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"Frightening" Investment Strategies Hit Harvard

The Harvard Crimson published a very interesting story a few days ago about Iris Mack, an analyst at the Harvard Management Company who brought attention to "frightening" trades involving derivatives via e-mails to the office of the university's then-president, Larry Summers. Like many other whistleblowers, Mack was promptly fired:

In an e-mail sent May 30, 2002 to Marne Levine, chief of staff for then-Harvard President Lawrence H. Summers, Mack detailed her concerns regarding what she deemed HMC’s “frightening” usage of derivatives and statistical modeling techniques, as well as the Company’s lack of a timely and portfolio-wide risk management system, high employee turnover rate, and low level of productivity in the workplace, specifically among managers...

Mack, a derivatives researcher for Enron before coming to HMC, says she was “shocked” by the mishandling and ignorance of derivatives at the HMC international equities division where she worked, led by Jeffrey B. Larson. At the time, Mack says, Larson’s group had only recently begun exploring more sophisticated financial instruments such as credit default swaps and capital structure arbitrage.

Larson left his job at Harvard in 2004 to start his own hedge fund, Sowood Capital Management, with $500 million worth of seed money courtesy of the university. What happened next?

Sowood collapsed in 2007 due to heavily leveraged investments in corporate debt—making national headlines as one of the first high-profile hedge fund implosions of the subprime mortgage crisis—costing Harvard $350 million.

Oops. 

More broadly, however, that a university-- not an investment bank or insurance giant-- was fiddling around in credit default swaps up until very recently bears some serious consideration. Also worth thinking about: the $17,256,161 that Larson pulled in during FY2003 and the $35,099,300 that Maurice Samuels, a Senior Vice President for the Harvard Management Company, netted that same year, according to tax records. While salaries for HMC employees have dropped to less astronomical levels since 2004, some still rake in millions. Here at Princeton, the three highest compensated employees all work for the Princeton Investment Company and a list of other educational institutions where the top earners are investment managers would be long. 

A few years ago, when the money was pouring in, all of this might have been unsettling but excusable and perhaps that's why Larry Summers apparently was not too interested in hearing about the trouble at HMC. Today, however, with endowment losses at Harvard and Princeton both estimated to end up around 30%, it might be time to rethink how universities manage their billions while injecting a little transparency into the process. Not that I'd get my hopes up. 

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TPMMuckraker has a post up on the Mack story.

Keepin' it classy

From The Daily Princetonian:

The University will continue its merchandising relationship with Russell Athletic despite allegations that the apparel giant took anti-union actions, Vice President and Secretary Bob Durkee ’69 said in an interview Wednesday.

Russell Athletic, one of a number of firms which the University has contracted to produce Princeton-branded merchandise, is facing criticism from workers’ rights organizations for its decision to close one of its factories in Honduras. More than 10 universities — including Harvard and Cornell — have ended their relationships with the company in response to the decision.

Also worth noting is a recent Princetonian editorial on the issue of Princeton's investment ethics (or lackthereof).  For what it is worth, you've yet to hear the last on that issue.

Bailouts and Endowments: Miracle Edition

In late January, I half-jokingly asked when Princeton and other universities would line up to start requesting bailouts.  What a difference a month makes. From The Daily Princetonian:

The $787 billion stimulus measure that President Obama signed into law on Feb. 17 may pour a significant amount of money into science research at the University, even as administrators impose budget cuts across all departments, Dean for Research A.J. Stewart Smith GS ’66 said.

In an earlier New York Times article, Dean Smith calls the money "a miracle."  Considering how much of the endowment billions are tied up in things like real estate, it probably is.

Meanwhile, Business Week suggests abolishing university endowments based on an interestingly corporatist set of rationales.  While it is hard to buy parts of BW's argument, they do dig up a rather interesting article from 1990 written by Yale Law Professor Henry Hansmann called "Why Do Universities Have Endowments?". From BW:

The article runs through 14 justifications for endowments and raises questions about all of them. For example, it's often said that endowments help future generations of students, and that's true. But Hansmann points out that by saving donations rather than spending them now, universities are giving advantages to future students at the expense of current ones.

For those interested, the full Hansmann article is available here.

Universities cut back on spending

Over on NPR's excellent blog Planet Money, Caitlin Kenney writes that public universities all over the country are struggling to find ways to cut their costs in the face of the economic downturn:

Universities around the country are bracing for massive cuts as states rethink their shrinking budgets. In preparation for expected budget cuts, many are asking their staffs to look for any way to save money. School officials say cutting a university budget is complicated by factors like tenure, which make it harder to lay people off.

The same problems apply here at Princeton University and at the other Ivies-- per The Wall Street Journal:

Princeton said its endowment supports 45% of its roughly $1.25 billion budget -- far more than most universities, making budget cuts necessary. Dr. Tilghman said the best-compensated employees would have their raises capped at $2,000 and administrative budgets would be reduced by 5%. Princeton said it would scrutinize all new hiring, including new faculty searches and defer new capital projects to save more than $300 million over 10 years.

And it appears the worst is yet to come, with the Journal reporting that "none of the schools gave data on performance to date of their holdings of more exotic and illiquid investments, such as real estate, commodities and private equities. The expected losses in those categories have led to the bigger, full-year loss estimates."

Question of the day: when will universities make the pilgrimage to Capitol Hill to request a bailout?

Princeton Endowment Drops

By Sebastian Jones

This morning Shirley Tilghman, the President of Princeton University, sent an e-mail to students and staff with an "update on Princeton's response to the economic downturn", spelling out some of the losses the university's endowment has suffered. According to Tilghman, by late October, "the University’s endowment had declined by 11%, based upon our standard reporting protocols, using information that is the best available as of the reporting date." She added that this figure likely "understates the actual economic loss":

And, of course, financial markets have continued to decline since then. Although we cannot know what the next six months will bring, we believe it is prudent for the University to plan for the possibility that its endowment will have declined by 25% at the end of the fiscal year.

Full e-mail below...

Update: Princeton University, BAE Systems, Zimbabwe

By Sebastian Jones

Two short items from a Friday meeting with Andrew Golden, president of Princeton University Investment Co. (PRINCO), and Cass Cliatt, Princeton's spokeswoman, about University investments in Zimbabwe and British arms supplier BAE Systems revealed by WPRB last week.

The broad takeaway: while Princeton claims it no longer owns BAE bonds and that it has two cents worth of an 18-year-old holding in Zimbabwe, nothing prevents the University from making future investments in either. Further, Princeton can only offer speculation to account for the listing of Zimbabwe on a federally-filed, public tax form that requires disclosure of investments of $10,000 or greater in foreign countries. What has changed, however, is that investment records are no longer made public due to concerns over "economic cost". The precise economic cost of having made investments public before 2002, when the current non-disclosure policy was implemented, remains unclear.

BAE Systems While the money manager responsible for the acquisition of BAE bonds is no longer affiliated with Princeton, “the fact these changes occurred had nothing to do with BAE," Golden told WPRB. “There is nothing that prevents us from investing in defense contractors,” Golden said, adding that the manager who acquired the BAE bonds “thought it was a good economic investment.” While PRINCO is charged with overseeing Princeton's multi-billion dollar endowment and managing funds of several organizations associated with the University, including WPRB, individual investment decisions are made by external money managers. Any non-economic factor applied to investment decisions-- what Golden termed a "social overlay"-- must be imposed by the Trustees of Princeton University and not by PRINCO or individual money managers.

Zimbabwe After a lengthy search, PRINCO could only locate a single, 18-year-old bond valued at around $.02, Golden told WPRB, adding he was “99 percent sure” it was the only investment. Should PRINCO’s review prove accurate, why Zimbabwe was listed last year among countries where the University has investments in excess of $10,000 remains a mystery. During the Friday interview with WPRB, Golden suggested it was an “out and out mistake” while Cliatt speculated that Zimbabwe might have been listed because in situations where “there’s any confusion” the University adopts a “conservative approach” to its filings.

This post was originally featured on the website of WPRB News on December 11, 2008.

More Context on Princeton's Investment Policies

By Sebastian Jones

I'm currently traveling, but I'll be posting a short story very soon based on WPRB's meeting last Friday with Andrew Golden, president of Princeton University Investment Co. (PRINCO), and Cass Cliatt, Princeton's spokeswoman. In the meantime, I wanted to point readers to an article that ran last Friday in Princeton's campus newspaper, The Daily Princetonian, that provides a great deal of context on the comparative policies for ethical review of investments at Princeton, Harvard and Yale-- something that becomes more interesting in light of our Friday interview with Golden, who told WPRB he felt Princeton's system is "more democratic". From the Princetonian:

At Yale, an eight-person Advisory Committee on Investor Responsibility (ACIR) meets regularly to discuss ethical investment policies for the school’s endowment, said ACIR chair Jonathan Macey, a law professor and deputy dean of Yale Law School. The committee, composed of two students, alumni, faculty and staff members, makes recommendations to the Yale Corporation Committee on Investor Responsibility relating to matters ranging from “company investment in South Africa, to defense contracting, political lobbying and environmental safety,” according to the ACIR website. Though some of the committee’s meetings are open to the Yale community and the ACIR values outside input, Yale evaluates the ethics of its holdings regardless of community interest, Macey said. “It’s none of my business what goes on at Princeton, but either an investment policy is ethical or it isn’t,” Macey said. “The idea that it’s only a problem if it upsets a lot of people seems odd to me.” “It doesn’t seem plausible,” he added. “It sounds like it’s a practical concern at Princeton, not an ethical one.” Harvard, like Yale, has an Advisory Committee on Shareholder Responsibility composed of faculty, students and alumni that recommends ethical investing policies to the Harvard Corporation Committee on Shareholder Responsibility. Princeton does not currently have a body specifically devoted to reviewing the ethics of its investment practices.

This post was originally featured on the website of WPRB News on December 10, 2008.

Princeton says it no longer holds BAE bonds

By Sebastian Jones

Princeton University says it "no longer owns" bonds of BAE Systems, a controversial British arms supplier,  that WPRB reported yesterday were purchased in 2001. This disclosure appears to represent a departure from the University's stated policy of not discussing investment holdings. In an e-mail sent to WPRB Wednesday evening, University spokeswoman Cass Cliatt wrote:

A case in point is your inquiry related to BAE. While we do not disclose specifics of our investment portfolio, I can confirm that your inquiry relates to a fixed-income account that was widely diversified, but since mid-2003, the University no longer owns those securities.

BAE Systems has been criticized for dealings with, among others, Suharto's Indonesia and Robert Mugabe's Zimbabwe and has been investigated on charges of alleged corruption on multiple occasions. Additionally, details surrounding the foreign financial account or accounts held by the University in Zimbabwe, first revealed by WPRB on Tuesday, have yet to be disclosed. In her Wednesday evening e-mail, Cliatt instead suggested that:

members of the campus community with interest in these issues typically would not need to know whether the University is invested in Zimbabwe today to know whether they feel the University should be invested in Zimbabwe.  And looking at a list of investment holdings on a given day can't tell you what we're invested in today.  It tells you only what we were invested in at the time the list was published.

Tomorrow afternoon, at the invitation of the University, WPRB is slated to sit down with Andrew Golden, the president of the Princeton University Investment Co. (PRINCO), to discuss how the University makes and monitors investments, why Princeton has stopped disclosing printouts of investments--as was a standard practice during the late 1990's up until 2002--and why consideration of non-economic factors in investment appear only to be considered after concerns are raised by the campus community.

[Editor's Note: If you have questions you feel WPRB should ask Mr. Golden, send them along to tips@wprb.com before 1:30 PM tomorrow]

Our full program on Zimbabwe, and on Offshore Financial Centers (OFCs)-- where companies, individuals and foundations can invest funds at very low tax rates, usually at the expense of their home nations' tax revenues-- aired this afternoon and will be posted online tomorrow evening. Roughly one third of Princeton's declared foreign financial accounts, as of June 2007, are situated in OFCs.

This post was originally featured on the website of WPRB News on December 5, 2008.

Princeton invested in arms supplier with Zimbabwe ties

By Sebastian Jones

In 2001 Princeton University purchased bonds in British arms supplier BAE Systems, essentially giving a $1.5 million dollar loan to a company whose dealings with regimes like Robert Mugabe’s Zimbabwe have come under repeated scrutiny from investigators, journalists and activists, WPRB has learned.

Update: Specifics on University Investment Policy

By Sebastian Jones

University Spokeswoman Cass Cliatt wrote WPRB this morning, pointing us towards a 1997 report (which she had previously mentioned in comments for our first story on Zimbabwe investments) titled Guidelines for Resources Committee Consideration of Investment-Driven "Social Responsibility" Issues. The report states that:

For the most part the Trustees have delegated the responsibility for selecting specific investments to outside money management professionals. These professionals are provided with a detailed investment policy statement that describes our basic investment goal of maximizing the total long-term return on the endowment consistent with acceptable levels of risk. Quite deliberately they have not been asked to take into account any non-economic social, political, or moral guidelines other than those few South Africa-related limits explicitly approved by the Board of Trustees. The Trustees expect that, in carrying out this assignment, the investment managers will vote on all shareholder resolutions in a manner consistent with the overall investment objective of maximizing the total long-term return on those investments, rather than seeking to achieve some separate social objective.

In order to deviate from the above policy-- which is to say, in order to consider the merits of an investment on non-economic grounds-- a situation requires involvement from students and/or faculty:

If there is considerable, thoughtful, and sustained campus interest in an issue involving the actions of a company or companies in the University's investment portfolio, the Resources Committee will study the issue. In the first instance, the Resources Committee will determine what constitutes "considerable, thoughtful, and sustained campus interest" in each case and report its conclusions to the Trustees. It may be appropriate, for example, to require that an issue be raised several times over an extended period of time, say two academic years. The Resources Committee will also consider the magnitude, scope, and representativeness of the expressions of campus opinion in making this determination.

However, how members of the University community would learn of potentially controversial investments and then create "considerable, thoughtful and sustained campus interest"-- particularly in the absence of publicly accessible, company-specific investment reports (as it appears may once have been available)-- remains unclear. Also, while the document directly addresses "companies", it does not appear to indicate whether campus interest in foreign financial accounts (which, among other things, can be bank holdings, brokerage accounts, or mutual funds) would prompt review by the Resources Committee. WPRB has asked Cliatt for clarification on a number of these issues and will update this post when we hear back.

This post was originally featured on the website of WPRB News on December 3, 2008.

Princeton University Invested in Zimbabwe

By Sebastian Jones

As the United States and members of the European Union condemned the Zimbabwean government and considered strengthening sanctions, Princeton University chose to invest in Robert Mugabe's troubled African nation, according to tax filings obtained by WPRB.

Princeton and China

Sebastian Jones reports on the ties that bind Princeton University and China, and the ethical questions they raise, for WPRB's news magazine, The Dispatch.