The Volokh Conspiracy - The Wall Streeting of Higher Education:

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 "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, "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 here and here by Roy Poses at Health Care Renewal.

Update:

Just this afternoon, Dr. Poses has posted (in a similar vein) "Hedge Fund U" describing the failure of the Yeshiva University Board of Trustees to catch the Madoff fraud--despite the presence of financiers in many leadership positions on Yeshiva's board.

	[Todd Zywicki, April 9, 2009 at 1:35pm] Trackbacks The Wall Streeting of Higher Education: 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 "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, "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 here and here by Roy Poses at Health Care Renewal. Update: Just this afternoon, Dr. Poses has posted (in a similar vein) "Hedge Fund U" describing the failure of the Yeshiva University Board of Trustees to catch the Madoff fraud--despite the presence of financiers in many leadership positions on Yeshiva's board.