Friday, December 19, 2008

More on University Endowments

The financial condition of university endowments is continuing its downturn. About a month ago, I blogged about the troubles that many universities were facing (University Endowments and the Financial Crisis). Things have gotten worse. As one of our commenters mentioned, Vanderbilt University, which had reported a positive return, may be in the same condition as other universities financially. At the very least, universities are cancelling bigger projects widely. Over at Harvard, this are equally grim (see Pushkin Comes to Shove for Harvard Faculty as Endowment Plunges). Yeshiva University anticipates that its losses from the Bernard Madoff scandal alone will top $140 million.

Endowments provide scholarship aid to students, fund faculty salaries and projects, support research and facilities. Like all investments, university administrators must exercise due diligence in the use of endowments funds. Should universities be in a better situation in this time of crisis than investors in general? Vanderbilt seems to think so according to its "Giving to the Future" endowment brochure. In it, Vanderbilt emphasizes that with "careful investment and adherence to sound financial principles, the endowment will continue to grow and support Vanderbilt, now and in the future." My suspicion is that that most universities ascribe to the same standards.

Have universities met this standard? It seems not. Over at Yeshiva, university trustee and chair of the investment committee J. Ezra Merkin resigned in the fall out from the Madoff hedge fund losses. Jim Chen wrote earlier this week criticized the "cowboy philanthropy" approach to charitable gifts that does not seriously consider duties of stewardship (see Curtains on Cowboy Philanthropy: a Cruel Lesson From the Maddoff Scandal). While we reflect on the changes that must be made to the financial industry as a whole, we must also take a closer look at university investment practices that allowed them to sustain the level of losses that have occurred. Sure, even careful investors took heavy losses during this severe downturn. But, universities must also ask whether in their hurry for new buildings, research projects and greater prestige, they also sacrificed sound financial principles that would have seen them better through this crisis. Years of healthy returns on investments may have lured ordinarily careful universities into more risky investments. Recovery will be slow, but will we make better decisions in the future?


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