<p>In response to vicarious I agree with Interest but would also say that I think there are signs that I see from some colleges that tell me they have the most cutting to do. I think the 5 Ivys you mention are all on that list. The sign I look at the closest is the amount of borrowing done compared to what they would normally draw out of the endowment. Many U’s in trouble are borrowing the entire amount they would normally take out of the endowment at a 5% rate. In the case of Dartmouth, Yale, and Columbia they borrowed twice the amount last year. Thats pretty alarming to me.</p>
<p>Those schools I think are going to be cutting curriculum options. If the kid is unertain what they want to major in I’m certain they will still have plenty of choices but if they are interested in a specific area I would sure try and find out if it will still be around. That goes for extra-curriculars as well. Look for them to cut areas with limited student participation and ones that don’t bring home the bacon research wise.</p>
<p>I was about to post both of those. I thought I was jaded, but this sets Harvard apart (I hope)- at least on tossing operating cash into the market at risk levels like these.
And how come it is the middle of October that we are hearing about this? Harvard didn’t think this was newsworthy?</p>
<p>As an aside, here is an excerpt from Harvard’s letter to students and parents today …</p>
<p>Greetings from the Financial Aid Office. We hope that the fall semester is off to a good start in spite of these challenging economic times. We would like you to know that Harvard remains deeply committed to its students and their families and will continue to have one of the strongest need-based financial aid programs in the country in the coming years.</p>
<p>For other Harvard financial news, there is a section called “University Financial Crisis” on the magazine’s website that I think is very useful.</p>
<p>JCBK, thank you for that link. One thing that popped out to me in Harvards financial statement was that 67% of the endowment remaining is in tier 3 assets per FAS 157. Tier 3 assets are the most hard to value and I think represent investments like private equity and real estate where you are really dependent on the outside entities valuation. Only about 15% were in Tier 1 which are assets like common stock which have liquid markets. Looks like they were trying to sell anything they could that they could get a decent price for which makes you wonder somewhat what the value really is of what is left.</p>
<p>And then again, the University of Chicago is on a hiring campaign even though their endowment has declined about 30% just like everybody else’s.</p>
<p>The news of a $500 million payment to cover losses from a bad interest rate swap was an eye opener. There are lots of schools with variable rate demand bonds hedged with interest rate swaps. Wouldn’t surprise me if we see this develop as a more widespread story as the financial reports start being made public.</p>
<p>Investing the university’s $3.2 billion “checking account” in the Harvard endowment pool instead of in cash instruments was just insane.</p>
<p>Without the $2 billion in new debt issued the operating cash would have dropped from $6.6B to $1.7B. They still have significant interest rate swap exposure and capital call committments.</p>
<p>Page 31 & 32 of the annual report includes, in my mind, some interesting information on what is happening inside the endowment. Its interesting that they hold virtually no domestic or foreign common stock. Their holdings in this area are virtually all tier 3 holdings which I would assume is convertible stock, which is usually a high risk/high reward form of stock.</p>
<p>They also sold about $2b from the asset category that includes hedge funds. There was a run on hedge funds from a variety of sources and many hedge funds were forced to then close their doors to withdrawals. It makes you wonder what percentage of the over $5B left in this asset category is in funds that are not permitting immediate withdrawals.</p>
<p>Overall, it does suggest that they were selling whatever they could and now are largely left in the tier 3 category with investments that were probably difficult to sell. If you assume recent estimates of these getting 50% on the secondary market then (Harvard tried to sell on the secondary market and were not happy with what was offered) I think it would be fair to estimate that Harvards $24B in tier 3 assets might be worth $12B less.</p>
<p>The financial crisis is affecting lots of schools. One parent I know on another forum (also educational but k-12 emphasis) posted a few days ago how the college her son is in has said his department is closing at the end of the year. They are not full pay people and it is very hard to see how he will be able to get the financial help he needs when transferring. They feel very misled since he is a freshman and would not have chosen this college if he knew they were considering closing the department. I am going to direct her here to read about the economic fiasco since I think some of these colleges haven;t faced reality at all. The worse part is that juniors also have to transfer and they will necessarily have a year wasted. </p>
<p>My d was looking over my shoulder and wondering why I was reading this thread. Although she is interested in some of the most ubiquitous major, major cuts are not what we are looking for. She will be a full-pay at some and a partial contribution of the college at some since she is a GI Bill recipient and we are only having her apply to colleges where it covers the cost or covers the cost with the Yellow Ribbon program.</p>
<p>Seems like this Stanford sale is going to give a really good insight into what the real value of endowments are including Harvard’s $24Billion in Tier 3 investments. Looking at Harvard’s still very illiquid assets I think they are going to have to do something similar to what Stanford is doing within the next year. </p>
<p>Military, I think the meaty cuts are going to begin with the 2010-11 year for schools that are heavily dependent on their endowment. Harvard’s spending actually went up 8% in 2008-09.</p>
<p>Rather than try and sell their illiquid assets I guess Harvard is sticking to the debt route. You know, they talk about repositioning their endowment but the simple fact is that Harvard and Yale have almost nothing but illiquid private investments and the only way they are going to change that is to do what Stanford is doing.</p>
<p>According to the Bloomberg article, “The California university, the nations fourth wealthiest, set an Oct. 27 deadline for bids on its $6.2 billion of endowment investments in 304 funds.” This $6.2 bb is par value, and not market value, right? Since “the median bid on private-equity funds increased 29 percent to almost 52 cents on the dollar in the third quarter”, this means that at the end of 2Q2009, the market value was 40.3 cents on the dollar, right? If this is right, then these investments were valued at 40.3% times $6.2 bb, or $2.5 bb at the end of 2Q2009, and this is the value that Stanford attached to these investments, and all of their investments (calculated the same way) equal $12.6 bb (this is the amount that Stanford said its endowment is worth as of 2Q2009). </p>
<p>But if I’m wrong, and these investments were deemed to be worth $6.2 bb (even though the median bid was only 40 cents on the dollar), then how do we trust the $12.6 bb figure?</p>
<p>I am only using Stanford as an example, because we have the data. But I would assume that other endowments use the same procedure in valuing their own endowments.</p>
<p>JCBK, my understanding is that the situation reflects your second paragraph-not the first. In terms of coming up with an accurate valuation of Stanford’s endowment, and others, I think the biggest question mark are these Tier 3 assets. Tier 1 assets have public markets so they are accurate, I don’t know what makes up Tier 2 assets but they are somewhere between Tier 1 and Tier 3. </p>
<p>So in the Stanford example I would assume that if they do get 50cents on the dollar for their $6.2 Billion in Tier 3 assets that a pretty accurate value of the endowment would be 12.6B - (6.2X.5) = $9.5B. In the case of Harvard they have $24B in Tier 3 assets so I think it would be fair to assume that what Stanford gets on their Tier 3 assets Harvard might expect to get on theirs which if its 50% would mean Harvard is down another $12B. I think this is why this is being closely watched.</p>
<p>Most of the colleges I follow shelved their smoothing formula almost a year ago. They have no choice. The longer they waited to start making the cuts, the worse the problem got. They had to start making cuts for the current fiscal year which began July 1st because not getting the ball rolling would have had disasterous impact on deficits over the next three years (compounding faculty salary increases, etc.). I don’t know what Stanford is crowing about. I suppose they are trying to create the illusion of solid fiscal manangement to bolster the sales effort for the joint venture shares in their endowment (to address their liquidity mismanagement).</p>
<p>The self-serving PR from universities that ran their fiscal ships into the ground is getting a little tiresome. Hennessey and Levin really should just stop beating their chests as long as their universities are borrowing money to meet payroll because they are out of cash. Stanford is not making dire budget cuts because of some lofty theory. They are making dire budget cuts because they don’t have any cash. People are bending over backwards to cut these guys some slack for their gross mismanagement, but the self-serving press releases get a little insulting.</p>