While all signs had already pointed in the direction of a 30% loss for Princeton’s endowment this year, an e-mail from Princeton University President Shirley Tilghman, sent this morning, made the news official.
By Sebastian Jones
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.
More broadly, 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.
TPMMuckraker has a post up on the Mack story.
This Sunday, March 8, The Dispatch turns to the sciences at Princeton University:
Alfred Miller speaks with leading synthetic biologist Prof. Ron Weiss on “programming bacteria.”
Nikki Leon interviews Dr. Roberta Hotinski, of the Princeton Environmental Institute, about the ways in which scientists are educating business leaders and the greater public about climate change.
Discourse will not air this week, due to a Sports broadcast beginning at 12:40.
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.
Of course, the same problems apply here at Princeton University and the other Ivies– per The Wall Street Journal, earlier this month:
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?
In its annual joke issue, The Daily Princetonian reports on the University’s latest international investment:
Following significant endowment losses in 2008, the University will be investing in a joint venture with Somali pirates, Princeton University Investment Company (PRINCO) president Andrew Golden said in an interview Friday.
However, they save the best for last. As seen in Tina Fey’s comedic approach to the Palin-Couric interviews, sometimes the true content requires very little manipulation. Do any of these faux-quotes sound familiar? You be the judge:
The University seems unfazed by what some have called the “questionable ethics” of the investment.
Golden explained that the University performs no regular ethical review of its investments and instead focuses only on maximizing financial returns.
“Fundamentally, the instructions we give to our investment managers is that they should invest with the goal of maximizing return over the long-term,” University Vice President and Secretary Bob Durkee ’69 said. “A strong presumption is that the University as an institution will not take a position or play an active role with respect to external issues of a political, social or moral character.”
Students should not really care about the ethics of the University’s investments, University spokeswoman Cass Cliatt ’96 said.
“Members of the campus community with interest in these issues typically would not need to know whether the University is invested in a Somali pirate band today to know whether they feel the University should be invested in such an organization,” Cliatt said. “If a group of people have a question or concern about something taking place in the world, that belief would exist regardless of whether the University is invested there.”
Golden agreed that interest in ethical investment practices should not stem from knowledge of how the University invests its money, but instead from a broader interest in the world at large. Examining a list of University holdings for the purpose of raising ethical questions would be “the tail wagging the dog,” he said.
“Why would you focus first on those companies we’re invested in as opposed to looking out and thinking ‘what do I care most about in the world?’ ” he explained. “I care more about the engagement of the entire community in social issues, in ways that go far beyond the investment portfolio, especially because the investment portfolio may be a particularly cost-ineffective way of making change.”
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… Continue reading
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.
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.
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.
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.
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 firstname.lastname@example.org 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.
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.
In Zimbabwe, BAE has been tied to alleged efforts by arms dealer James Bredenkamp to supply the government with military equipment, potentially in violation of sanctions. Just days ago Bredenkamp, who The Guardian claims “acted as BAE’s agent in southern Africa”, had his assets frozen by the United States Treasury Department for his close relationship with Robert Mugabe’s regime.
For years BAE supplied military equipment to Zimbabwe, a relationship that began in the 1980’s when the Zimbabwean Air Force acquired 12 fighter planes from British Aerospace, BAE’s predecessor.
In 2000, the British government imposed an arms embargo against Zimbabwe, yet replacement parts for BAE-manufactured planes arrived as late as 2001, in apparent violation of sanctions, according to a UN report. Those components were allegedly supplied by Bredenkamp, who received £20,000,000 between 2003 and 2005 from BAE, The Financial Times reported this July. The payment served as “the first detailed evidence of a financial relationship” between Bredenkamp and the company. Both have both repeatedly denied violating sanctions. Continue reading