Posted by Todd Zywicki:
The Wall Streeting of Higher Education:
http://volokh.com/archives/archive_2009_04_05-2009_04_11.shtml#1239298542
This week's Chronicle of Higher Education has several interesting
articles all that focus on the influence of Wall Street on higher
education.
Consider this entry by Arjun Appadurai, who speaks to "[1]Higher
Education's Coming Leadership Crisis":
Governance. Most college and university boards are composed largely
of wealthy people, usually from the worlds of finance, law, and
private enterprise. They are sometimes alumni but are often
selected for their personal capacity to give, their links to other
people who might give, or their historical record of having given.
Many trustees today have in fact been part of the elite sectors of
finance, law, and enterprise that have proven improvident,
shortsighted, and badly governed. Can they be seen as the wisest of
our wise who will bring both generosity and wisdom to the academy?
Obviously many trustees have values and intellects that transcend
their business skills. In some lucky educational institutions,
those board members take care to respect the differences between
the enterprises they own or manage and the educational institutions
to which they serve as financial and policy stewards and, above
all, as people to whom the president is accountable. But can we any
more believe that the erstwhile masters of the economy are the best
suited to be stewards of our most cherished educational
institutions?
The exigencies of fund raising have created a gradual tendency to
identify university stewardship almost completely with corporate
leadership. Here colleges and universities may wish to learn
something from the way American communities think about local
school boards, which tends to reflect a deeper trust in the broad
social intelligence of all Americans, of citizens from every walk
of life who have earned the respect of their peers. After all, in
aggregate, the hard-earned dollars of American parents, converted
into tuition, are more vital to the overall financial health of
American higher education than large private and corporate gifts,
except in a small number of privileged institutions. If parents and
ordinary citizens trust us with their money, surely they can be
expected to be as wise with the trusteeship of our colleges and
universities.
Higher education faces many challenges in the short run. Our
solutions will not stick if we do not re-examine the potential
value of "Rolodex" presidents, slash-and-burn financial officers,
and too many corporate leaders who could not mind their own stores.
The cover story, "[2]Debt Bomb is Ticking Loudly on Campuses" is an
eye-opener as well. The combination of rising interest rates, a
plunging stock market, and overinvestment of endowments in
highly-illiquid investments has spawned both solvency and liquidity
problems, even at places like Harvard:
The end of the fiscal year usually isn't a momentous occasion for
colleges. But this June 30 could be a day of reckoning many never
expected.
Colleges borrowed tens of billions of dollars over the past decade
to improve facilities, in some cases stretching themselves to the
limit and beyond. Now the financial crisis threatens to turn that
debt into a ticking bomb.
The complex problem arises from a simple scenario: The debt load
for many colleges has gone up, but the value of their assets has
plunged. On top of that, some of the debt that they structured to
protect themselves from rising interest rates has now become a
financial liability.
A special problem has turned out to be "debt swaps" which have gone
sour and are now forcing institutions to borrow money just to keep the
lights on:
In some cases, it's the very deals colleges made to hedge against
the risk of rising interest rates on their debt � called "swaps" �
that are now causing them problems.
Both Harvard and Vanderbilt Universities, for example, held swap
agreements on their debt that required them to post collateral if
the market value on their swaps declined below a certain threshold.
Because of unusual conditions in the interest-rate market, the
value of many such swaps, which are in effect contracts with third
parties, has dropped below those thresholds.
To avoid tapping its already declining endowment to meet that
collateral call, Vanderbilt last month borrowed $250-million on the
taxable market to continue operating freely. Harvard decided to buy
its way out of some swaps altogether. Some of the $2.5-billion it
borrowed in taxable and tax-exempt markets in December went toward
that purpose.
The irony, of course, is that falling endowments and rising debt
obligations are leading to a series of downgrades of the credit
ratings of colleges and universities. So now, just as they need to go
into the market to borrow money to fund operating expenses, they are
facing higher costs of borrowing.
Of course, the bankers make money both coming and going on
these--first writing the swaps then later unwinding them. It seems
unlikely that it is just a coincidence that leveraging of higher
education and the growth in the use of expensive, illiquid investments
just happened to coincide with a growing trend toward the domination
of university boards by Wall Street, as noted awhile back [3]here and
[4]here by Roy Poses at Health Care Renewal.
References
1. http://chronicle.com/weekly/v55/i31/31a06001.htm
2. http://chronicle.com/weekly/v55/i31/31a00101.htm
3.
http://hcrenewal.blogspot.com/2008/12/what-linked-parallel-declines-of.html
4.
http://hcrenewal.blogspot.com/2008/11/leadership-of-elite-american-university.html
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