Currently browsing posts filed under "Finance"
Follow this category via RSSA question about finances
Roughly how much has Williams spent on major construction projects replacing or massively renovating existing buildings in the last decade?
Since we’re now at a point where the cuts are starting to hurt, with raises on hold for faculty, a hiring freeze on staff (along with headcount-reduction-by-attrition?), a couple million saved by going back to loans, another million by getting rid of need blind admissions, etc., I would like to get a sense of how much cash Williams sank into replacing Baxter, replacing the Adams Memorial Theater, semi-replacing Stetson-Sawyer, and major renovations to buildings like Mission and Morgan. What, at the end of the day, was the cost of all that construction during the bubble years?
Any ballpark estimates or educated guesses would be much appreciated.
If, for any reason, you don’t feel comfortable commenting in the thread below, please email me at ronitb at gmail dot com. Your anonymity will be protected.
Abso-efin-lutly
This prescient comment appeared on EphBlog on November 8, 2007.
Having run Citibank’s MBS trading desk some years ago I would suggest that you have only seen the tip of the iceberg in the credit disaster. It is not an issue of which CEO to fire, or having made loans to “risky” borrowers. Back in the 80’s S & L’s went belly up mainly due to the disintermediation that was permitted on the liability side of the balance sheet. To past the “thrift test” a savings bank needed to have 85% of it’s assets in mortgages. In NY State the usury rate for mortgages was 8%. Volker inverts the yield curve, short rates go to 16% and then you have to compete with the Merrill RAT for short term money…instant insolvency…add to the that the Fed disallowing regulatory net worth certificates as RAP capital and bang. Fast forward to 2003-2006. Mortgage loans are now originated by fly by night companies with no capital, sold to the street, for inclusion in CDO’s and SIV’s. The rating agencies run their Monte Carlo simulations, and determine the likelihood of defaults, monoline insurers, subordinate tranches, and suddenly a residential mortgage with no down payment, inflated appraisals, and no income verifications, are now AAA. And who ends up the owners of these 30 year term 8 yr duration negatively convex instruments…hedge funds who then lever them 6 to 1 and fund them overnight to ride the curve …in order to garner 25% returns. It is highly likely that they have in the past 3 years refinanced a trillion dollars of home loans 30% above the real value of the properties. That puts the real losses near 300 billion not the 14 billion at citi or the 8 at Merrill. Just because you can create a derivative security doesn’t mean you should. And where the hell were the regulators? They have a role because home mortgages are the last remaining deductable debt…because…property taxes are the backbone of local governments and school finance. If the fed doesn’t flood the market with cash (driving the dollar to an additional 25% decline and oil to 125, and gold to 1000+)…the housing market has 30% more to go on the downside, financial stocks down the same, insurers chapter 11…etc etc etc…The street has just inadvertently created hundreds of billions of dollar of junk bonds with no natural buyers…that’s why they keep writing them down but never sell (superfunds, SIV rescue funds)…once they sell all hell will break loose…can you spell depression?
Amazingly accurate! I sure wish that I had paid closer attention at the time. A year later (November 2008), this Eph wrote “The bailout will fail and the economy will crater.” Right again!
Of course, no one is perfect. On February 23, 2009, he wrote: “I should charge for the advice. Hope your readers shorted the market.” This was just a few weeks before my Wolf! post. The market is up more than 50% since then. The shorts have been crushed. Can’t win them all!
What to know what this Eph is worried about today? Me too! Default by the US Government.
Under my old moniker I predicted the financial crisis on Ephblog with uncanny accuracy six months before it happened (have to change names from time to time because my child gets furious at me for commenting here), so I should have some credibility on the financial side. Just for the record fortunes have been made shorting treasuries, they do not as you seem to think have to default in order to lose value, higher yields, lower dollar, spreads to other sovereign debt, etc, and I seem to recall the rating agencies commenting recently on a potential downgrade for US Debt, so I am surely not alone. The income comment regarding the CEO’s was not a criticism of them, it was to point out the age old dilemma that regulators are not as smart or well paid as the participants and therefore never are able to head problems off, hence as Dimon said there is a new crisis every 7 years or so. Can the US default? Abso-efin-lutly and that is brand new, and why the deficit is an issue in the Mass Senate race.
I had promised myself that I would buy gold when it broke $1,000. Then it did, and I kept waiting for a pull back. Still waiting.
If Ephling is right, what should you or I or the College be investing in?
I would love for Ephling to provide a thorough overview of his current thinking.
Haverford endowment disaster
hwc writes:
The first of many interesting June 30th, 2009 annual reports just popped up and – wow! – is it ugly.
Haverford posted a staggering 35.6% drop in endowment value from one year earlier. No wonder there hadn’t been any “updates on the economy” from the President.
With a total endowment of $336 million. $140 million is in Level 3 assets — the new accounting lingo for assets such as private equity partnerships for which there is no established market price.
With a total endowment of $336 million, they have about $192 million that is liquid within 12 months. They have $104 million of debt. And they have $140 million of outstanding cash calls that they expect to be called within the next four years.
I don’t know what their budget calls for, but last year’s endowment spending would be 7.3% of the new endowment number.
Essentially, they are going to have to cash out the entire liquid portion of their endowment to cover operating expenses and private equity cash calls over the next four years.
Breathtaking. I think there are going to be many more of these reports to come.
Also:
Link:
Haverford 2008-2009 Annual Report (PDF)
Page 13, far right column:
$335,977,000 Total Endowment Net Assets (June 2009)
$521,199,000 Total Endowment Net Assets (June 2008)It’s a 36% year to year decline. The actual investment loss was 32.8%, then you have subtractions for operating draw and additions for gifts.
BTW, Bowdoin and Middlebury have posted their year end reports, too. Nothing stood out about Bowdoin except high cash call commitments (relative to their endowment size) and they borrowed $20 million in taxable bond debt in May 2009. I haven’t looked at Middlebury.
High Frequency Trading
Arthur Levitt ‘52 interview on high frequency trading. See also his Wall Street Journal op-ed.
The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you’re only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?
But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It’s fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.
High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.
Read the whole thing. Levitt is 100% correct. For a dissenting view, see here and here.
24/7
Interesting article on Wall Street financier Chris Flowers features this quote.
Flowers may appear nerdy, but he has a quirky charm. And his low-wattage exterior belies a steely determination, whether at the chessboard or in the ongoing battles among Wall Street alpha males, that has served him well. He may not be outgoing, but he’s the sort of person a top executive can feel comfortable trusting. “I like someone who is 24/7, always reachable, keeps their cool, thinks through problems carefully and as a partner,” says James B. Lee Jr., a vice chairman at J.P. Morgan Chase who has worked with Flowers in myriad capacities and whose company is a limited partner in his funds. “He’s a very, very good and natural partner.”
1) This is another example of Lee ‘75 sucking up to a past (and future) client. Not that there is anything wrong with that!
2) A phrase like “Wall Street alpha males” will go unremarked in an article like this. How will our grandchildren read that?
3) Why is the male:female ratio among the finance elite at least 10:1 and more like 25:1 or even 100:1? Excellent question. At least one reason is the “24/7, always reachable” portion of Lee’s quote. Success in finance, especially at a place like Goldman, requires exactly that. Are you the sort of person who might not want to be reachable 24 hours a day, who might want to visit your daughter’s class, go on her field trips or coach her soccer team? Good luck with that if you want to climb the greasy pole at Goldman. Women or more likely than men, I think, to make sensible choices with regard to those trade-offs, so they are much less likely to make it to the top.
What explanations would readers give to the puzzle of female underrepresentation in elite finance?
College Endowments and Private Equity / Venture Capital
From David: Useful article on private equity. No specific mention of Williams, but lots of good background for those interested in how the endowment does/should invest.
From hwc: Year end endowment numbers are starting to roll in. Here’s a Bloomberg article today with year end estimates from the finance people at Swarthmore, Pomona, Davidson, and Smith.
From David: Useful overview article on the venture capital industry. Williams has appoximately 10% of its endowment in venture capital. It is a very hard question as to whether or not a better number would be 2% (closer to the average of large institutions) or 20%.
Vicarious’83 asks: As a practical matter, I wonder how much flexibility the college even has to adjust its allocation to these types of investments in the short run?
Comments have been moved over from Speak Up!
Collete Chilton’s Pay: $726,556
According to the College’s Form 990, Chief Investment Officer Collete Chilton’s total compensation was $726,556 in FY 2008 and $686,053 in FY 2007. Comments:
1) The Record should do an article about Chilton’s compensation. Don’t the editors believe in muckraking anymore? I bet that some of the more left-wing Williams professors would provide good quotes, either on or off the record. Don’t think that there is anything suspect going on here? Perhaps you failed to read the College’s letter to the Senate Finance Committee.
Some members of the Investment Office are eligible for bonuses based on the return on our investments, though the office is so new that we have not completed the first year of returns on which bonuses would be computed. So, in the past ten years no such bonuses have been paid.
In other words, the College worries that Chilton and other (how many?) investment professionals won’t work hard enough even though Williams is paying them hundreds of thousands of dollars per year. So, in addition to all that guaranteed money, we need to pay them extra bonuses or else they’ll —- what exactly? Spend all day at the movies?
I think that this is the sleaziest arrangement at Williams today.
2) How did this happen? Tough to know. I am still trying to get the inside story. My guesses/speculation:
a) Both Morty and key trustees were in favor of starting an Investment Office and other steps for turning Williams into Yale.
b) No one worried too much about Chilton’s compensation. The Trustees, of course, see their role as more supervisory. They don’t set salaries. There may have been a head-hunter or compensation consultant involved. Morty, while in theory worried about the College’s overall budget, had no real incentive to pay Chilton less.
Never forget that Morty, for all his many wonderful qualities, is not — How to put this politely? — immune to the siren song of worldly wealth. It is not out of the goodness of his heart that he serves on the board of MMC. It was not an accident that he failed to take a pay-cut, unlike presidents at some other schools, during the budget crisis. It is not irrelevant to him that the Northwestern job pays around twice as much. It was not via random motion that his annual salary increased by hundreds of thousands of dollars during his time at Williams.
So, subconsciously or not, Morty would realize that a proposal to pay the new Chief Investment Officer substantially more money than he was then making would only provide a (dramatic?) upward push to his own compensation.
c) This deal was made in the bubble years. There is no way that Chilton could find a comparable job paying this much money today. Even for 2006, the compensation is excessive. Professionals I quizzed felt that someone with Chilton’s resume — modest compared to others in the field — would be somewhere in the $300,000 to $500,000 range when her contract was signed three years ago.
3) What should be done? The College ought to close the Boston Investment Office. (Read the whole comment thread for details and background.) Most/all of the senior investment professionals (like Chilton) would decline to move to Williamstown. Problem solved, without any nasty firings or salary cuts. In a financial crisis in which Williams can’t afford to spend a few thousand on the Williamstown Jazz Festival, we can’t afford a Boston Investment Office.
Pssst… Want to make $30/hour?
One of the oddest aspects of going to a elite college are the “business” opportunities I’m sometimes sent, especially those relating to undergraduate admissions editing/counseling. I just got an e-mail today inviting me to join a certain company as a paid editor of undergraduate admissions essay. Click the “more” for the letter/commentary. Read more
Classic Pastry Art
Somewhat dated Bloomberg article on the financial crisis:
The shakeout in global banking has untethered more than a quarter of a million people, most of them in New York and London, who thought they were in secure, well-paying jobs. Some were investment bankers and traders who, with cheap credit and a gambler’s view of risk, raked in millions of dollars in annual bonuses over the past five years.
…
All are now displaced, forced to reflect on their fall and to find their way in a job market where the biggest U.S. and European banks may spill tens of thousands more workers before the carnage is over.
…
Some young bankers in London and New York have happily ditched plans for a future in finance. Elizabeth Woodwick, 24, joined Lehman Brothers’ debt capital markets group in July 2006, after graduating from Williams College in Williamstown, Massachusetts.
She worked 15-hour days, she says, and after a year moved into an apartment with a spiffy new kitchen. That’s when she began baking to relax, throwing cookies or muffins in the oven before and after work. In June 2008, as markets wobbled, she quit Lehman and signed up for the French Culinary Institute’s program in classic pastry art.
“I liked the people, but it was so intense,” she says of her stint in banking, taking a break from a class assignment for which she was making a chocolate showpiece of the Berkshire Mountains. She calls Lehman’s demise just three months after she left “surreal.”
Now, she’s contemplating moving back to Minnesota, where she grew up, to work in a restaurant.
Since Woodwick, unlike several other Ephs, left Lehman Brothers before it exploded, it is not clear that she is a good example for the article. It is common for analysts to leave after 2 years. But the printed article does feature a great photo of her in baking gear. Alas, it does not seem to be on-line.
Hard Times at Harvard
“There are going to be a hell of a lot of layoffs. Courses will be cut. Class sizes will get bigger,” conceded a Harvard insider, who, like every other administrator on campus, was not permitted to speak openly to me on the classified subject of alignments and resizements and belt-tightenings.
Radical change is coming to Harvard. Fewer professors, for one thing. Fewer teaching assistants, janitors, and support staff. Shuttered libraries. Less money for research and travel and books. Cafés replaced by vending machines. Junior-varsity sports teams downgraded to clubs. No raises. No bonuses. No fresh coats of paint or new carpets. Overflowing trash cans.
Read the whole article; there is too much I want to quote, though the story does drift at times into dramatics. Some on this blog have argued and will argue that Williams is in similar trouble, but at least we don’t have an equivalent to the Allston Science Complex.
Cheerier Markets
Williams’s endowment was valued at $1.81 billion on June 30, 2008, 4.4 percent less than a year earlier, according to the National Association of College and University Business Officers. The school in Williamstown, Massachusetts, planned for a 35 percent loss for the fiscal year.
“While it will be months before we have a final audited figure, it is likely that our investment return will be better than the minus 35 percent that we conservatively used in our planning model,” Wagner, the interim president at Williams, said in a July 1 letter posted on the college’s Web site. “If that proves to be true and if our return for the next two years comes close to the zero that we have been modeling, that would reduce to some degree the extreme pressure that we had projected the college facing a couple of years from now.”
Williams, tied with Amherst College, in Amherst, Massachusetts, for the top liberal-arts institution in U.S. News & World Report rankings, plans to continue cutting costs, Wagner said.
Williams gains some prime Manhattan real estate
Williams Club Donates Its Building to College
The Williams Club has completed the donation of its Manhattan
headquarters to the College, which is leasing it to the Club to continue
its operations. The move benefits both sides financially.“The College is very grateful to the Club and its leaders for the care
that has gone into the planning of this generous gift to Williams,”
Interim President Bill Wagner said. “It represents the close, fruitful
working relationship that has long existed between the College and the
Club.”The Williams Club was founded in 1913 by such noted alumni as Herbert
Lehman and Francis Lynde Stetson, and counted President Harry Garfield
as its first contributor. The Club has operated out of its present
structure, a double brownstone at 24 East 39th Street, since 1924. The
property was recently appraised at $21 million.“This gift fits well with the Club’s purpose, which since its founding
has been ‘to advance the interests and influence of Williams College in
New York,’” said Jeff Urdang ‘89, President of the Club’s Board of
Governors. “In addition, the College has been gracious when the Club
building needed renovations. This has been a chance for the Club to
return that generosity.”The Club will continue to operate as before, offering its members
lodging, food, beverages, programs, and reciprocal club access.A celebration of the gift, involving senior representatives of the
College and Club, will take place at the Club on Oct. 1.
- Is the college charging anywhere near a market rate for the lease? If not, what is the extent of the subsidy being granted by Williams to the club and its mostly-wealthy members?
- Is the club’s revenue anywhere close to where it needs to be in order to afford such a prime location?
- What exactly is the accounting treatment of a gift like this? Does it help the endowment in any way?
- In the long term, this is a valuable addition to Williams’ assets regardless of what happens to the club, which probably will not survive much longer than the current generation of elderly patrons who seem to frequent the place.
Here, by the way, is the club’s location -
What do you think Williams should do with the building?
Heart of Securities Fraud
Matt Taibbi’s Rolling Stone article on Goldman Sachs mentions Arthur Levitt ‘52 and includes this fun section.
The bank [Goldman Sachs] might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.
“That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud.
“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”
Who was the Goldman Sachers in charge of those short positions? Michael Swenson ‘89. You go, Swenny!
Taibbi, although a good writer, is fundamentally clueless on this topic. In any large institution, there will be different departments doing/selling different products, often with no knowledge of each other. My local supermarket sells both low-fat yogurt and Ben & Jerry’s Brownie Batter Ice Cream. The former makes health claims that the latter implicitly denies. Yet, there is no “fraud.”
The same applies to Goldman. The Goldman folks selling ABS securities to idiots pension funds and municipalities probably believed (more or less) in what they were selling. It is hard to be a good salesman if you can’t even convince yourself. And — Look at history! — housing prices had never fallen nationwide. Isn’t part of a liberal arts education learning from history?
Swensen, and the other proprietary traders at Goldman, probably had little if any interaction with the people selling to ABS securities. They drew their own conclusions and made their own bets. They did what they were supposed to do: forecast future prices more accurately than the market and position their capital accordingly. No fraud here.
Get it Back
Erin Burnett ‘98 asks if we taxpayers are ever going to get back the money that we have “invested” in GM?
Answer: No. Full analysis here.
UPDATE: Why doesn’t the embedded video that I have inserted in the post (but which you can’t see the code for unless you are an EphBlog administrator and click the edit button) work? I don’t know. When I click through to the original web page, the CNBC video plays fine for me.
UPDATE 2 from RB: fixed
Naked Shorts
Those evil naked short sellers! We hateses them.
Naked short selling is the practice of selling stocks short without borrowing them. That leads to failures to deliver shares, although there is no agreement on just how bad a problem that is.
Wall Street firms tend to see it as a minor ill, and point out that naked short sellers will still have to pay up if the stock price rises. They also say that not all failures to deliver are caused by short selling, although no one seems to have any data on just how many failures come from other causes.
The S.E.C. adopted a rule — called Regulation SHO, for short — in 2004. It led to the release of lists each day of stocks with a large number of failures to deliver shares. Earlier this year, the commission proposed amendments that would toughen the rules, making it harder to execute naked short sales or to keep the positions open. Wall Street has protested that the changes could go too far, while some companies call them inadequate.“We believe that some of the volatility in our stock may result from manipulative short-selling practices,” Barry McCarthy, the chief financial officer of Netflix, a DVD-rental firm, told the S.E.C.
An analysis he submitted indicated that the highest volume of naked shorting in his stock tended to be at the highest prices, which would seem to be an indication that the short sellers knew what they were doing. The company dropped off the failures list in late September, a few weeks before the stock shot up on good earnings.
McCarthy ‘75 is one of the more prominent Ephs in corporate America. Anyone who thinks that naked shorting is an important issue in the US equity markets is an idiot. It isn’t clear from this brief article exactly what McCarthy thinks. After all, his job is to be a great CFO, not to regulate the financial markets.
But, even if you believe his analysis, it sure looks like the short sellers were doing exactly what they were supposed to do. When the stock price was unsustainably high, they sold it short, thereby preventing the price from getting even more out of whack. When the price was too low, they bought (thereby covering their shorts) and keeping the stock price nearer to where it ought to be then would have happened had they not acted.
Side note: I drafted this post 2+ years ago. (I have several hundred (!) unfinished posts in the queue.) Since then, the article was updated with this correction:
The High & Low Finance column in Business Day yesterday misstated the pattern of trading in Netflix, a DVD rental company. Data submitted by the company to the Securities and Exchange Commission indicated that the highest volume of short selling appeared to be at relatively low prices, not relatively high prices.
Maybe. But common sense suggests that this is just bunk, at least on average. If the shorts sold at low prices, then they would lose money and go out of business. They can only earn a living if, they sell high and then buy low. That someone at NetFlix spent time gathering this data and then submitting it to the SEC is not a good sign for the health of the company.
The College and the Economy
To the Williams Community,
I am happy to report that at their meeting this weekend the trustees
approved an operating budget for the coming academic year that calls for
spending of $205 million, keeps our financial aid program intact, and
contains no layoffs.Given what’s happened in the world economy, there’s still hard work for us
to do on charting the College’s way through the subsequent few years. But
it’s worth taking a moment to acknowledge the accomplishment to date. It
results from the creativity and shared sense of purpose among faculty,
staff, students, and trustees and was made possible by wise stewardship of
financial resources by generations of College leaders and the loyal support
of alumni, parents, and friends. If all these efforts continue, Williams
will emerge from these challenging times as strong as ever.Among the many steps taken to reduce spending next year, we’ve frozen all
faculty and staff salaries, reduced the number of faculty and staff
positions through attrition, delayed major capital projects, lowered
spending on building renewal, and cut managers’ budgets by 15%. These
changes, while painful, have protected the College’s highest priorities of
maintaining our financial aid program, avoiding layoffs, and continuing the
high standard of our academic program.So, it won’t be business as usual. But it will still be Williams at its best
– great faculty and students interacting inside and outside of small
classes, supported by dedicated staff, in first-rate facilities.We’ve tried to be as thoughtful as possible about where to cut, focusing on
things that can more easily be reversed when the world’s business cycle
moves to recovery. We need to continue this deliberate process because
further cuts in subsequent years will almost certainly be needed.For those of you interested in more details, what follows are the numbers.
Of the College’s main sources of revenue (fees, endowment, and gifts) the most significant change has been in endowment income, which in recent years has covered about 44% of our expenses. We’d planned in 2008-09 to spend $94 million from the endowment. That was about 5% of its $1.8 billion value last July 1. With the rapid drop in the endowment’s value, we cut spending enough to lower that figure to $91.5 million. For 2009-10 we’ve reduced it to $78.5 million, or $15.5 million less than what we started with this year.
We are modeling spending from endowment in 2010-11 of around $70 million, a drop of another $8.5 million. We believe that we can also hit that target without violating our key principles of financial aid and without layoffs. The Ad Hoc Budget Advisory Committee is working on recommendations for possible further cuts for 2011-12.
Planning that far ahead requires the wisest possible projection of future
endowment values. Here’s our latest thinking. As of today, the return on the
endowment since last July 1 is probably around negative 25%. This estimate
is based on what we know about the part of the endowment that can be valued each day because it’s invested in publicly traded stocks and what we know about the performance through Dec. 31 of the private investments that only get reported less frequently.If that investment loss of 25% persists through June 30, then our endowment,
after subtracting spending from it and adding new gifts to it, would be
around $1.3 billion. We are modeling no growth in our investments in 2009-10
and 2010-11, followed by returns of positive 8% in future years.If the endowment is around $1.3 billion on July 1, we’ll be spending about
6% of it in 2009-10. That spending rate makes sense in the short-run to
smooth out the disruption of the business cycle — but we’ll need to get it
back soon to around 5% to avoid depriving our future students, faculty, and
staff, whom the endowment is also meant to support.Fortunately we now have the time to plan for that in a careful, thoughtful
way, for which I give great thanks to all involved.Regards,
M. Schapiro
President
Obama “can’t be Erin Burnett.”
Seeing the quote in the title was just so funny that I had to share it with our dedicated Erin Burnett ‘98 fans as well as the rest of the EphBlog community that isn’t David. This article asked a bunch of talking heads/pundits/people who like to talk/commentators about the President’s communication of economic woes and plans and what’s going on with the current crisis. What should he say himself? Who should the surrogates be? There are some notably bad surrogates (the markets didn’t like Geithner for awhile, Summers is like watching really boring paint dry). But at least now we know what Mark Shields thinks:
“The president has a lot bigger agenda than responding to why industrials were down or tech stocks were up,” syndicated columnist and PBS NewsHour commentator Mark Shields recently told The Observer. ”He can’t be Erin Burnett, explaining every twist and turn in the markets. But given the gravity of the situation and the lack of alternatives, in too many instances, that has become what the [P]resident has had to do.”
Comprehensive Fee Set for Next Year
Tuition — $39,250
Board — $5,110
Room — $5,280
Activities and Residential House Fees — $240
Total — $49,880
For the letter from Morty to current students, click Read more
Line Their Own Pockets
A crazed MassPirigian Marxist seems to be impersonating our own JeffZ on EphBlog.
[I]t [John Stewart's criticisms of CNBC] was really a much deeper (and justified) critique of an entire industry (wall street and supporters in the media) pushing an idea of quick, easy, illusory gains to an unsuspecting public, when in reality, the only ones who actually made out like bandits were the hedge fund managers and so on who raped ordinary Americans’ 401k accounts to greedily and unapologetically line their own pockets through commissions from fictitious gains.
Huh? Just how did, say, Chase Coleman ‘97 and Andreas Halvorsen ‘86 rape your 401k account? If you are not an idiot, your 401k is in index funds and it is impossible for anyone to take your money, even those dastardly hedge fund managers, without actually hacking into the database at Vanguard. Even if your 401k is in some actively managed fund (which it shouldn’t be), the only way for hedge fund managers to get your money is for your manager — you know, the guy that you picked — to buy high and sell low. How is it Coleman and Halvorsen’s fault if your manager is stupid?
There was enough stupidity, greed and criminality in the world that we do not need to attack hedge fund managers for imagined crimes. Want to know who is really “rap[ing] ordinary Americans’ 401k accounts,” or at least their past and future tax revenues? Whoever is handing hundreds of billions of dollars to AIG. That would be first Bush and then Obama.
Moreover, most of the large criminality associated with “fictitious gains,” i.e., Madoff, had little if anything to do with “ordinary Americans.” Madoff and his ilk stole from rich people. That’s where the money is!
To the extent that you have a meaningful point, it is that real incompetence/criminality occurred at places like Fannie/Freddie/Bear/Lehman/Merrill/AIG and that ordinary Americans, including those invested in index funds, lost out as a result. True! But that had almost nothing to do with hedge funds. And, more importantly, the real crime is occurring now as hundreds of billions of dollars are being transferred from ordinary Americans to these miscreants and their counterparties. That’s change we can believe in!
[S]ome of the bubble could have been avoided. It is so easy for people to forget that Wall Street does not create wealth
Sure! Just look at all the countries in the world without financial markets. They are so rich . . .
Although Wall Street is not the most efficient imaginable system for allocating capital, it is better than all the others. If Jeff has an alternate solution for how to move money from savings to investments, he should describe it.
Student Feedback Solicited by ACBP
The student members of the Ad Hoc Advisory Committee on Budget Priorities (ACBP) are soliciting for student feedback on what at Williams is important to the student body. I’m withholding the e-mail address because the message was sent specifically to students, but feel free to sound off in the comments (especially you ‘08 alums.) For the e-mail, click Read more
Jim Cramer, P ‘13, on the Daily Show – Must See TV
Jim Cramer, whose daughter who will be attending Williams next year, was on The Daily Show tonight, after some back-and-forth over the week. It all started when Rick Santelli of CNBC canceled on Stewart, causing the same night this clip was aired. Cramer should get massive kudos for having the guts and gumption to do what Santelli could not, and had to personally represent the failures of Wall Street.
Video here.
The Eph connection is admittedly weak, though Cramer’s children are mentioned as Daily Show fans in this clip. However, Williams was also known when I arrived in Fall ‘07 as a feeder school for the Wall Street titans. I recall several days when it seemed every senior I knew was in coat & tie for a Morgan Stanley reception in Paresky basement or a Merrill Lynch interview at the OCC, and this interview is not just about Cramer or CNBC; it’s about the nature of Wall Street and the business that so many Ephs went into. I don’t pretend to understand the underlying economics (though I feel good about my ECON 120 midterm), but the interview is valuable for both Stewart’s relentless prosecution and Cramer’s attempts to explain the forces at work around him.
I don’t often make blanket statements, but if you’ve never seen anything else on the Daily Show, you watched a single online video, watch this interview. It was the first three segment interview I’ve seen on the Daily Show, and still went 8 minutes into overtime. Two other clips of Stewart’s best are here (post 9/11 speech) and here (speaking against partisanship as entertainment).
Media coverage here. (to the tune of 533 articles so far) Once available, you can find the interview at the show website, or Hulu.com. According to James Fallows, a longtime journalist for the Atlantic, “Jon Stewart has become Edward R. Murrow.”
New Normal
A former EphBlog author writes:
I am not sure I agree with your prescription for dealing with Williams’ finances, but I thought you would find this article interesting. If Princeton is feeling a pinch, then Williams is probably in worse shape.
Indeed. At the same time, Will Slack ‘11 writes:
The college is taking it [the financial crisis] more seriously than your writings would suggest.
Well, I certainly hope that this is true, and I have no reason to doubt Will. But, how does he know? How can any outsider (meaning anyone not in Administration) know? There can be clues, but have not seen much. Can anyone provide some evidence? The steps that we know about (cutting budgets by 2% this year and 15% next year, dropping the number of visiting professors and new tenure-track hires) are nowhere near enough.
Open Hatches
Williams is in real financial trouble and, for whatever reason, the Administration is refusing to take the situation seriously enough. The College has already appointed 8 new faculty members for 2009-2010 and still has 12 openings. Madness. The College can not afford this expense, if it is to avoid layoffs and cutting financial aid. Something has to give. The next Williams president will rue Morty’s profligacy, his refusal to play the bad guy in his final months in office.
Recall my original advice to “Batten down the hatches.” That was less than 5 months ago and, already, things have gone from bad to worse. My suggestion to freeze the salary of those making more than $100,000 was attacked and yet, Williams has now frozen salaries for everyone. My recommendation to not hire visiting professors was similarly challenged. Here is Morty on visitors.
You’d rather have us get visitors rather than tenures because visitors are only one year, not a commitment. The other way to look at is you can make a killing in the faculty market. Students like tenured professors better generally than visitors, though not always. Teaching evaluations tend to be better for tenure or tenure track professors. I think it could be pretty short-sighted to say we could replace tenure people with visitors. This is something the CAP will be talking about. They may not share my views. I’d take a tenure track over a visitor any day, although some of the visitors are absolutely spectacular who really fill voids in the faculty. When you bring in people like that, it’s a great opportunity that you don’t want to lose. On the other hand, if you’re bringing in people to just teach temporarily on their way to teaching somewhere else, I don’t know how engaged they are in the life of the campus. I hear from my students all the time that the visitors don’t contribute as much, on average, as regular faculty.
I expect that we will see fewer visitors next year than the originally promised 7. You read it here first.
Now, partly this is me saying “I told you so” or “I am telling you so.” But more important is the trend. Each month the College delays the necessary cuts because it hopes that things will get better. They don’t (and won’t), so the cuts that I recommend happen a few months later. I predict that the same will happen over the next year. Cuts that seem incomprehensible to many readers are, in fact, inevitable.
That’s why avoiding new faculty hires right now is so important. The cost is not just for salary and support for next year. Each faculty hire locks the College into significant costs for the next 8 years. Williams can’t afford to make those sorts of commitments right now. The sooner we adjust to our reduced circumstances, the better.
I wrote a short letter to the Record on this topic. See below the break for the full text of the original op-ed.
The point of this post is to highlight the fact that the hatches are still open. Williams can not afford to hire new faculty. We are not as rich as we pretend to be.
President Schapiro’s January 26, 2009 letter to the Williams Community is meant to allay our concerns about the financial crisis. Instead, it should alarm anyone with knowledge of the College’s finances and worries about its long-term strength.
First, it is very hard for any outsider to have a sense of the magnitude of the problems that we face because the College makes it almost impossible for us to know the basics. For example, how many dollars did the College spend from the endowment each year from 2000 to the present? There is no way to deduce this information from the College’s published financial statements. Yet, without it, one can not have an informed opinion about whether or not President Schapiro’s plan to spend “up to 6.9% of the beginning of the year value of the endowment” in fiscal year 2010 (starting this July) is prudent or spendthrift.
Second, we know that this percentage, the “avail rate,” is calculated incorrectly. As Professor of Economics Emeritus Gordon Winston demonstrated years ago, the relevant measure is not the endowment itself; instead it is the College’s net financial wealth: the endowment minus outstanding debt. As President Schapiro explained to the Boston Alumni Association in December, if you have a $500,000 house with a $200,000 mortgage, you don’t really have $500,000. You can’t ignore the mortgage. You real wealth is $300,000. Similarly, the value of the endowment is around $1.25 billion (at best) but a proper calculation of the avail rate would subtract out the College’s $262 million in debt. So, 6.9% of a $1.25 billion endowment is actually 8.6% of the Williams’s net financial wealth. A top-tier college that spends more than 8% of its wealth each year won’t be a top-tier college for long.
Third, the College’s most basic assumption about the endowment — that long-term real returns of 5% are a plausible assumption and that, therefore, spending 5% of the value of the endowment each year is “conservative” — is absurd. World GDP growth is no more than 3%. If Williams could really grow the endowment at 5% forever, then eventually, Williams would own the whole world. As desirable as that outcome might be, it won’t happen. Assuming 5% real growth is ridiculous, all the more so because everyone does it.
Taking the 100-year view, the College should assume 3% real growth from its net financial wealth. At best, that would suggest spending $30 million from our $1 billion in net wealth. That the College is currently planning to spend more than twice as much, including hiring more faculty while making no meaningful effort to decrease employment, even through attrition, is an worrisome indication that the Trustees are not taking their fiduciary responsibilities seriously. Williams can not afford to hire 8 new faculty members. The longer we delay the necessary cuts, the more painful those cuts will be.
Next Question
Right at the 4-minute mark of an excellent stimulus discussion, Paul Krugman bats back an idiotic question from Mika Brzezinski ‘89.
Visit msnbc.com for Breaking News, World News, and News about the Economy
I’m not sure where Brzezinski “learned” that Larry Summers invented the concept of economic stimulus, but it certainly wasn’t Williams.
The Madoff Student Center?
An anonymous tipster alerts us to the fact that a “David Paresky” is listed as a victim of Bernie Madoff’s scam in this document. Could this be the same David Paresky, Class of 1960, in honor of whom the Williams student center is named? We have reason to believe that’s quite likely.
Questions:
1. Can you find the names of other prominent Williams donors on the list? Please list in comments below.
2. Are there any outstanding pledges to the Williams endowment that are secured by a portfolio of Madoff-centric assets?
3. Attempt to stir up pointless controversy: Should Williams follow the lead of Brandeis and sell off the WCMA’s holdings?
NBC’s “Erin Burnett Problem”
Passing this along from a tipster who wanted to make David’s day:
One of the big journalistic lessons of the Iraq War was that “embedded” reporters who get one side of the story are not well suited to give accurate information to the public.
Americans now depend on the media for accurate information about the financial crisis. This Sunday’s Meet The Press made something absolutely clear: Journalists who are “embedded” on Wall Street and depend on Wall Street execs for access on a day-to-day basis are ridiculously unqualified to give the public good information about the economic crisis.
Indeed, NBC has an Erin Burnett problem. Watch and see for yourself how Burnett consistently serves an an apologist for Wall Street’s worst practices:
Full story on the Huffington Post, with YouTube clips.
UPDATE: Change title, no idea why Austrians were involved.
Morty’s Monday Message
To the Williams Community,
Coming out of this weekend’s Board of Trustees’ meeting, I would like to
bring you up to date on how Williams is adapting to the downturn in the
economy.Over the three months since I last wrote on the subject, the College has
deepened its analysis of the situation, mapped a way forward, and begun to
reduce spending. These efforts led to fruitful Board discussions, which
underscored several themes:Despite the changed economy, Williams will remain Williams –
a vibrant college where students will receive the finest
possible liberal arts education.We remain committed to retaining our full financial aid program
and to avoiding layoffs.To accomplish this we need to find very significant savings
elsewhere in our operations.We are in this relatively strong position because of the talent and
dedication of our faculty, staff, and students and the commitment of our
alumni and parents.On this last point, I’m pleased to report great news regarding The Williams
Campaign. Despite beginning during the dot-com bust and ending in the
deepest recession in decades, the Campaign closed at a total of
$500,165,000. This heartening outcome results from the hard work and
generosity of many in the Williams family. On behalf of everyone who will
benefit from this effort, now and in the future, I thank all who have taken
part. Both capital and annual gifts have enabled us to make permanent
additions to our curriculum, financial aid, and campus infrastructure.
Without this extraordinary result and the ongoing capital and annual support
of those devoted to the College, our current challenge would be even
greater.Another piece of reassuring news is that despite our concern about the
effects of this economic turmoil on current Williams families, we’ve been
relieved to see that the number of families who have asked for mid-year
financial aid reviews has been no greater than usual. We still understand,
and appreciate, the degree to which many families of all income levels are
having to sacrifice to make available for their children a Williams
education.The economy’s greatest effect on the College itself has been the degree to
which falling financial markets have reduced the value of our endowment.
While we’re fortunate that the endowment continues to outperform benchmarks
and to contain enough liquid assets for us to meet our obligations, it’s
still the case that the endowment’s overall value is significantly less than
the $1.8 billion recorded last June 30. Its liquid assets, which can be
valued day-to-day are down so far this fiscal year by a little over 20%.
Making a reasonable estimate of its illiquid assets, which can’t be valued
every day, leads us to conclude that the overall endowment value is down
this fiscal year by a figure approaching 30%. Meanwhile the financial
markets remain volatile.In October we announced the College’s first responses. We postponed for a
year the construction of the new Sawyer Library and renovation of Weston
Field, reduced by $2 million the amount we’d planned to spend this year on
building renewal and maintenance, and decided to postpone the filling of all
but the most essential openings for faculty and staff. After careful study
by the Committee on Appointments and Promotions, we chose to postpone
searches for 6 of 14 tenure-track faculty appointments and to drop searches
for half of 22 visiting faculty positions. A separate ad hoc group has
recommended the postponement of around 20 of what were 30 staff openings,
while several remain under review. We also asked all budget managers to find
ways to spend at least 2% less than expected this year on non-personnel
expenses.Next year’s operating budget is planned to go down by $10 million to around
$207 million. Accomplishing this while protecting financial aid, avoiding
layoffs, and not overspending from the endowment will require the following
steps:We¹ve cut spending on building renewal and maintenance next
year by over $6 million a little more than half. The fact
that our physical plant is in such great shape makes this step
more practical than it otherwise would be.We reluctantly join many colleges and universities in deciding
to have no faculty and staff salary increases for the year.
While relieved somewhat to note that general inflation is
currently near zero, we know how important competitive salaries
are to the health of our educational offerings and commit to
increasing salaries again as soon as feasible.We¹ve asked all budget managers to submit plans for the coming
year that include cuts in non-personnel spending of 12% and 15%.
We¹ll decide closer to the beginning of the fiscal year which
level is necessary depending on external circumstances. We¹ve
also asked all budget managers to explain how they would cut an
additional 6% the following year.We¹ve been greatly aided in the process by cost-saving suggestions from
faculty, staff, and students. Our thanks go to all who used the Website
developed for this purpose to submit nearly 400 ideas. They ranged from
small to large and covered almost every aspect of college operations. The ad
hoc Committee on Cost-Saving has reviewed them and passed them to relevant
managers. Two of the larger ideas have already been put into action. One was
to experiment with closing the campus as much as possible over the recent
winter break, which had the added benefit of reducing our greenhouse gas
emissions. Another suggestion with a large financial impact was to suspend
after this spring semester the Williams in New York Program. The faculty had
already voted last fall to end the program in its present form, pending a
process through which it’ll be re-imagined. That planning will continue and
I’m confident that the program will eventually reappear in new form. These
ideas, combined with several others, represent savings of more than
$500,000.An important annual calculation for the College is how much to spend from
the endowment, keeping in mind the needs of both current and future
students. To strike this balance we¹ve generally aimed to spend in the long
run on operations an annual average of around 5%, though in some years in
which the endowment grew healthily we spent at lower rates to avoid spending
for spending’s sake and instead save for the future. That practice has
served us well. But in the same way that the College spent from the
endowment at higher rates during previous deep recessions, the Board has
agreed to do so now. We plan next year to spend up to 6.9% of the beginning
of the year value of the endowment a level that’s sustainable for a few
years but not longer.Like all financial plans, ours is based on assumptions about the external
environment. The steps that I’ve described here are based on our
conservative model that the endowment will drop 30% this year, stay level
for the next two, and in the following year go up by 8%, a figure closer to
its historical average. If the endowment fares better than this, we can
carefully increase spending more than currently planned and/or spend less
from endowment. If it does worse, we’ll have to adapt even further.Economic downturns are stressful. This one, with its speed and depth, has
certainly put pressure on the families of our students, of our faculty and
staff, and of our alumni. But it’s in times of challenge that communities
find their greatest strength. I’ve been not only encouraged but also moved
by the deep goodwill that Williams people, on campus and afar, have brought
to our collective effort to meet the current challenge. We know that making
the most of this situation requires the best, shared efforts of us all.
Through this process we will reaffirm for our time those initiatives most
central to our mission and those, less essential, that can be pared away.The ultimate result can only be an even stronger Williams — one that I
thank you all for helping to build.Regards,
M. Schapiro
President
Cornell’s Monday Financials
While waiting to see if David’s Monday Predictions come true, you may enjoy Cornell’s update of the same sort, fresh from President Skorton last night.
My department, Horticulture, is losing five lines for grad students. I’ve yet to hear of a layoff here, but my sense from how people are talking is that some must be coming. There was a request for retirement plans; from what I hear no Hort professor has indicated any. There is a tension between the mandate from the top to make cuts, and the knowledge within the department that if we comply, the shrink may be permanent. It’s a classic case of conflicts of interest. Not only does no one want himself or a colleague to lose a job, no one wants to help the dean shrink our department.
Beautiful Machine
Amazing three part series (I, II, III) on the collapse of AIG in the Washington Post. Arthur Levitt ‘52 is mentioned.
Might-Have-Beens
Fascinating Washington Post article on the origins of the financial crisis.
A decade ago, long before the financial calamity now sweeping the world, the federal government’s economic brain trust heard a clarion warning and declared in unison: You’re wrong.
The meeting of the President’s Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. — all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.
Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn’t like to be pushed around.
Now, in the Treasury Department’s stately, wood-paneled conference room, she was being pushed hard.
Read the whole thing. Levitt ‘52 has some regrets.
The crisis has prompted second thoughts. Goldschmid, the former SEC commissioner and the agency’s general counsel under Levitt, looks back at the long history of missed opportunities and sighs: “In hindsight, there’s no question that we would have been better off if we had been regulating derivatives — and had a clearinghouse for it.”
Levitt, too, thinks about might-have-beens. “In fairness, while Summers and Rubin and I certainly gave in to this, we were not in the same camp as the Fed,” he said. “The Fed was really adamantly opposed to any form of regulation whatsoever. I guess if I had to do it over again, I certainly would have pushed for some way to give greater transparency to products which turned out to be injurious to our markets.”
Most important lesson is that the origins of the crisis are bipartisan. Both Democrats and Republicans made major mistakes. Our political class as a whole failed us.
Lesson for radical anti-Federalists like me? Less power to the political class. That’s change we can believe in!
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