<p>^^ either way, it isn’t Japan or Europe that is gobbling up American bonds. The Chinese are officially the largest buyers now, and looking at the way out diplomacy is shaping up now, they will continue to gobble up our bonds at the fastest rate, considering they have the most money to spend out of all the countries in the world (with a HUGE trade surplus in the trillions)</p>
<p>America and China are caught in a rather awkward synergistic embrace. America needs China to buy American debt, and China needs America to buy Chinese exports. If one goes, the other goes…it’s all very awkward.</p>
<p>@Alexandre: Yes, France is doing a good job at making babies 
but that’s the only bright spot</p>
<p>Bagels > toast</p>
<p>Ilovebagels, I am not French, so I have no vested interest in this, but France has a lot going for it. I would live in France over any other country on Earth. It has more culture and history than most countries, some of the best architecture and cuisine to be found anywhere, an incredible landscape, and a joy for living unlike any other place I have been. </p>
<p>French bread > bagels > toast! ;)</p>
<p>When I said the only bright spot, I meant within the EU demographic timebomb, not within France.</p>
<p>But while we’re on the subject, I view France as a beautiful and wonderful place (for all the reasons you mentioned), but for vacationing, and retiring, not living and trying to find a job (just ask the 300,000 Frenchmen and women who have fled to the UK)</p>
<p>But I digress. To segue back in to the topic at hand…France (and for that matter, Europe sans Oxbridge) hasn’t done a bang-up job at producing eminent universities. Might this change with the new economic realities of the 21st century? Could Europeans have gained some key advantage? or perhaps more likely, have the American universities lost one of theirs…</p>
<p>Don’t read too much into the numbers ilovebagels, France is a great place to work. I have worked in the US, UK, France, German and the UAE. France wins hands down, with Germany coming in second place. It really depends on personal preference of course. I am talking about overall quality of life. I will agree with this however, France isn’t the best place for Entrepreneurs. The majority of people who leave France to live in the UK or the US do so because it is indeed easier to get a business started. </p>
<p>As for European universities, their purpose is very different from their US counterparts. I definitely agree that the US model is more appealing for students. But in terms of quality of education, I think European universities are just as effective, just not as flexible or fun as US universities. This could change as Europe has identified the appeal of US universities and has already bounced around ideas for the development of “modern” univerisities. But this will tak a long time to accomplish…decades.</p>
<p>One thing is clear, Europe will remain a central part of the World for a long time. In the Middle East, where I come from, there is a lot of talk about how Europe is decaying. That is just wishful thinking on their part. Europe has been and will remain central to humanity for centuries.</p>
<p>Indeed, it definitely depends on one’s personal preference. Whenever I visited Europe, I found it to be relaxed, yes, but to the point of being frustratingly slow. I prefer moving at the speed of Asia, the hypercontinent that never sleeps ;)</p>
<p>But that’s just part of my nature.</p>
<p>Anyway, I certainly hope Europe remains central to humanity beyond tourism (“a giant theme park for Chinese tourists” as one pundit put it). It is the cradle of Western Civilization, from Athenian democracy to Charlemagne, from the Glorious Revolution to the Bastille, to say nothing of the art and architecture created in the furious wake of History’s unfolding.</p>
<p>However I just don’t see Europe giving me much reason to believe it has the means, or even the will, to be “central to humanity” (which in itself a rather nebulous phrase that could mean all sorts of things and should probably be clarified or just avoided entirely)</p>
<p>ilovebagels, we can go into a very long discussion of how Europe is in fact very dynamic, you just have to look closer. Yours is an American/British-influenced view of Europe. You need to see their point of view before fully understanding (and appreciating) them. I shared your opinion of Europe too when I was in college. My opinion changed when I worked in Europe for three years in the late 90s. </p>
<p>When I said that Europe is “central to humanity”, I meant that historically, and until this day and most likely well into the future, Europe will contribute to civilization in all of its forms, be it social reforms, art, technology or medicine. Now if the Europeans could only be as commercially-minded and consumer-driven as the US! hehe! Actually, I hope that never happens.</p>
<p>on the endowment issue:</p>
<p>schools like harvard, Yale, etc are in trouble because they use anywhere up to 30% of the funds generated by the endowment to fund school expenses.</p>
<p>Other schools, like Duke (10-12%??), Johns Hopkins (4-7%), and small LACs that often use less than 3% of their endowments to fund their works will be in less trouble because of their overall higher dependence on tuition instead of depending greatly on endowment for funding.</p>
<p>So Georgetown will now be the least impacted of all the top schools?</p>
<p>^^ no, because Georgetown was in the midst of some plans for building new labs, buildings, renovations, etc., which they now don’t have the credit for. </p>
<p>I’ll give you this counter example only because I know it so well: JHU, on the other hand, is going to continue building new buildings, a $72 Million Renovation, a $30 Million new library and working on a new $2 Billion tech park in East Baltimore thanks to fundraising at a pace of nearly $1.5 Million per day, every single day, for the past 8 years. (About $3.74 Billion raised).</p>
<p>it depends alot on how well a university is able to fund its projects outside of the endowment, etc. Harvard and Yale were counting on their endowments to build a lot of new infrastructure. Georgetown was asking for a lot of money (loans i think?) to build new buildings. JHU was fundraising to get money set aside for each building. +, a lot of the JHU expenditures like on Research, etc, are covered through Government grants, like in the previous recorded year when government research grants totaled around $1.55 Billion.</p>
<p>Actually, Princeton gets (sorry, ‘got’) a whopping 47% of its operating budget from endowment.</p>
<p>Harvard and Yale were closer to 1/3</p>
<p>I can’t speak for the other Ivies save for Penn, which got 9% of its operating budget from endowment. Like JHU it has funded buildings with debt lightly, as it is fortunate enough to be able to have a phenomenal medical system which attracts hundreds of millions of dollars in funding annually.</p>
<p>Harvard, Private Equity and the Education Bubble
March 3, 2009, 10:42 am</p>
<p>[The Deal Professor by Steven M. Davidoff]
Harvard</p>
<p>There have been a number of bubbles over the past decade that we now know about. Unfortunately, we are also about to find out if there was an education bubble.</p>
<p>Fueled by endowment gains and tuition increases, universities in recent years have gone on a building, faculty and program expansion spree. I have personally seen it in the law school realm. Instead of the historical 12-credit loads, the norm over the past few years in law schools has trended towards nine to ten credits. This allowed for more research, but also meant that the faculty needed to expand to continue offering the same course levels. Salaries also rose as law schools and other areas of universities competed for top talent.</p>
<p>But the same forces buffeting the general economy are affecting the university.</p>
<p>Yale recently froze all faculty salaries for employees paid more than $75,000, and Harvard froze all faculty salaries at its arts and sciences school. The big private, elite universities appear to be particularly at risk. To understand why, let’s take a look at the Harvard endowment.</p>
<p>As of June 30, 2008, this endowment stood at $36.9 billion, and last year, it paid out $1.6 billion to Harvard. The Harvard endowment has grown at a torrid pace in recent years — it was just $22.6 billion in 2004 — fueled by portfolio gains and especially a 28 percent, 10-year return on its private equity portfolio. That compares to a total portfolio five-year return of 17.6 percent as of June 30.</p>
<p>But like everyone else, the endowment was hit by the downturn. It has not announced definitive 2008 results, but Harvard has said that it expects returns to be down by about 30 percent. I think the situation is much worse than that. In 2007, approximately $5.16 billion of Harvard’s total portfolio was in private equity, and by my estimate, a total of $11.2 billion, or 26 percent, in all kinds of illiquid assets (the others being real estate and land). Here, this figure is for all of the general investment assets managed by Harvard. That figure was $43 billion as of June 30, 2008, with the bulk being the $36.9 billion endowment.</p>
<p>The 2007 figures and allocations for the entire $43 billion portfolio are disclosed in the endowment’s 2007-2008 year-end report.</p>
<p>Calculating the losses in year-end 2008, I estimate that Harvard’s total private equity portfolio declined 40 percent to around $3 billion. I assign such a figure because I mark-it-to-market — and right now, these illiquid assets are hard to sell and even harder to price. In the long run, these investments may pan out, but for the short term, these private equity assets are at best mispriced.</p>
<p>Applying these calculations through the total endowment as of this date should give about $25.5 billion split with 23 percent to 24 percent in illiquid assets, or about $6 billion. For these purposes I have assumed that all of Harvard’s hedge fund holdings ($8.3 billion as of June 30, 2008) are liquid. This is unlikely because of the many hedge funds that have imposed lock-downs on capital withdrawal. And my aggregate number here is in line with the 30 percent decline Harvard has stated it thinks should occur.</p>
<p>This is where the problem lies. Harvard pays out its endowment on a three-year basis. So for the next three years, I estimate it will still pay out on average about $1.5 billion. This may actually be low, as Harvard seeks to keep spending stable and help out colleges, such as the Harvard Divinity School, that rely heavily on the endowment.</p>
<p>However, if you do the numbers calculating a zero percent return on liquid assets (stocks, etc.), a negative five percent return on illiquid ones (private equity, etc.), and an annual donation rate of $500 million, you get the following allocation:
2010 2011 2012
Liquid assets (in millions) $16,972 $14,472 $11,972
Illiquid assets 7,229 8,368 9,449
Total 24,202 22,840 21,422
% illiquid 29.87% 36.64% 44.11%</p>
<p>If you change the returns to five percent for liquid assets and zero for illiquid ones, you get the following:
2010 2011 2012
Liquid assets (in millions) $17,946 $16,343 $14,661
Illiquid assets 7,531 9,031 10,531
Total 25,477 25,374 25,191
% illiquid 29.56% 35.59% 41.80%</p>
<p>In either case, illiquid assets rise to approximately 41 percent to 44 percent of the endowment. This is the general point of these numbers: Even as you adjust them, Harvard is about to go from an asset illiquidity level of 26 percent (and a target level of 31 percent) to a much higher level.</p>
<p>The reason the illiquid part grows is future investment commitments by the endowment to private equity and real estate partnerships. The 2007-2008 report did not disclose these commitments, but the 2006-2007 report stated they were $8.17 billion through 2017. Assuming that this commitment stayed the same or went down by no more than $1 billion in 2008 (Harvard last year said they were going to grow the portfolio), Harvard is going to have to follow through on about $7 billion to $8 billion in commitments in the coming years.</p>
<p>In the numbers above, I estimated that Harvard has to cough up about $1.5 billion a year over the next three years on these commitments. The reason was aptly stated by Blackstone Group Chief Executive Stephen A. Schwarzman last Friday, as he referred to the buyout firm’s large supply of “dry powder.” This powder is uncommitted funds, and private equity hopes to use these funds to take advantage of distressed opportunities. Moreover, funds are not flowing back from private equity firms, as they are holding their portfolio companies for the long run.</p>
<p>So, my numbers are rough, very rough estimates — but the problem is apparent. In the short term, unless it boosts its liquid returns, Harvard is going to have to raise a lot in donations or eat up its liquid assets to fund university obligations and its private equity commitments. This results in a spiraling decline in Harvard’s liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity. This assumes the markets stay where they are in the next three years — there are scenarios where liquid assets do worse (like yesterday), or better, of course.</p>
<p>This is likely why Harvard recently sold $1.5 billion in debt, and unsuccessfully tried to sell $1.5 billion of its private equity portfolio. It needs to cover short-term funding obligations rather than liquidate illiquid assets at fire-sale prices. In essence, Harvard is more like a hedge fund than ever — trading for short-term gain with the same risks involved.</p>
<p>Other universities may be in worse positions. Duke, for example, sold $500 million in bonds, and Princeton $1.5 billion. Again, the reason appears to be to fund liquidity.</p>
<p>The result is twofold. First, private equity may not have as much dry powder as people believe. Private equity investors, known as limited parters, or LPs, are likely to strongly resist meeting all of their commitments. This may lead to a renegotiation of some funds as private equity seeks to accommodate their clients.</p>
<p>Private equity was historically viewed as the savior to higher education, but it now may mean its trouble.</p>
<p>Second, there is education itself. To paraphrase “Top Gun,” “their mouths were writing checks their brains couldn’t cash.” Universities expanded rapidly during the past few years on the basis of endowment growth. But not only is that growth gone and endowments fallen, the numbers may be far worse because of how much these entities depend on private equity.</p>
<p>In the long term, this should all rebalance and dry powder gains may compensate, but as Keynes said, “in the long run, we are all dead.” The Yale model assumes that endowments have perpetual life, but they also have short-term funding commitments.</p>
<p>Universities and endowments are surely hoping the situation is not as bad as the above might suggest. The likely result is pain at the university and for faculty, as many of these institutions go through their own “deleveraging.”</p>
<p>I found this on [True</a> Blue: Duke has now lost $3 BILLION in financial crisis](<a href=“http://butlerrickards.blogspot.com/2009/02/duke-has-now-lost-3-billion-in.html]True”>True Blue: Duke has now lost $3 BILLION in financial crisis)</p>
<p>Duke endowment was 6.1 Billion…if this is correct Duke is in big trouble.</p>
<p>Wednesday, February 25, 2009</p>
<p>Duke has now lost $3 BILLION in financial crisis</p>
<p>Duke University has so far lost a staggering $3 billion (yes BILLION with a B) in the world-wide financial meltdown. And if you are asking right away why you are learning this from us, and why you did not hear it from the Brodhead Administration, you have identified an additional dimension of the crisis on this campus.</p>
<p>The communications debacle began with an October e-mail from President Richard Brodhead. As other universities were reporting huge declines in endowment, Brodhead pronounced Duke’s finances “stable” and “secure.” Chair Robert Steel echoed this reassurance after the December Trustee meeting, repudiating the “no reporter’s” rule he initiated just two months earlier and beaming “good news” to The Chronicle.</p>
<p>That’s why we were so shocked nine days later to hear again from Brodhead, this time under cover of the exam period, when he admitted our endowment – once $6.1 billion – had lost 19 percent.</p>
<p>Executive Vice President Tallman Trask has now been sent out twice with updates: the decline tweaked to 20 percent in mid-January and by early February it arrived “in the mid 20’s.” We’ll say 25 percent to make our work easier, though our source tells us it’s closer to 27.</p>
<p>Trask’s percentages equal a loss of $1.5 billion in the endowment. Unfortunately, Steel, Brodhead and his administrators have given no nuggets of information about other classes of assets, which have also been hit hard. So we will calculate.</p>
<p>There are additional billions in the same investment pool as the endowment – subject to the same percentage loss. One good source says $3.7 billion more, but we cannot confirm that. Here’s what we do know:</p>
<p>– Trask has confirmed the pool holds surplus (dare we say profits) from the health system. Total: $1.4 billion.</p>
<p>– And the pool apparently includes Duke’s pension fund, confirmed at $1.3 billion.</p>
<p>A 25 percent loss here $680 million.</p>
<p>There’s an additional nugget of $651 million (as valued at the start of fiscal year on July 1, 2008) counted as a university asset, even though it technically is under the umbrella of a separate entity, The Duke Endowment, which holds approximately $3 billion for all its beneficiaries. The 25 percent loss applies here too, and that’s an additional $163 million gone from the list of university assets.</p>
<p>Lastly, we want to consider the portion of the university endowment that we spend annually. We calculate that Duke used up $418 million in the last fiscal year, and it’s believed this year’s secret budget calls for $450 million. Normally this spending is covered by earnings – dividends, interest and capital gains. But with current capital losses, there are no net earnings, meaning this year’s endowment spending must come out of principal.</p>
<p>In a liquidity bind, Duke borrowed $500 million two weeks ago to meet this cost in the next 12 months. The alternative would have been to sell assets at current depressed prices. In retaining the assets, Duke is gambling prices won’t go down more. And it’s a further gamble that prices will go up enough to justify interest costs – but that’s an analysis for another post.</p>
<p>An invasion of principal will be repeated every year until the crisis is resolved; last week Trask said projections of where this might lead “become rather terrifying.”</p>
<p>In addition to the $450 million invasion by June 30th, which is the same as a loss, interest on the five year bonds that Duke issued will be $80 million or more.</p>
<p>Trask did announce $150 million in spending cuts last week – formulated with hardly any consultation with faculty, students and alumni. This move will hardly ameliorate Duke’s crunch, because other sources of income – contributions, grants for research, and on-time payments by patients in the health system, to cite just a few examples – are also drying up. Initial plans for these cuts were laid weeks ago – with no indication the intensifying deterioration in the economy has changed them.</p>
<p>Returning to Duke’s assets – so far we’ve discussed a loss just short of $3 billion and the hemorrhaging is not over. The pace of Trask’s advancing our loss from 20 to 25 percent suggests we’re dropping more than $100 million a week.</p>
<p>(We do not have the precise date of Trask’s February update because The Chronicle did not bother to file a story when told of this deepening loss. Ten days ago we gave The Chronicle access to the information you are reading now and the newspaper has not utilized it in any way. We will review the newspaper’s performance in a comprehensive, future post. Similarly, Steel has not reappeared since the “good news,” and we will profile his actions separately at a later date.)</p>
<p>The news gets worse when we consider the Harvard Factor. In initially reporting a 21 percent loss on its endowment, Harvard officials noted that investments in private equity and hedge funds were still on its books at overly optimistic prices. When these investments are “marked” at true value, to use the Wall Street term, Harvard anticipates its loss will be 30 percent. Barrons, the weekend magazine of the Wall Street Journal, estimated many universities would see a 50 percent decline.</p>
<p>Beware. This is precisely where Duke has concentrated its investments. On July 1, 2008, just before the meltdown began, Duke had 42 percent in hedge funds and 23 percent in private equity situations. (There are minor variations on these percentages in various reports.) Typically such investments are locked in place for the long term by contracts.</p>
<p>Duke faces an ominous downside potential here, and it is going to grow. We believe Duke has contractual obligations to invest $2.3 billion of new money in hedge funds and private equity in the next two years. Such continued investments are routine in these kinds of deals.</p>
<p>Those are big numbers. Lest we become desensitized, we invite some perspective on how significant the losses really are. In a recent year, Duke added $125 million in contributions to its endowment. Our $1.5 billion loss in the endowment alone – so far – wipes out 12 years of giving.</p>
<p>Similarly, Brodhead’s Financial Aid Initiative eked out $308 million over four years (three of them in public). Duke’s endowment loss means that five times
as much has disappeared in the meltdown.</p>
<p>And more. The loss of $1.5 billion in endowment will reduce our annual spending under the Trustees’ five percent rule by $75 million. The much ballyhooed increase in need-based undergraduate financial aid this year involved only $11 million.</p>
<p>A substantial loss in pension fund assets will necessitate larger annual contributions to maintain the funding status of the plan, putting more strain on the annual budget.</p>
<p>As the economy continues to droop, so does Brodhead’s profile. He did speak at a meeting of the faculty senate at the start of the academic year, appending to his previously scheduled annual message in a open session that was held in a sub-sub basement room in the Divinity School, a room that seats 117.</p>
<p>Last week Brodhead returned for an executive session of the senate, known as Academic Council.</p>
<p>The president has not reached out at all to students, parents nor alumni.</p>
<p>The nadir of the leadership’s response was a clandestine retreat that Brodhead and Steel put together ten days ago, with a rebuff to The Chronicle’s request for names of principals and advisers. We can only hope the agenda embraced the increasing certainty that we will not somehow jolt out of this quickly.</p>
<p>Our commentaries about Duke’s governance have had a consistent mantra: Let there be light. Let us have transparency and accountability. That message was important in boom periods, it is greatly magnified by current conditions.</p>
<p>By refusing to even acknowledge the extent of the calamity – much less to discuss it openly and honestly with all stakeholders – Duke’s president and chair have eviscerated their credibility.</p>
<p>Note: the preparation of the above report was made more difficult by the Brodhead Administration’s failure – unprecedented in Trinity College and Duke University history – to produce an annual report for the 2007-2008 school year; material that is on line is for the period ending June 30, 2007. Policy also made our work difficult: Vice President for Public Relations Michael Schoenfeld has consistently told us we are entitled only to public reports, with no help in understanding or interpreting them.</p>
<p>So are these additional losses on top of reported endowment loss unique to Duke, or would other schools with similar org structure (eg a University with a large healthcare system and pension fund to back it up) be suffering from similar “secret” losses?</p>
<p>Schools similar to Duke in that regard that I can think of off the top of my head would be Emory, JHU, and Penn</p>
<p>ilovebagels, I wonder how much all uiversities, not just Duke, have lost. Like I said, the landscape will be downright frightning come July 2009. </p>
<p>I guess we all have to wait and see, but I would be very spurprised if there are more than 5 universities (way down from 13 last June) with endowments exceeding $6 billion by mid 2009. All I can say is OUCH!</p>