Free Fall in Crimson

Harvard University and the New York Times are the high church bishoprics of the money culture’s permanent counter-reformation: elite northeastern institutions that compulsively monitor each other for any sign of declension, heterodoxy, or waning prestige in a time of corrosive status anxiety. Both, of course, have lately fallen on hard times. Harvard has hemorrhaged 27% of its endowment, which plunged from $36.9 billion to $26 billion between June 2008 and June 2009-a crisis that spurred the school’s largest ever single bond offering, of $1.5 billion, earlier this year. Meanwhile, the revenue-challenged paper of record finds itself some $250 million in hock to Mexican debt prince Carlos Slim Helú. Both institutions are now stooped under cost-cutting mandates and hiring freezes-and both appreciate just how nettlesome it is for any world-renowned tribune of elite culture to be in the humiliating position of doing more with less.

So last week, when Times education correspondent Abby Goodnough took the measure of Harvard’s economic woes, she recurred to the paper’s puckish, purse-lipped house style deployed in any contretemps over the absconding of elite institutional cash: She doggedly hunted down the lifestyle sacrifices exacted on Harvard’s overprivileged student body. “At Harvard,” the online headline for Goodnough’s dispatch ruefully announced, “Leaner Times Mean No More Hot Breakfast.” Noting that the college’s mammoth Faculty of Arts and Sciences is cutting $75 million in anticipation of a two-year budget shortfall of $130 million, Goodnough marvels that the cuts are “extending beyond salary and hiring freezes to measures that affect what students eat, where they study, and other parts of their daily routine.” The barely thinkable psychic cost of these cutbacks to the student body’s lavish dining-and-cramming infrastructure is, Goodnough continues, that “the euphoria of fall in Harvard Yard is dampened.”

One shudders to think of how these euphoria-deprived pashas of the nation’s bogus meritocracy will forge onward in their post-Harvard professional lives. Will they bypass leather banquette tables at Le Cirque for furtive shame-filled footlong binges at Subway? Will they shun the siren calls of Marc Jacobs or Barney’s for the fall savings spectaculars at Loehmann’s or-shudder-Filene’s Basement? Will their would-be summer Hamptons rentals molder in favor of low-budget rustic resort accommodations in the Catskills or on the Jersey Shore?

Time alone will tell. But Goodnough reports, thankfully, that the service cutbacks are already being met with the rage of a privileged overclass. “Students generally feel that if you come to Harvard, for what you’re paying, you should probably have the right to a hot breakfast,” says morning-meal Jacobin Andrea Flores, the senior president of the Undergraduate Council. “They want to preserve the things that are at Harvard that you can’t get anywhere else.” (Flores, apparently, was told by some overzealous guidance counselor that Harvard was the only university that served a hot breakfast.)

Of course, Goodnough’s piece, with its terrifying accounts of curtailed library and bus services at the beyond-the-Yard undergrad accommodations at the Quad (a place that, long before the cuts, was already widely viewed as a sentence of cultural deprivation, our correspondent notes: “’getting quadded,’ or assigned to live in that area, is many a student’s nightmare”), takes its time in assessing how the university’s actual, you know, workforce is affected by the new austerity regime. It is only fourteen paragraphs in that we learn, via a university flack, that 250 staff positions have been eliminated-a figure reported elsewhere (in the Times-owned Boston Globe, to be precise) as 275. And nowhere does she mention that another 500 got sucked up in an early retirement package that targeted 1600 jobs originally. Another 40 jobs have been downgraded to part-time status, with the hits to income and benefits entailed in all work casualization drives.

More puzzling still is the absence of any account of just how the nation’s largest university endowment got mired this deeply in red ink. Oh, sure, there was the global financial collapse-and as Goodnough, ever keen to lay on the cutesy details of ivied deprivation, notes, other elite schools are smarting, too: Princeton’s shuttered some computer labs, and one of its storied dining clubs, while in a multivalent horror story, Stanford may cancel this year’s traditional Halloween Mausoleum Party. But the curious thing about Harvard’s investment plight is that it antedates the onset of international financial sclerosis last fall. Harvard Management Co., the school’s investment arm, had long carved out a profile as a high-flying trader in hedge fund portfolios, derivatives-i.e., second-order market bets on stock performance that rarely involve any underlying assets-and other exotic financial instruments that greased its toboggan skids toward the market trough. On June 30, 2008, Forbes reports, Harvard Co. fund managers “had, thanks to… fancy derivatives, a 105 % long position in risky assets. The effect is akin to putting every last dollar of your portfolio to work and then borrowing another 5% to buy stocks.”

Making matters infinitely worse, Forbes writers Bernard Condon and Nathan Vondi report, was a 2005 interest rate swap approved by then Harvard President Lawrence Summers, now ominously chairing the White House’s National Economic Council. The deal essentially converted $3.7 billion worth of variable rate derivatives into fixed rate investments, at what then looked like beneficial interest rates. But when the markets started plunging, so did interest rates, turning the interest bets into massive liabilities, in a fast-constricting credit market. With no other means of meeting its exploding debt obligations, the university started its $6 billion-and-counting binge of bond issues, at 6-plus percentage rates-hardly the optimal way to meet a crisis in fund liquidity.

One bad Harvard investment, in a hedge fund run by a former Harvard Co. manager named Jeffrey Larson, posted a $350 million loss in 2007-a full year ahead of the investment-house collapse on Wall Street.

Larson himself, however, booked a neat $17.3 million in fees on the debacle. Similar equity deals have elegantly handcuffed the fund from unloading its bad paper, as debt obligations keep coming due. The university is facing “billions in capital calls” for the tanking equity partnerships, Forbes’ Vondi and Condon write, but the school can’t dump the alliances “because no one wants to buy them. Private equity stakes like Harvard’s are selling at 40% to 60 % discounts in various markets. ‘Endowments will be shocked at the valuations of their [private equity] portfolios,’ said Stewart Massey, an endowment consultant at Massey Quick. ‘It’s going to be an absolute bloodbath.’”

But really, why dally with hedge-fund bloodbaths when you can savor the news that student athletic clubs, such as the Taekwando association and the Harvard Dance Team, are now sharing odd-couple accommodations because the Malkin Athletic Center has reduced its hours?

Or why bother reporting that the top five managers at Harvard Co. managed to rake in between $3.9 and $6.4 million apiece in bonus compensation during fiscal 2008, even as their debt-leveraged portfolio was poised to devour the school’s operating capital?

Because, after all, faculty gatherings no longer can spring for complimentary cookies. It’s all so very wacky-the rush to crimp the perks of the nation’s knowledge elite! Though, you know, such set pieces are nowhere near as wacky as the realization that the fortunes of the most fabled American university have been effectively hijacked by boiler-room style hedge fund managers. Or that the school’s endowment is in freefall largely thanks to the ruinous-dare one say girlish? — miscalculations of a former Harvard president best known for deriding the math abilities of the fairer sex. Nor can the ironies Goodnough lovingly catalogs ever hope to measure up to the inevitable day when Harvard endows a communications chair in the honor of New York Times publisher Carlos Slim Helú.