detroit votes!).

------
dandrews
"That Summers suggested women lacked a natural ability for sciences did not
help matters one bit."

That isn't quite accurate. Summers had prefaced his remarks saying "I'm going
to provoke you", then pointed out that math and science test scores were
higher for high school boys than for high school girls. No one understands
why, he continued, but is it _possible_ that genetics plays a part, and it is
not strictly a socialization issue?

He was castigated by some faculty members for those politically incorrect
remarks. How DARE he even ask the question?

See:
[http://www.boston.com/news/local/articles/2005/01/17/summers...](http://www.boston.com/news/local/articles/2005/01/17/summers_remarks_on_women_draw_fire/)

~~~
zurla
I think he actually argued that men might have a different distribution for
mathematical ability than women. Specifically, he suggested men might have a
higher variance in their distribution, meaning more men in the tails at both
sides. But the distributions would still have the same mean. So men are not
'better than math' than women -- there would be more dumb ones and more smart
ones, and less in the middle, effectively.

This phenomenon, by the way, is commonly observed in other species for various
genetic traits. From an evolutionary perspective, it makes sense for the males
to "roll the dice" and have a higher variance for many traits. For example,
one superstar male frog can have _many_ more offspring than one average male
frog. But one superstar female can really only have as many offspring as the
average female. That's a crude over-simplified explanation, but the idea is
sound.

~~~
davi
_he suggested men might have a higher variance in their distribution, meaning
more men in the tails at both sides_

That's my understanding as well.

A professor I respect a lot presented his analysis of Summers' argument in a
lecture I went to. This professor said that Summers' argument was
statistically invalid, since the number of outliers in the tails of the IQ
distribution was insufficient to tell if the distribution was in fact
different at the tails between men and women.

It's fair to say that this rebuttal was not the one Summers got when he
presented his idea to the faculty. :)

------
antipax
Honestly, the article comes off kind of like someone who was a billionaire
complaining about how they've become a millionaire. We don't get free coffee
or _free hot breakfast every weekday morning in the dorms_ at my school.

~~~
sailormoon
I was thinking that too. Those poor diddumses! Next thing you know they'll
have to do their own laundry.

Harvard's demise might be a sobering economic indicator, but I wonder if
there'd be many who actually mourned its passing? To me it's nothing but a old
boy's club filled with entitled trust fund brats, and the only real benefit of
going there is that you then get hired by the previous generation of
intolerable WASP twats. And members of this little club seem to have made an
outsize contribution to the ills of wall street, law, government and the
current crisis.

Who respects Harvard? Who'd miss it? Not I.

~~~
dantheman
I respect Harvard; they do great work. I think the world would significantly
miss it if Harvard, it's really hard to respond to such a poor argument, but
the medical school alone is a world changing institution.

~~~
sailormoon
Well, looks like their PR department does great work, indeed. But it's not
just their token medical school - I think their business school and law
departments have also been "world changing institutions", just maybe not in a
positive way.

Anyway this idea of having elite schools for an elite class is dangerous. Just
look at the list below. Nepotism and class segregation by proxy, that's all
Harvard is. Oh lookie, there's Obama! He went to Harvard, replacing GWB, who -
surprise - went to Harvard. And the CEO of Goldman Sachs, who replaced the old
CEO who also went to Harvard! What a coincidence.

[http://en.wikipedia.org/wiki/List_of_Harvard_Law_School_alum...](http://en.wikipedia.org/wiki/List_of_Harvard_Law_School_alumni)

Make no mistake. Harvard is "The Man" writ in bricks and stone. I am not very
much a fan of The Man, which is why I am not unhappy to see The Man in trouble
financially. But no worries, if things really get bad I'm sure a bailout's on
the way.

~~~
mistermann
Whats with the downvotes? I, for one, largely agree with you.

~~~
endtime
HN isn't reddit, at least not yet. Populist/anti-establishment/anti-elite
sentiment doesn't guarantee upvotes regardless of comment merit here.

------
mdasen
I thought that Alan Dershowitz' comment was particularly interesting:

 _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. 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._

The issue that a lot of organizations and businesses seem to be facing now is
that they're doing like he says and spending in the fat years what they have
which makes the lean years painful. However, this also applies to spending on
salaries. As the article notes, Harvard spends a lot more on professor
salaries than other Universities because, during the fat years, they spent
what they had giving it to professors. And now Professor Dershowitz complains
that he has to share in the lean years just as he shared in the fat years.

There are only two plausible ways to do it. Either salaries stay at a pretty
steady rate and don't rise in the fat years and hurt in the lean years because
the rises are smaller -or- salaries run in tandem with the fat and lean years.
You can't get huge raises in the fat years and expect it through the lean
years as well.

Now, clearly Harvard's building spree is the cause of some of the hurt, but it
isn't like the faculty and students haven't taken their cut of the fat years
with the highest professor salaries around and students who pay next to
nothing in tuition. If you want in on the fat years, you get in on the lean
years.

~~~
lutorm
How do you infer that Dershowitz approved of the salary increases in the fat
years?

~~~
mdasen
Well, if he didn't, then why would he complain about cutbacks?

I'm not trying to pick on him or anything, it's just that he's quoted. But if
your salary is increased from $150,000 to $200,000 and then you're asked to
cut it down to $150,000, well, if you didn't approve of it in the first place
the chances are that you'd be ok with going back.

We often don't get to make those choices as individuals, but usually no one
complains about their salary increasing. It's also totally possible that he's
protesting on other people's behalf as I doubt he's hurting as a successful
book author and probably one of their more well paid professors.

But generally speaking, when a company is having fat years, people generally
want a piece of it. I don't mean any disrespect to Professor Dershowitz. It's
just that most people act like he acts - it's human nature. It's annoying when
fat years are here and we don't get a cut. It's annoying when lean years come
and people want us to make concessions. I feel that way too. It's completely
devoid of reality, but it's an interesting part of our psychology.

~~~
pbhjpbhj
I'd have to re-read to be sure but I don't think Prof Dershowitz was
commenting on salaries at all. The salary of the professors shouldn't be
linked to the Uni's investments. The Prof to me was saying that if they'd been
less inclined to blow all the money in the rich years then they'd have the
reserves needed to tide themselves over the lean years without having to dick
about with peoples salaries, etc..

Also, them overspending 100Million on a building has got to bite a bit when
they then announce they're going to cut back on your breakfast. $100Mil buys a
lot of breakfast.

------
davi
Most interesting was the idea of conservatism as an asset for some classes of
enterprise:

“Harvard, institutionally, never had change when I first came here,” the law
professor Alan Dershowitz told me. “It was like the old baseball teams; you
were born here and you died here.... But the turnover now has become like
corporate turnover—and that always takes a toll.”

------
ja27
It's been amazing. A good friend was laid off from what should have been a job
for life there. I don't see how they're going to operate while eliminating
people from nearly critical positions.

If this would happen to my company, I'd expect the doors to close. If it
happened to any of our competitors, we'd be throwing a victory party.

~~~
tokenadult
_A good friend was laid off from what should have been a job for life there._

Where else in the current economy do people expect to have jobs for life?

~~~
smhinsey
I think there's probably a decent chunk of government or quasi-government jobs
(post office, amtrak) that are pretty reliable, but this recession has
certainly shaken things to their core. Who knows these days?

------
TrevorJ
I wonder what perceptual damage this will do to the Harvard brand?

Being one of the world's leading business school and being in financial
trouble just doesn't look good.

~~~
prodigal_erik
How much time do business schools spend on managing investments? It sounds
like its own specialty, but I don't know where one learns it.

------
biohacker42
_Only a year ago, Harvard had a $36.9 billion endowment, the largest in
academia. Now that endowment has imploded_

Was anyone able to get through all 6 pages and find what exactly _imploded_
means?

~~~
ajross
The important details are on the second page, and the explanation isn't very
clear. But at it's core this is a liquidity crisis. Harvard hasn't _lost_ all
that much (maybe 25% if the $8B number holds up). But as a result of the
recent aggressive investments, huge chunks of its endowment is in illiquid
assets that can't themselves be used to fund the university. Combine that with
some very liberal spending projects in recent years, and suddenly this very
wealthy university can't actually pay its bills.

~~~
roc
Which is another way of saying: Harvard is still in denial.

They (like many) are refusing to admit that they made bad investments that are
no longer worth what they once were. So they're trying like hell to avoid
_realizing_ those losses, because that red ink would go on _their_ permanent
record. Which is tantamount to career suicide. (Hence the blame-gaming at all
levels)

~~~
Retric
Selling in a down market can often be worse than debt.

The cuts are extreme because they need to start thinking 1/2 the ROI * 70% of
the endowment or ~35% of last year’s income. They must do a huge drop in
spending over the next 10 years or they are going to actually run out of
money.

~~~
roc
Assuming we're merely in a _down_ market. Which is the standpoint which I
categorize as 'denial'.

