<p>Today, as I do regularly, I was checking out both the front page and Amherst’s student newspaper, aptly if not creatively known as The Amherst Student.</p>
<p>While I find myself concerned with the number/nature of cuts to student programs that seem apparent to potential students today but will disappear or be unrecognizable by the time they may be able to attend next fall. </p>
<p>While so many will want to know the ramifications to financial aid, which Amherst doesn’t reference in their cutbacks, I really want to fully understand “the little things” that will ultimately be forced to change. Come April, when it’s time to make decisions that compare schools to which my son has been admitted, looking at programs, departments and school resources as they are today might not be based on accurate information.</p>
<p>I rather like how Amherst students are making a real effort to take their programs into their own hands in an effort to assure their protection. It demonstrates a very real value of personal responsibility when you assure what you want by not depending/relying on others to merely hand it to you.</p>
<p>Still… while on the one hand I like how committed Amherst is to supporting it’s faculty, I truly hope the commitment remains equally as strong towards classroom and overall student experiences. Especially the case when one considers what I am hoping to buy with my tuition dollars.</p>
<p>3) Increase enrollment by 100 students over four years</p>
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<p>The more interesting news from Amherst is the liquidiy problems. They still had $80 million tied up in the CommonFund. Nearly all of their bond debt is variable rate demand bonds, subject to forced buy back with one day or one week's notice ($150 million+ liquidity commitment). And, the shocker. On an endowment of $1.2 million max, they have cash call commitments to private equity, real estate, and hedge funds of $503 million with less than 40% of their endowment in liquid bonds and stocks. They could sell off every publicly traded investment and still not cover these cash commitments. Plus, the endowment would then be totally invested in non-liquid funds. </p>
<p>Marx acknowledging that Amherst will likely sell taxable bond debt to cover their liquidity situation is fairly dramatic news.</p>
<p>See? How are we, as just ordinary consumers who depend on our brokers to know this stuff for us personally, how are we supposed to understand all of this stuff? What the hell are variable rate demand bonds? And why is selling taxable bond debt to cover liquidity situations dramatic vs just regular news of the bad news variety? Bigger question, will Amherst be able to meet the needs of the school and keeping the quality of the education as it's been and still be able to fund those things like financial aid that they've been insisting they will?</p>
<p>And just as an aside, when you listen/read the transcripts of what the SEC was doing when warned of red flags in the investment world, I swear to all that is above that no one truly gets it.</p>
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What the hell are variable rate demand bonds?
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<p>Colleges sell tax-exempt bonds to pay for major contruction projects, repaying the bonds over 30 years or so. These bonds can be fixed rate (i.e. a specific interest rate over the life of the bond). Or the bonds can be Variable Rate Demand Bonds. These carry a cheaper initial interest rate. However, the interest that is paid changes daily as these bonds are bought and sold in a daily secondary market. If there are no buyers for the bond on a given day, the college must buyback the entire bond issue. Could be $20, $40, or even $60 million dollars cash money to repurchase a variable rate demand bond, cash that must be available on a couple hours notice. As far as I know, Amherst has not had to repurchase a bond, but they must have lines of credit to cover the possibility.</p>
<p>The bigger issue is that they have contracts to invest another $503 million in private equity and hedge fund limited partnerships. This cash has to come from somewhere.</p>
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And why is selling taxable bond debt to cover liquidity situations dramatic vs just regular news of the bad news variety?
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<p>It's not something that LACs with billion dollar endowments do very often. The only debt they carry are tax-exempt bond issues tied to specific major building projects. </p>
<p>It's not unheard of. Harvard has borrowed with taxable bond issues, borrowed heavily recently to cover their own cash calls. It does, however, show that Amherst is having to borrow to raise the cash to cover these commitments.</p>
<p>You would think that if the managers of the endowment were "sophisticated" enough to invest in all these hard to value private equity issues, that they could have figured out a way to hedge their long positions by selling some S&P futures when it became apparent the market was cracking. Are they allowed to be levered so incredibly on the long side without a downside hedge? Thanks.</p>
<p>OK. admittedly I suddenly feel like I am sitting in Charlie Brown's classroom and all I can hear is "whantwha whanntt whan" :) Either that or I am thinking of covering my ears and singling lalalalalala to tune it all out.</p>
<p>What is really going to hurt in the longer run is that any potential growth isn't going to be coming from huge Alumni donations considering so many people have taken personal hits. Just saw a piece on Madoff that among his victims were a couple in the 70's who lost every dime of 4 mil. Their retirement and their grandchildren's college funds.</p>
<p>You look at the fact that this is the largest graduating class and there was such a heightened sense of competition back in September and now applications are down almost across the board at a great many elite schools. </p>
<p>So, is this letter from the president just the tip of a very deep and unstable iceberg? Are we talking issues of Titanic proportions?</p>
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So, is this letter from the president just the tip of a very deep and unstable iceberg? Are we talking issues of Titanic proportions?
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<p>The letter from Marx is just the coy tip of the iceburg in terms of cuts that will be coming over the next three years. However, this is certainly no Titanic scenario for colleges like Amherst. </p>
<p>It just means that a lot of the luxury spa "extras" in the budgets will go by the wayside, as well as some bone and muscle.</p>
<p>Amherst's liquidity problems appear to be particularly acute. However, the college has the highest AAA bond rating and can certainly borrow a lot money if it needs to in order to meet cash calls.</p>