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Tellus Endowment Crisis

Tellus Endowment Crisis



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Published by Fortune

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Published by: Fortune on Jul 06, 2010
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Educational EndowmEntsand thE Financial crisis: social costs and systEmic risksin thE shadow Banking systEm
a study oF six nEw England schoolscEntEr For social PhilanthroPytEllus institutE
11 Arlington Street Boston, Massachusetts 02116 617.266.5400
Educational Endowments and the Financial Crisis
Project Team
Principal Investigator and Lead Author
Joshua Humphreys, Ph.D.Senior Associate, Tellus Institute, andLecturer, Harvard University
Christi Electris, Associate, Tellus InstituteYewande Fapohunda, Analyst, Tellus Institute,and MPP Candidate, Harvard KennedySchoolJustin Filosa, Assistant, Tellus InstituteJames Goldstein, Senior Fellow, TellusInstituteKatie Grace, Analyst, Tellus Institute, andSta Associate, Initiative or ResponsibleInvestment, Harvard Kennedy School
Senior Advisers
John K. Stutz, Ph.D., Senior Fellow and VicePresident, Tellus InstituteAllen White, Ph.D., Senior Fellow and VicePresident, Tellus Institute
Expert Advisory Panel
Dean Baker, Ph.D.Co-Director, Center or Economic andPolicy ResearchRichard Freeman, Ph.D.Herbert Ascherman Proessor o Economics,Harvard UniversityResearch Associate, National Bureau oEconomic ResearchSenior Research Fellow, Centre or EconomicPerormance, London School o EconomicsPeter Kinder, J.D.Senior Adviser, RiskMetrics GroupDavid Wood, Ph.D.Director, Initiative or ResponsibleInvestment, Harvard Kennedy School
Additional Thanks
This paper beneted rom data, inormation,and advice provided by numerousorganizations and individuals, including DanApel and Cheyenna Weber, ResponsibleEndowments Coalition; Appleseed, Inc.; JimBildner, Center or Applied Philanthropy;Richard S. Bookbinder, TerraVerde CapitalManagement LLC; Boston RedevelopmentAuthority; Commonund Institute; HarvardStudent Labor Action Movement (SLAM);Peter Hasegawa; Matthew Keenan,ProxyDemocracy; MIT Student-WorkerAlliance; Mark Orlowski, SustainableEndowments Institute; William Page, EssexInvestment Management Company LLC;Rich Rosen, Tellus Institute; Eric Schildge,Dartmouth Students Stand with Sta; JanetShenk, Panta Rhea Foundation; and HeidiWelsh, Sustainable Investments Institute.
Institutional aliations are listed or purposes o identication and do not constitute an endorsement or sponsorshipo the report or its ndings. Research orthis study was supported with unding rom the Center or Social Philanthropyat Tellus Institute and Service EmployeesInternational Union (SEIU), CTW, CLC.The opinions, ndings and conclusionsexpressed in this report are those o theCenter or Social Philanthropy at TellusInstitute and do not necessarily refect the views o SEIU, nor do they constituteinvestment advice.
© Center or Social Philanthropy,Tellus Institute 2010Revised May 27, 2010
Educational Endowments and the Financial Crisis
ExEcutivE summary
Educational EndowmEnts and thE Financial crisis:social costs and systEmic risks in thE shadow Banking systEma study oF six nEw England schools
ver the last two decades, wealthy colleges and universitiesplaced an increasing share o their endowments into high-risk, high-return, largely illiquid investments. During theboom times, this so-called “Endowment Model o Investing”generated impressive nancial returns. Then came the nancialcrisis, and in the space o a year, investment losses destroyed tenso billions in endowed wealth at colleges and universities, up to30 percent o endowment value at some o the wealthiest schools.
Mounting endowment losses have been used by college administrations to justiy some othe severest austerity measures in a quarter-century: deep budget cuts, diminished endow-ment payouts, sta layos, and other substantial reductions in orce and benets. The hardshipcaused by these measures has rippled out in the orm o lasting job loss, stalled constructionprojects, and local business downturns in college communities that used to be secure havens oregional employment and economic resilience.How did universities, once careul stewards o endowment income, get caught up in the WallStreet-driven nancial meltdown? Did our higher education institutions, like America’s big banksand nancial companies, take ill-advised risks chasing speculative returns?
Educational Endow-ments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System
looks at what happens—and who suers—when universities embrace high-risk investing.
This report examines six privately endowed New England colleges and universities—BostonCollege, Boston University, Brandeis University, Dartmouth College, Harvard University and theMassachusetts Institute of Technology—as case studies for exploring deeper connections betweeneducational endowments and their impact on our institutions, our communities, and our economy.Even after the crisis, these six schools control nearly $40 billion in endowment assets, more than12 percent of the roughly $310 billion held in college and university endowments nationwide atthe end of FY 2009. They are among the largest employers in their communities in the Bostonmetropolitan region and the Upper Valley of western New Hampshire and eastern Vermont.Based on this sample and a review of trends in endowment management, the study’s main
ndings include the following:
The risks o the Endowment Model o Investing have been greatlyunderestimated.
Investment risk-taking has jeopardized the security of endowment income.
For the past two centuries, endowment management has centered on protecting the prin-cipal o endowed gits and generating reliable income. Investments were traditionallymade in relatively transparent, liquid securities such as publicly traded equities, bonds, andmoney-market instruments. But in the last 25 years, many universities have ollowed the

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