Felix Salmon

Andrew Martin has a very long, and not particularly illuminating, article about college indebtedness in today’s NYT. The title of the piece is “Colleges’ Debt Falls on Students After Construction Binges”, and it’s almost 3,000 words long, but somehow Martin fails to even hazard a guess as to the degree to which colleges’ debt is falling on students after construction binges. We’re certainly told that it’s happening:

A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish to attract students — has left colleges and universities saddled with large amounts of debt. Oftentimes, students are stuck picking up the bill…

Higher debt payments and other expenses have contributed to the runaway inflation of college costs, and the impact on students is real and often substantial.

How big are these bills? How substantial is the impact on students? Martin doesn’t hazard a guess: instead, he just says that “the costs are not easy to isolate”. But there are a few hard numbers, far down in the piece:

Outstanding debt at the 224 public universities rated by Moody’s grew to $122 billion in 2011, from $53 billion in inflation-adjusted dollars in 2000. At the 281 private universities rated by Moody’s, debt increased to $83 billion, from $40 billion, in that period. Rather than deplete their endowments, some colleges borrowed to help pay bills after the financial crisis, but most borrowing was for capital projects.

Since 2000, the amount paid in interest and principal has increased 67 percent at public institutions, to $9.3 billion in 2011, and it increased 62 percent at private ones, to $5 billion last year.

Martin doesn’t tell us what this works out at on a per-student basis, so let’s try. According to the Census Bureau (see Table 5), there are 20.4 million students enrolled in US colleges, split between 16.6 million undergrads and 3.8 million graduate students. According to Martin, using numbers from Moody’s, the amount of college-level debt being borne (in part) by those students has gone up by $112 billion, and the annual debt service has gone up by $5.6 billion. (These are numbers Martin could have just printed directly, but for whatever reason he chose not to; instead, you need to back them out of the numbers he cites.)

Students don’t bear all those extra costs: as Martin notes, “in some states, including New York, California and Connecticut, borrowing for public colleges and universities is mostly paid for by taxpayers, so students are not directly responsible for payments on the debt”. But for the sake of argument — and despite the fact that the University of California is the single biggest debtor, with SUNY at number 2 — let’s assume that all the extra costs are borne by students. In that case, we have 20.4 million students paying an extra $5.6 billion per year in interest, which comes to an annual cost of $274 per student.

Remember that $274 is a deliberate over-estimate, since a lot of the extra borrowing that Martin is writing about will get paid out of state budgets rather than out of students’ tuition fees. What’s more, the rise in interest payments coincides with a lot of universities shifting floating-rate debt to fixed-rate debt, which increases the interest payments but makes it them much less prone to rising unexpectedly.

Obviously, the increased costs will be higher at the universities with the most construction activity, and lower at more frugal colleges: the $274 is just an average. And I’m no fan of what Martin calls the Edifice Complex: I’ve been highly critical of capital projects at Harvard and NYU. But if it wants to make the case that students are paying “often substantial” sums as a result, the NYT is going to have to do better than this.

Indeed, if you want to criticize big capital projects, then “students end up paying a large part of the interest expense” is way down the list of good ways to do so. Interest expenses are generally small as a percentage of capital costs, because interest rates are low; what’s more, when you divide them between tens of thousands of students, the per-student cost becomes entirely manageable. The problem is more in the way that these projects force universities to lose a lot of flexibility in terms of their optimal size: it’s much easier to grow than to shrink, even as it’s hard to maintain quality when you’re growing too fast. The result, all too often, is shiny facilities, and a lower-quality education.

There’s a bigger lesson here, too, for the NYT. Martin says that the data underpinning this article was compiled for the NYT by Moody’s, which means that the NYT has access to a full and rich database. So why doesn’t it publish that data? Good data-driven journalism both publishes as much data as possible, and uses the data to drive conclusions, rather than simply dropping numbers into a foreordained article.

What should have happened here was for Martin to take a deep dive into Moody’s data, to try to work out which colleges saw the largest debt-service increase and whether there was any correlation between debt-service increases and tuition increases. Even if he didn’t have the appetite to do that work himself, at least if he published the data then the rest of us could do it. Instead, we just get an article which is very long on anecdote and very short on useful data. It’s a shame.

When we last checked in on Cooper Union, it was an opaque morass of murky finances in desperate need of some sunlight. President Jamshed Bharucha has made all the right noises: he told Brian Boucher, for instance, that “if you have a financial problem, you need to put that out there, along with all the possible options”. But the fact is that since he arrived in July 2011, he has released little more in the way of financial information than any of his predecessors*, while making it clear to his favored media outlet (the Wall Street Journal) that the conclusion of the current process is foreordained: Cooper Union is going to start charging tuition, after more than a century of being free.

But Bharucha has lost control of the narrative: a group calling itself Students for a Free Cooper Union has occupied the top floor of the iconic Foundation Building, and is getting a lot of mostly very positive press. It’s worth noting that the protesting students are guaranteed free tuition until they graduate: they’re not protesting out of narrow self-interest. But they do understand that free tuition is at the very core of what it means to be Cooper Union, and that Cooper without free tuition simply wouldn’t be Cooper any more.

But don’t take the protestors’ word for it. Look at the official Revenue Task Force report, from October. It’s worth quoting at length, since the occupiers themselves couldn’t put it any better:

The learning environment created by The Cooper Union’s policy of full-tuition undergraduate scholarships is inimitable, attracting a student body with a high degree of engagement and intensity. Many Cooper students who were admitted on scholarship to other top-tier schools have chosen Cooper for its ethos of scholarships for all.

Rather than competing with one another, Cooper students are known for teaching each other, fostering a culture of collaboration in which the students see themselves as colleagues with the faculty, rather than as consumers purchasing education as a commodity.

Full-tuition scholarships are a 110-year tradition at Cooper Union, and also serve as a counter- point to the crisis in American higher education, one in which crippling costs, divestment in public funds, and ever-decreasing avenues of access are becoming the new normal.

By operating outside higher education’s conventional consumer model, Cooper Union’s meritocracy has engendered far-reaching creative, cultural, economic and political implications and consequences. The college’s twinned commitment to access and excellence is not only the key to the Cooper student’s accomplishments inside its classrooms, laboratories, and studios; it is also a model for the field of higher education as a whole.

The problem is that even after saying all this, the Revenue Task Force was in an impossible situation: while coming to the conclusion that free undergraduate tuition is untouchable, they were also told that the revenues they were tasked with finding could not come from other obvious places, like the Board, alumni, or the sale of assets.

And so the report comes to the conclusion that undergraduate enrollment should shrink by “up to 30%”, in order to make space for a set of new graduate programs, some of which would charge more than $30,000 per year.

Now Cooper Union has never really been a home to graduate programs: there are a handful of grad students now, but Cooper Union has always been much more about teaching than about research, and no one has really thought through how Cooper might move to a system where a large part of the budget would come from grad students, even as the undergrads continued to be the heart and mission of the school. It’s not at all clear that potential grad students would even want to shell out $30,000 a year — plus downtown New York living expenses — to attend a boutique college housed in all of two buildings. And given that Cooper students study art, architecture, and engineering, where on earth did the idea come from that the college should offer a two-year pre-med course?

The whole concept reeks of mission creep, at a school which already relies far too much on its students, rather than its teachers, when it comes to maintaining quality. Cooper has a lot of adjuncts and a very small tenured faculty, and if you ask anybody associated with the school how it keeps its quality high, they’ll tell you that it’s a function of the enormous pool of applicants. The idea is that Cooper is extremely good at identifying America’s most talented teenagers, and can basically get its pick of the crop thanks to its free-tuition policy.

It doesn’t really matter whether that’s empirically true or not; what’s certain is that Cooper’s exceptionalism is an article of faith among both students and faculty, and that it is deeply rooted in the school being free. How and whether that could translate to a for-profit grad-school program is far from clear — and given the success of the board in implementing previous grand projects, it’s hard to have much faith in its success. After all, if the quality of Cooper comes in large part from its ability to pick and choose its students, then there’s really no reason to believe that a non-free graduate program would have particularly high quality at all. Charging for some students would violate Cooper’s stated mission, which says that it “awards full scholarships to all enrolled students”. Worse, it would set a very dangerous precedent: in the likely event that the grad-school program was a flop, it would at that point be much easier to extend the tuition fees to undergrads.

Indeed, that is already being talked about. A document leaked on Monday, written by a mysterious “Undergraduate Tuition Committee” somewhere within the engineering school, lays out all the reasons why Cooper should start charging tuition to everyone, including the inevitable “under-performance of other revenue sources”. Here’s a taster:

A low undergraduate tuition (eg, initially ~$9600/yr) holds the prospect of a minimal and reversible impact on the academic quality of future classes and on the institution’s reputation… in the event that more risk-laden revenue generation efforts underperform, progressive increments in undergraduate tuition might be applied…

Charging undergraduate tuition is the most likely method to succeed in meeting the School of Engineering’s five year target. Some alternative approaches, such as creating new graduate programs (for which tuition will be charged) are, in the short term, too uncertain to rely on.

The document is both marked up and scanned, and includes this astonishing passage:

Or, in English, “never mind if bright minority candidates can’t afford to study at Cooper Union any more, there are much better good financial packages for them at lots of other colleges”.

The document was greeted by the occupiers for precisely what it is: a clear indication that undergraduate tuition is on the table at Cooper Union. As such it only adds urgency to the first of their three demands, that “the administration must publicly affirm the college’s commitment to free education”.

It also shows the importance of their second demand, that “the Board of Trustees must immediately implement structural changes with the goal of creating open flows of information and democratic decision-making structures”. Important discussions about the future of Cooper Union should happen in public, in full view of all stakeholders, especially students and faculty. Such discussions will be noisy and protracted, and probably unpleasant for trustees — especially the ones who signed off on a massive mortgage for the new engineering building, without any idea how they were going to pay it. But the trustees need to bear in mind exactly who they’re representing, and put up with a certain amount of unwelcome publicity. As the current occupation shows, they’ll get it anyway.

There’s no good reason why the very existence of the “Undergraduate Tuition Committee” was a secret** until its report was leaked on Monday, and Cooper Union, in its official communications, still hasn’t said anything about it. Instead, Assistant Director of Public Affairs Jolene Travis put out a statement dismissing the occupiers as “eleven art students” who “do not reflect the views” of the broader student population, adding for good measure that “full tuition scholarships at The Cooper Union are currently valued at $38,550″. (The reaction to this statement, which was handed out to select journalists, can be found here.)

The third and final demand of Students for a Free Cooper Union is the resignation of Jamshed Bharucha, which seems like a good idea to me. He is running a financially-struggling school, which desperately needs all the money it can get. But no one is going to donate money to a shambles which looks like this. The university frequently asserts that the protests are coming from a small minority, while a silent majority actually supports the administration. But I see no evidence for this view at all*: it looks more as though the senior folks at Cooper are simply deluding themselves.

A year and a half into Bharucha’s tenure, there’s very little reason to believe that he’s the right man for the job — while the current occupation, which was vocally supported at a press conference Tuesday afternoon, seems to provide a pretty strong prima facie case that his university has no faith in him. Bharucha should at the very least make it clear to whom he considers himself answerable, and under which circumstances he would resign. But it seems to me at least that Cooper needs a leader: someone who can communicate effectively, be honest about the many enormous mistakes that were made in the past, and lay out a plan to keep this storied institution on a sustainable footing for centuries to come.

That plan should probably include most of the ideas in The Way Forward, a paper compiled by the Friends of Cooper Union which suggests a number of ways that the college can fix some of its fiscal issues. Even together, they probably don’t add up to enough to pay the mortgage on the new engineering building. But they’re a well-intentioned start, which the university could rally behind while it works on outstanding financial issues. Who knows: faced with a broad new sense of purpose and a new president, donors might even be willing to open their checkbooks again.

*Update: Bharucha has actually been more transparent on the financial side than I gave him credit for; specifically, I missed the Audited Financial Statement Summary, which gives a pretty good indication, if you’re good at reading financial statements, of how Cooper Union wound up in its present predicament. And as for Bharucha’s support within the student body, it turns out that it does exist, among the engineering students. They’re just very quiet about showing it: you won’t find much in the way of public statements of support on the internet, for instance. Most of the opposition to Bharucha is being organized by art students, which maybe makes sense, given the level of income the average art student can expect upon graduation.

**Update 2: Maybe not entirely a secret. Go to the Minutes page of the Engineering Students Council. Then click on “Open Student Body Meeting with Dean Wolf – (2012-10-16)”. Under a heading named “August”, the existence of the Undergraduate Tuition Committee is referred to.

Update 3: I have now received a long response to this post from Cooper Union: you can read the whole thing here. This is what it says about the Undergraduate Tuition Committee:

The acting dean of the Albert Nerken School of Engineering has organized committees to identify possible revenue streams through the creation of new programs. An analysis, which included 500 variables, was conducted to see at what level of revenue would be needed in order to maintain the full tuition scholarship for undergraduates. This is an ongoing process and no decision has been made.

Also, a group calling itself the Engineering Student Council has released a statement in support of Bharucha.

Would you like to take a free online university course which teaches you the basics of quantitative analysis and also helps you manage your money so that you get high returns with low risk? Of course you would. Let me introduce you to Computational Investing, Part I, taught by Tucker Balch, Ph.D., on the Coursera website.

Under “Recommended Background” we’re told that “the primary prerequisite is an excitement about the stock market”. And there are two recommendations under “Suggested Readings”, including All About Hedge Funds : The Easy Way to Get Started, by Robert Jaeger. (Apparently it “explains how any investor can take advantage of the high-potential returns of hedge funds while incorporating safeguards to limit their volatility and risk”.)

This is a genuine university course: it’s the same one that Balch teaches at Georgia Tech. And so you’d expect a few disclaimers, at least, along the lines of “this is an introductory course, it’ll help you understand a few concepts, and maybe be the first step on the road to becoming a quantitative analyst yourself one day, but please, kids, don’t try this at home”.

You might expect such a thing, but you’d be disappointed. Instead, you get the exact opposite. Check out Week 4 (you might have to register; it’s easy and free) and then “Lecture Video 1.2: Response to Questions from Students”. According to Balch, the “number one most popular question” he gets asked is “Do I use these techniques to manage my own funds?”. He responds as forthrightly as he can:

The answer is yes.

Balch continues:

I have a number of different investments that I use these approaches for. With regard to my company, Lucena Research, we manage a few small funds as a way to test our techniques and validate them. One of them in particular I’ll show you in just a moment.

It’s far from clear how a student who has merely taken an online course might ever hope to replicate the returns that Balch manages to generate at Lucena (“Hedge Fund Technology for the Strategic Investor”). But in any case Balch does share with us a Lucena portfolio which “was developed specifically to be low risk”. It looks like this:

I look at this and I immediately get suspicious: there’s something quite Madoff-like about the way in which Balch’s returns go steadily up and to the right regardless of what the stock market is doing. Here’s how Balch explains what’s going on in there:

This approach was developed specifically to be low risk. It includes a basket of less than 20 equities that are traded about every 2 weeks. It’s 2X leveraged, meaning that half of the money is borrowed investment.

So this approach is a 2X levered fund with less than 20 stocks? Sounds very risky to me. But Balch shows us the numbers to prove that it isn’t:

The first thing to note here is that although Balch told us he was going to show us one of the “small funds” that he uses “to test our techniques and validate them”, this does not look like a real-money fund. There’s no indication, for starters, of what the borrowing costs are: if the fund is indeed 2X leveraged, how much does it cost to borrow $10 million on an ongoing basis?

Maybe those numbers are somehow incorporated into the returns — but then there’s the very odd section on “Transaction Costs”. The commissions bit makes sense: if you trade 10 times a week on average for 20 months, then that’s about 860 trades in all, and the commissions add up to about $20 per trade.

But then there’s the “slippage”, which doesn’t make sense. Commissions are real costs: they’re the amount of money you have to pay your broker to execute your trades. Slippage, on the other hand, is not a real cost, but rather a theoretical cost: it’s the difference between the official market price of a security, and the price you actually end up paying. It’s a way of taking a theoretical portfolio, which always trades at the market price, and adjusting the returns to make them more realistic. If you have a real portfolio, as Balch suggests that he does, then there’s no “slippage”: the slippage is built in to your actual returns.

So it seems that Balch, after promising to show us the returns that one of his “small funds” has generated, ends up doing no such thing. (And also, I don’t think that a $20 million fund would count as “small” for a college professor who tells us that most of his money is in his TIAA-CREF retirement account.) Still, he says:

This is a conservative approach which nets about 15%-20% per year. You can absolutely follow more risky approaches that’ll provide higher returns. This is the kind of approach I follow.

In other words, if you take what Balch is saying at face value, he’s managed to come up with a conservative investment strategy, which is levered 2-to-1, which generates returns of more than 15% per year, which he follows himself. And he encourages his students to try to do the exact same thing.

There are lots of courses on Coursera, and most of them aren’t as sketchy as this. But I do think that what we’re seeing here is the beginning of a serious problem with online universities like Coursera: you can never be sure about their quality control. And in general, if you’re taking a college course where the professor encourages you to lever up a small number of stock-market investments in the hope of getting low-volatility 20% returns, I’d advise thinking twice about that professor, and that course. Because it just doesn’t pass the smell test.

On Thursday, I looked at the way in which cultural institutions tend to spend a huge amount of money on architecture, even if they would be better off spending that money more directly on their missions. In response, I got a fascinating email from a professor at NYU, asking me about its plan to spend some $6 billion on a hugely ambitious construction project — one which is fiercely opposed by local residents and NYU faculty.

The opposition is predictable, of course: Greenwich Village is as Nimbyish as communities get, and the professors who are railing against the plan are precisely the people who are going to suffer the most from endless construction work and ultimately the disappearance of the views and light many of them currently enjoy. But that doesn’t mean they’re wrong to oppose the plan. As we saw at Cooper Union, ambitious construction projects can be hugely damaging to colleges — especially ones which don’t have a large endowment to fall back on.

At Harvard, the empire-building of Larry Summers resulted in a disaster — but at least the endowment is huge enough that if Harvard loses $1.8 billion, it’s not the end of the world. At NYU, by contrast, the size of the endowment is significantly smaller than the budget for the university’s expansion. And as a result, the whole project is significantly riskier. If NYU ends up having to dip into its endowment to fund losses on this project, then that could be hugely damaging for an institution which is already under-endowed by the standards of most top-tier US colleges.

The situation at NYU Is, I think, the flipside of the saga we just saw at the University of Virginia. There, a popular president found herself at odds with trustees who had been successful in the private sector; at NYU, the faculty is similarly opposed to the plans of the trustees, but in this case the president is very much aligned with what the trustees want.

In both cases, it seems, the faculty seems pretty happy with the state and status of the university as it stands, and are looking for low-risk stewardship. The trustees, by contrast, are much more aggressive, and are looking for growth and full-bore engagement in the higher-education arms race known as Bowen’s Rule. Here’s how Howard Bowen put his five-point rule in 1980:

1. The dominant goals of institutions are educational excellence, prestige, and influence.
2. In quest of excellence, prestige, and influence, there is virtually no limit to the amount of money an institution could spend for seemingly fruitful educational needs.
3. Each institution raises all the money it can.
4. Each institution spends all it raises.
5. The cumulative effect of the preceding four laws is toward ever increasing expenditure.

On top of that, there are many New York-specific idiosyncrasies involved in the NYU plan. NYU is nestled in the heart of downtown New York, on some of the most valuable land in the world. That makes expansion insanely expensive, of course — but it also raises opportunities for a higher-education form of regulatory arbitrage.

New York has strict and recondite zoning laws, which are largely responsible for the value of any given plot of land. Take a site in Greenwich Village: if all you’re allowed to build there is a few townhouses, it’s going to be worth a fraction of its value if you’re allowed to erect a 40-story hotel. Every so often, zoning is changed, normally in the direction of allowing more development. When that happens, the people lucky enough to own the land in question make windfall profits.

This dynamic helps explain the way in which property developers are deeply enmeshed in city politics — and it also, I think, helps explain a lot of NYU’s behavior. NYU, quite aside from being an educational non-profit, is also the largest property developer in downtown New York. And with this plan, it’s trying to change the zoning for a lot of the Washington Square area in a way that will, if all goes according to plan, essentially drop a huge pile of money in the university’s lap. Hence the proposals for things like hotels and retail: they’re not allowed right now, and if they do become allowed, NYU fully intends to build such things and make substantial profits from them.

This isn’t a stupid plan. It makes sense, if you don’t have a $30 billion endowment throwing off huge amounts of cash every year, then you look for income in other places.

On the other hand, when a university turns property developer that’s decided mission creep — and it’s mission creep accompanied by billions of dollars in debt. Property magnates generally do really well for themselves — until they don’t. And here’s where you can see the cleavage between NYU’s trustees and its faculty. The trustees tend to be successful businesspeople — people who have had the requisite combination of risk appetite and luck that’s necessary to make lots of money. And rich people have another characteristic, too: they nearly always overestimate the amount of skill and underestimate the amount of luck which went into their success. Plus, they think that success is somehow infectious: if they’ve made their millions through levering up, then that’s probably a good strategy for the non-profits whose board they’re on, too.

On top of that, the president-and-trustee class of people has a natural tendency to want to build monuments to themselves, as well as a certain emotional detachment when it comes to empathy with other people. They’ve seen the plans: the architects have shown them glossy pictures of what Greenwich Village is going to look like in 2031, but they don’t really feel the amount of noise and pain involved in getting there from here. They don’t live in Washington Square Village.

And most importantly, they don’t need to rack up enormous student loans just to attend NYU in the first place. Here’s the chart, from the NYT’s excellent infographic on university tuition and student debt:

You can see from this chart that while there are lots of colleges which charge NYU-level tuition fees, NYU is among the very worst of them in terms of the amount of debt its students are burdened with upon graduation. That’s partly because it has a relatively small endowment, and therefore can’t offer the level of financial aid that, say, Princeton can; it’s also, of course, a function of the fact that New York is an incredibly expensive place for a student to live. But either way, if NYU cared about its students as much as it cares about its reputation, it would be searching hard for ways to decrease the debt they’re graduating with.

Instead, NYU is embarking on a building plan which will almost certainly, in one way or another, feed through into higher tuition fees and higher levels of student debt at graduation. After all, tuition fees are a hugely important source of income for NYU, and NYU is going to need all the income it can lay its hands on if it’s going to be able to pay off the loans it takes out to construct all these new buildings.

I’m no preservationist stick-in-the-mud: I think that cities need to evolve over time, and that if Greenwich Village had a bit more density, New York would cope just fine. I also carry no torch for things like “the acclaimed Sasaki Garden”, which turns out to be a bunch of concrete planters which are all but inaccessible to real New Yorkers. If NYU wants to replace that garden with something better, I’m all ears.

But I do think it’s worth asking some pointed questions about who exactly all this construction is supposed to benefit. It’s certainly not the current students, who will be long gone by the time it even gets started. It’s not the current faculty, whose lives will be disrupted and who are almost unanimously opposed. And there’s a strong case that it’s not future students, either, who will see even higher tuition fees and I’m sure won’t welcome the extra student loans they’re going to have to take out.

Universities will always have plans to expand — and indeed NYU already has campuses in no fewer than four different countries. Before embracing this particular plan, then, it might be worth looking at the history of previous university expansion projects, and asking whether they actually delivered on the promises they made at this point in the process. Because the costs of this particular project seem a lot more obvious than the benefits do.

Remember the murky finances of Cooper Union, which went from healthy to disastrous in no time at all? There’s a lot of controversy about what went wrong, where exactly the problems lie, and what’s the best way to fix them. But one thing’s abundantly clear: the management and trustees of Cooper Union have been unhelpfully opaque about the college’s finances for years, and the college’s students and alumni are fed up with the “trust us, we’ve worked it out this time” approach.

The first thing that’s needed, before any big decisions about things like tuition fees, is transparency about Cooper Union’s finances, and generally much more openness and clarity from management. After all, this is the place where contractor Jonathan Rose got a $2 million contract to oversee the new flagship academic building, while before* his mother Sandra Priest Rose sat on Cooper’s board of trustees — all without any kind of disclosure as to how he was selected. Was Sandra Priest Rose’s pledge of $5 million towards the building contingent on her son getting that contract? No one knows.

But transparency, it turns out, is exactly the opposite of what we’ve ended up getting. Yesterday, Cooper Union’s president, Jamshed Barucha, posted a “framework for action” on the college’s website. In it, we’re told that something called the Revenue Task Force has released an “interim report” which has “recommended” that Cooper “explore” charging fees for “academic programs that build on our unique strengths”, which “may include master’s and other professional programs”.

All of which sounds rather tentative, but in principle the timing here is propitious. Tomorrow sees the Second Community Summit at Cooper Union where the Task Force’s report could be discussed and debated.

Except, discussion and debate isn’t really what Cooper is looking for here. Barucha has not released the Task Force report, and shows no sign of doing so. And for all the qualifiers in his note, it’s quite clear that the decision has already been made. “Cooper Union to Charge“, says the WSJ; “Cooper Union Will Charge Tuition for Graduate Students“, says the NYT.

The WSJ is a good guide to the official Cooper Union line:

The school’s economic troubles date to the early 1990s, when rent it received from the land it owns under the Chrysler Building decreased from $13 million to $11 million while school expenses increased.

It’s far from clear that this is even true: Barry Drogin, for one, who has looked into this issue very deeply, says quite unambiguously that “the Chrysler Building rent and payments in lieu of taxes (PILOT) have risen steadily every year, with large increases scheduled every ten years starting in 2018.” In any case, the Chrysler-building-rent problem is long solved. Revenue from the building will be $32.5 million in 2018, $41 million in 2028, and $55 million in 2031. Cooper’s fiscal problems have nothing to do with insufficient income from the Chrysler Building, and the fact that Cooper still seems wedded to that storyline is worrying.

And then there’s this:

Mr. Bharucha said he has received backing for the plan in recent discussions with faculty and alumni nationwide. “There is very strong, if silent, majority who are highly supportive of a plan that energizes the institution,” he said.

I love the idea of a “very strong” majority which is “highly supportive” of this plan — and yet, for all their incredible support, are somehow completely silent. Bharucha might as well have said that pigs fly when you’re not watching them: his statement might be unfalsifiable, but at the same time it’s also completely implausible. Cooper’s stakeholders are incredibly mistrustful of Bharucha and the trustees, and it’s hard to see how even a silent majority could be supporting a plan which exists only in the vaguest possible form.

After all, we’ve been here before. In 2006, Cooper Union filed something called a cy pres petition, in a successful attempt to get New York to allow it to borrow money against the Chrysler Building. That petition only came to light years later: the whole process, at the time, was shrouded in secrecy. And you can see why that might be: even as Cooper was loudly proclaiming its health in public, the petition was saying that “The Cooper Union currently faces the possibility that it will become unable to carry out its statutory mission in the not-too-distant future”; that it “currently faces a grave fiscal crisis”; and that even faced a real risk of losing its academic accreditation.

As part of that petition, Cooper committed to implementing something called a Master Plan, which involved cutting spending, raising $250 million, increasing the amount that alumni donate to the school, and other things, none of which really happened. As the board of trustees reported in 2011, “three key components of the Master Plan were not achieved as anticipated” — all of which were vastly more germane to the current fiscal crisis than any change in Chrysler Building rents in the early 1990s.

In other words, there’s really no reason why anybody should trust Bharucha or the trustees — to have any faith that they’re being fully truthful with the rest of the school, or that they’re in any position to successfully execute on their promises.

And what of the huge new $160 million (ish) academic building? The trustees still say that it has nothing to do with the fiscal crisis, despite the fact that it’s responsible for some $10 million a year in interest payments:

It is also important to state that 41 Cooper Square was not the cause of the current financial dilemma. Its construction relieved Cooper Union of the costs that would have had to be incurred to renovate the old engineering building and the Hewitt Building to make them acceptable sites for a 21st century education and meet accreditation standards.

This just doesn’t pass the smell test. There’s some small possibility that it’s true, but unless and until the trustees show how they arrived at this conclusion, I have no reason to believe them. The engineering faculty actually voted against the construction of the new academic building, saying that they were more than capable of staying where they were at significantly lower cost. (This fact was, of course, not included in the cy pres petition.)

More to the point, there’s never been a coherent account of how exactly Cooper Union ever intended to pay off the massive $175 million loan it took out to construct the new building. It needed its income from the Chrysler Building to pay its annual costs; and of course it doesn’t have any tuition revenue, since it doesn’t charge tuition.

This is the main thing that has never been adequately explained — by constructing the new building, Cooper Union added on a permanent $10 million annual expense, without any stated means of being able to cover that expense. The new academic building is a sunk cost at this point, of course. But until the trustees explain their logic surrounding its construction, it’s going to be extremely difficult to trust them to do the right thing going forwards.

*Update: Finally, some clarity on the Jonathan Rose/Sandra Priest Rose question. Tellingly, it comes from Roxanne Donovan, a representative of Jonathan Rose Companies, rather than from Cooper Union. She says that Jonathan Rose was hired more than a year before his mother was invited to join Cooper’s board; she also says that there was a formal RFP process for the selection of Jonathan Rose Companies.

Why Cooper Union wasn’t able to be transparent about this itself simply baffles me, and really makes my point. Just because you’re being secretive doesn’t mean you have something to hide.

David Segal is the best writer on the NYT’s business desk, so it’s a good thing that he was chosen to pen today’s 5,000-word disquisition on the economics of law degrees. He’s taken a particularly dry subject and turned it into a compelling and accessible read; that’s no mean feat.

At the heart of the article is law schools’ bait-and-switch operation: universities rake in millions of dollars in tuition fees from students who are given to understand that a well-paid job lies waiting for them upon graduation. But such jobs are hard to find and precious few law graduates will ever waltz straight into a $160,000-a-year Biglaw job, especially if they graduate from a non-top-tier school.

The connection between well-paid jobs and top-tier universities is well known and as a result, there’s something of a statistical arms race going on between universities, all of which want to improve their rankings. Segal doesn’t quite accuse the colleges of outright lies, but he comes very close: at one point, for instance, he talks about the “several different explanations” which Georgetown Law provided to explain a suspicious-looking offer of temporary work to unemployed graduates, one of which claimed that the university — which was also the graduates’ employer — didn’t know where those alums were.

But I’m a wonk and I’d like to have seen a few more numbers in this piece. For instance, when Segal says that only “a small fraction of graduates are winning the Big Law sweepstakes”, I’d like to know what that fraction is: roughly what proportion of the nation’s law graduates, each year, is going to get one of those $160,000-a-year jobs?

And then there’s this:

In the Wonderland of these statistics, a remarkable number of law school grads are not just busy — they are raking it in. Many schools, even those that have failed to break into the U.S. News top 40, state that the median starting salary of graduates in the private sector is $160,000. That seems highly unlikely, given that Harvard and Yale, at the top of the pile, list the exact same figure.

Even at Harvard and Yale I’m suspicious of that $160,000 figure; for the non-top-tier colleges, it’s clearly fictional. No matter how many of your graduates go on to $160,000-a-year jobs, there’s always going to be a significant number who earn a lot less than that and there are going to be almost none who earn more. As a result, the mode might be $160,000, but the median will never be that high. (And in reality the distribution of law-grad salaries is highly bimodal, with the first mode at a much lower level.)

Dean Baker has a more serious criticism of Segal’s piece, noting that “most of the new jobs that are being created are at the top and the bottom of the skills level”. If that’s the case, he says, “then the NYT has seriously misrepresented the state of the legal market”.

I wouldn’t go that far. For one thing, I’m not sure that someone clutching a law degree from Thomas Jefferson School of Law in San Diego really counts as being at the top of the skills level; Segal’s whole point is that lower-tier law schools are churning out graduates who would have been better off not getting a graduate degree at all, partly because they could put their skills to better use in the world of employment rather than racking up hundreds of thousands of dollars in student loans.

But Baker’s point is well taken: “the economy,” he says, “could simply be suffering from a situation in which there are too few jobs in total”. Given the NYT acreage afforded him, Segal could and should have spent a little time looking at how the number of law-school graduates has changed over time and how their employment prospects have changed as well. If the number of graduates is holding roughly constant even as the number of jobs has plunged, then that looks like a problem with the broad economy more than a problem of law school mendacity.

Let’s say I earn $50,000 a year, and a widget costs $1,000. Then my pay goes up 3%, while the cost of the widget goes up 10%—year after year. Would you say that the widget has been getting more affordable over time? Stanley Fish would. Fish is approvingly citing a new book from Robert Archibald and David Feldman, which he quotes saying that “for most families higher education is more affordable than it was in the past”:

Here their target is a way of framing the issue. Usually the question asked is, “What percentage of a family’s income goes to the cost of higher education?” Archibald and Feldman prefer to “ask instead whether the amount left over after subtracting the cost of college is rising or falling over time.” The answer they give (buttressed by statistical tables) is “rising”: what their data show is that “over long stretches of time, college costs have been rising at a faster pace than income per worker, yet the average worker’s actual dollar income has gone up by more than the costs, leaving more resources on the family to spend on other things.”

I fear to think what statistical sleight-of-hand might be hidden in that qualifier about “over long stretches of time,” especially since in recent years real college costs have continued to rise fast even as real median incomes have gone nowhere or shrunk. But in general this approach to gauging affordability is absolutely bonkers: the percentage rise in price is completely ignored, and only the dollar rise in price matters. Using this technique, just about anything can be considered “more affordable than it was in the past.” If the widget rises in cost by $100 and my annual pay goes up by $1,500, that does not in and of itself settle the question of whether the widget has become more affordable.

What’s more, I haven’t read the book, but Fish’s take does seem to be at odds with its official blurb:

A technological trio of broad economic forces has come together in the last thirty years to cause higher education costs…

A college education has become less reachable to a broad swathe of the American public at the same time that the market demand for highly educated people has soared. This affordability problem has deep roots. The authors explore how cost pressure, the changing wage structure of the US economy, and the complexity of financial aid policy combine to reduce access to higher education below what we need in the 21st century labor market.

I’m also completely unconvinced by Fish’s explanation of the main reason behind cost inflation at colleges:

Chief among these is the change in the sophistication and cost of the technology that has at once transformed the setting of higher education and become one of the areas of knowledge higher education must impart to students. Students expect to be instructed in the new technologies, and that instruction requires their installation, and then as new refinements emerge, their re-installation. “[A] modern university must provide students with an up-to-date education that familiarizes students with the techniques and associated machinery that are used in the workplace the students must enter.”

Were colleges and universities to strike a Luddite stance and hold out for pencil, paper and blackboard instruction, they would “in effect be guilty of educational malpractice.” When it comes to incurring these new expenses, they “do not have a real choice.” In no sense, then, are changes in price “driven by any pathology in the higher education industry.

It’s true that computers are more expensive than pencils, and it’s surely true that some part of the typical college-tuition fee is spent on information technology. But we’re talking about fee inflation here: in order for Fish’s argument to hold water, IT costs at colleges would have to be rising faster than inflation year in and year out. Which strains credulity, in a world where IT is getting steadily cheaper and where a lot of IT services can now take place in the cloud. Even if the move into the cloud is only now beginning, I very much doubt that it’s ever going to result in a decrease in tuition fees.

The fact is that technology is a way of reducing the costs of education much more than it is a factor in their growth. That’s why Rupert Murdoch has just hired Joel Klein:

The likelihood that Murdoch’s education strategy will involve either charter schools or online college-diploma mills is very close to zero. Instead, it is all but certain to revolve around one of the most fertile areas of innovation today: the application of digital technology to learning. In the next few years, “what you’re going to see in educational software and new solutions and online learning is going to be game-changing,” says Klein, in terms of “the ability of new technology to both improve instruction and the quality of it through new learning platforms.”

“Archibald and Feldman,” says Fish, “allow us to say that at least in the area of costs the fault lies not in ourselves, but in the stars.” Which I’m sure is convenient for Fish, who describes himself as a “dean who encountered the rising costs of personnel, laboratory equipment, security, compliance demands, information systems and much more every day.” But it’s not particularly believable.

Gerald Epstein and Jessica Carrick-Hagenbarth have a 41-page paper out which gets boiled down quite effectively to its title: “Financial Economists, Financial Interests and Dark Corners of the Meltdown: It’s Time to set Ethical Standards for the Economics Profession”.

They took a group of 19 academic financial economists and looked for possible conflicts of interest — board memberships of financial institutions, consultancies, that kind of thing. They conclude:

In this study, we showed that the great majority of two groups of prominent academic financial economists did not disclose their private financial affiliation even when writing pieces on financial reform. This presents a potential conflict of interest. If this pattern prevailed among academic financial economists more broadly this, in our view, would represent an even greater social problem. Academic economists serve as experts in the media, molding public opinion. They are also important players in government policy. If those that are creating the culture around financial regulation as well as influencing policy at the government level for financial reform also have a significant, if hidden, conflict of interest, our public is not likely to be well-served.

The findings understate the severity of the situation in the real world, where most consultancies and substantially all paid speeches are kept secret. Financial economists tend to make a lot of money, most of it from the financial sector rather than their putative employers, and they’re very unlikely to disclose their income or their conflicts in public.

Paul Krugman is an interesting case in point:

Before I went to work for the NY Times I did a lot of paid speaking, mainly to investment bank conferences outside the US… My fee for overseas talks was usually $40-50K.

I do very little paid speaking now, and no consulting, because the New York Times has quite strict rules: basically I can only get paid for speaking to nonprofits that have no possible interest in influencing the content of the column. It’s a good rule – read Eric Alterman’s book “Sound and Fury” to see how speaking fees can corrupt pundits – though it meant that I took a substantial income cut to work for the Times.

Krugman is clearly comfortable with the idea that speaking fees can corrupt pundits, and thinks it’s a good idea that NYT columnists don’t accept them. Yet at the same time he had no problem accepting such fees as an economist, and I’m quite sure he never disclosed those fees when he was writing academic papers on financial subjects.

It seems obvious that when you’re regularly making significantly more than the median national annual personal income from giving a single speech, you’re prone to being captured by the people paying you all that money. And the secrecy makes things much worse. I once mentioned in passing on my blog a consultancy gig which I happened to know about and didn’t think was particularly secret. The consultant in question phoned me up extremely distraught, fearful that the employer, a hedge fund, would read my post and react to it with a whole parade of nasty possible actions. There’s no good reason for such secrecy on either the employer or the employee side — unless, of course, there’s something ethically suspect about the arrangement in the first place.

I don’t know what the solution to this problem is, but clearly more disclosure would be a very good idea. But it’s not going to happen: there’s too much money riding on the continuation of the status quo.

(Via Folbre)

Hello, Reuters readers. Thank you, Felix, for inviting me and Justin to guest blog while you're away. I promise to make the most of my newfound form of procrastination.

Over the weekend, the NYT ran a piece about academics rediscovering the "culture of poverty." The story goes that for decades it was taboo to offer social, as opposed to economic, explanations about why particular people and neighborhoods were poor—unless, of course, you belonged to a certain camp of conservative critic. According to the Times:

The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a "culture of poverty" to the public in a startling 1965 report. Although Moynihan didn’t coin the phrase (that distinction belongs to the anthropologist Oscar Lewis), his description of the urban black family as caught in an inescapable "tangle of pathology" of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune.

Now, it seems, culture is again fair play. Over the past few years, culture-informed explorations of poverty have been seeping into the research literature. High-profile examples include these Princeton/Brookings papers about unmarried parents and this special issue of The Annals of the American Academy of Political and Social Science (which led to a recent Congressional briefing). Nobel-winning economist George Akerlof goes down this path in his new book, Identity Economics: he and co-author Rachel Kranton argue that students decide how much to invest in their education (i.e., their earning potential) partly by whether they see themselves as fitting into the culture of the "nerd," the "jock" or the "burnout."

I'm all for understanding the nature of poverty, but the culture lens makes me nervous. Maybe that's because right after I read Identity Economics, I read The Trouble With Diversity, by Walter Benn Michaels, an English professor at the University of Illinois at Chicago. One of the main arguments of that book is that there is a lurking danger in turning a conversation about economics (poor people don't have money) into a conversation about culture (poor people have different values and make different life decisions). The big risk: since Americans are loathe to judge one culture as superior to another, we will come to accept poverty as a valid alternative. You're not poor because you can't get a job that pays enough to cover your bills (a failure of education, the free market, etc)—you're poor because you are part of a different culture, which, in diversity-committed America, we all have to respect.

The other thing that worries me about the culture frame is that so much rests on the categories we use to try to capture "culture." Akerlof's nerd-jock-burnout rubric is clear-cut and colorful. But is that where the truly useful information lies?

One of the best things I've ever read about the nature of poverty is Kathryn Edin and Laura Lein's 1997 book, Making Ends Meet. Edin and Lein, a sociologist and anthropologist, spent long periods of time interviewing poor single mothers—most of whom both received welfare checks and undertook some sort of paid work. When deciding the right balance between welfare and work, the mothers certainly took into account which paid better. But they also considered which would allow them to be better mothers by spending more time with their children, and which would provide a more predictable (even if lower) stream of income. Devotion to full-time motherhood definitely reads as a cultural value. But does the preference for income predictability?

If we look at poverty in terms of culture, we might be missing an important part of the puzzle. Let's not forget something else that Daniel Patrick Moynihan once said: “The reason people are poor is that they don’t have money.” Sometimes an economic problem is just an economic problem.

The noise surrounding a perceived rotation out of Israeli stocks by the Harvard endowment is really rather hilarious. Benjamin Joffe-Walt has managed to amass a whole sequence of quotes from people who have no idea what they’re talking about: one person is calling on “all academic institutions in the US” to follow Harvard’s lead and “divest from Israeli war crimes”; a second claims Harvard “still have tens of millions of dollars invested”; and a third comes up with the convoluted explanation* that it’s all to do with the fact that Morgan Stanley no longer considers Israel to be an emerging market:

“There are some funds which invest only in emerging markets,” continued Heen, the Cellcom CFO. “So Harvard had to sell our stock because Israel is no longer classified as an emerging market and they no longer have the ability to hold this stock within the emerging markets fund.”

Needless to say, university endowments, more than any other investors, are entirely unconstrained by such concerns.

The fact is that the Israeli holdings itemized in Harvard’s 13-F only added up to $41 million in the first place, or about 0.15% of Harvard’s total endowment. But it’s all pretty meaningless anyway, since the 13-F itself only accounts for a small fraction of the endowment’s total exposure.

The chances of this move being at all politically motivated are remote: the most recent concerted attempt that Joe Weisenthal can find to get Harvard to divest from Israel dates all the way back to 2002. And I’m sure that if you looked at all endowment 13-Fs on a quarterly basis, you’d find that every quarter a pretty large number of endowments will turn out to have sold out of some small market or other. It’s just that by sheer coincidence, this time it’s the two big hot-button names, Harvard and Israel, and hence there’s lots of headlines.

Next quarter, or the one after that, a few Israeli holdings are bound to reappear in Harvard’s 13-F. I wonder whether anybody will notice that.

*Update: The explanation might be convoluted and implausible, but according to a statement from Harvard, it also seems to be true!

The University has not divested from Israel. Israel was moved from the MSCI, our benchmark in emerging markets, to the EAFE index in May due to its successful growth.

Our emerging markets holdings were rebalanced accordingly. We have holdings in developed markets, including Israel, through outside managers in commingled accounts and indexes, which are not reported in the filing in question.

For some reason, it seems that Harvard’s EM holdings get itemized in its 13-F, while its EAFE holdings are run through external managers and don’t get itemized. No big story here.

If you fancy some iPad reading for the Memorial Day weekend, you could do a lot worse than to download this Tellus paper into GoodReader or similar. It’s titled “Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System; the lead author, who writes very clearly and readably, is Joshua Humphreys.

I’m still working my way through the whole thing, but my initial impression is very positive. Humphreys points out in great detail, for instance, the downsides associated with giving university endowments charitable status and allowing them to issue tax-free bonds; I don’t know what happened to the tax which was being mooted a couple of years ago, but maybe it’s time to revisit it, especially since opposition to the idea even back then was so weak.

Humphreys also notes that university endowments in many ways exacerbated the financial crisis, as well as doing great harm to their own university budgets and their local economies. Meanwhile, their governing boards tend to be incredibly conflicted, with more than half a dozen trustees on Dartmouth’s board alone having managed investments for the endowment.

Humphreys has his own axe to grind: a long-time advocate of socially responsible investing, he makes the case that “as long-term investors, colleges and universities have an important stake in the sustainability of both the wider financial system and the broader economies in which they participate. Rather than contributing to systemic risk, endowments should therefore embrace their role as nonprofit stewards of sustainability.”

This makes sense to me, especially if university endowments are going to operate under the umbrella of charitable status. But even if they want to continue to chase absolute returns, it’s clear that the endowment model massively overestimated their appetite for illiquid assets. The idea was that because they’re investing with the longest conceivable time horizon, they can put a lot of their money into highly illiquid investments. But then they got bit by the fact that their universities were naturally likely to fall back on endowment monies at precisely the point at which illiquid markets seize up completely. Endowments should be countercyclical buffers, when it comes to universtity finances, not pro-cyclical exacerbators of financial crises.

And they should also be a lot more transparent than they are. Writes Humphreys:

When reported, school-specific data are nonstandardized, inconsistent, incomplete and fragmentary, and scattered across municipal, state, SEC and IRS filings, incommensurable annual reports, and costly proprietary financial databases unavailable to the general public.

There’s no excuse for this. Let’s force endowments to standardize their public reports, and show, rather than tell, just what their highly-paid employees are doing to deserve all their millions of dollars in remuneration. And let’s force them, too, to spend a lot more time concentrating on liquidity risk management, and to cast a skeptical eye on the amount of leverage that these institutions really need. Humphreys finds, for instance, a 2007article by Geraldine Fabrikant about Jack Meyer, containing this astonishing number:

When Mr. Meyer and his team were at Harvard, the endowment was known for making money by betting on small pricing differences between different kinds of securities.

For example, Mr. Meyer and his team might capitalize on the price difference between new Treasury issues and older ones. And to magnify gains, they would leverage those bets as much as 15 to 1.

That sounds very much like LTCM to me, and I think everybody can agree that we don’t want university endowments to be LTCM. And I’m not sure that it’s at all possible, with hindsight, to justify these kind of salaries:

It’s true that if you want massive returns on your endowment, you’re likely to end up paying massive salaries to the people who manage it. But you’re also likely to start spending future endowment gains you don’t yet have, and end up with a billion-dollar hole in the ground. It’s good for universities to be ambitious. But not if their ambitions expand to the point at which they feel the need to start selling off their own donated art just to keep the lights on.

I’m a great believer in the benefits of an undergraduate education when it’s done right (which is rarely). But grad school is a different matter entirely: the opportunity costs are much higher, the amount of debt involved rises substantially, and the range of jobs you can do at the end of it in many ways goes down rather than up.

Thomas Benton has a great column about grad school in the humanities: no one should do it, he says, unless they’re independently wealthy or otherwise being paid for somehow.

But what about more vocational graduate degrees, like law school? Anybody thinking about it should read not only Elie Mystal’s post at Above the Law but also the long comment stream attached, filled with people like Elie who graduated from law school with six-figure debts and found themselves either stuck in Biglaw jobs they hated, or else just simply overwhelmed by impossible finances.

It’s also worth noting the bimodal distribution of law-graduate salaries:

In order to make law school work (assuming you’re not paying cash for your tuition and living expenses), you basically need to end up in that second hump, over to the right: Biglaw, as it’s known. But a glance at the chart shows that most law students won’t make it there.

Here’s Benton, talking about humanities students, but with a lot of applicability to other fields too:

The letters I receive from prospective Ph.D.’s are often quite angry and incoherent; they’ve been praised their whole lives, and no one has ever told them that they may not become what they want to be, that higher education is a business that does not necessarily have their best interests at heart. Sometimes they accuse me of being threatened by their obvious talent. I assume they go on to find someone who will tell them what they want to hear.

Right now, a lot of people are thinking of going back to school, just because unemployment is high and well-paying jobs are hard to find. But anybody doing that should be very careful indeed about the debts they’re racking up. They could end up hurting much more than any degree will help.

(HT: O’Dell)

Update: Just found this astonishing chart, from Mike Mandel. It speaks for itself, I think:

Did you know that it’s possible to get a PhD in financial journalism? Lennie Fuller does — he’s a former Lehman executive who’s now thinking of doing exactly that at Stirling University. He asked me if I had any ideas about possible thesis topics, and I thought in my bloggy way that throwing the question open might be interesting. So what do you think the big open questions in or about financial journalism are?

Fuller is a qualified Scottish Chartered Accountant, and wonders whether something similar to the CFA might not be implemented in financial journalism: should journalists be regulated or qualified before going to work? If you don’t really understand something like structured finance, is it possible to write sensibly about it?

My feeling on this one is that the arguments against such a scheme are so overwhelming as to render any thesis on the subject pretty moot. Freedom-of-speech principles alone would more than suffice, as would the simple fact that the public would not be well served by any scheme which served to further perpetuate the degree to which journalists have been captured by the financial institutions they cover.

That said, one interesting thesis topic might be an empirical look at the expertise of the people who produced the best journalism of the crisis. Certainly the trade press, where one finds a great deal of narrow expertise, failed utterly to grasp the bigger picture. What kind of qualifications or knowledge, if any, did the best journalists of the crisis have in common? My feeling is that the main qualification that journalists needed was a strong and healthy skepticism of authority figures, including senior bankers, central bankers, and regulators. And that’s not a trait one learns by studying overcollateralization waterfalls in detail.

Fuller also wonders whether financial journalism “should only be investigatory as all other information is freely available in the market” — which seems to me to ignore the mechanism (journalism) by which an enormous amount of information enters the market. (There’s a reason why all those trading floors are surrounded by screens tuned to CNBC, while the trading screens themselves invariably have full feeds from Reuters and Bloomberg.) More generally, I think that people like Fuller, who are looking at financial journalism largely from the perspective of a financial-market professional, have to be careful to remember the crucial public role played by journalism. Just because information is “in the market” doesn’t mean that it’s known by the general public. And it’s the job of journalists to intermediate between the two.

More generally, it’s the job of journalists to interpret what financial-market professionals are doing and to explain it to a generalist audience. Yes, market activity can be complex, and as a result some of the subtleties will be missed. The professionals might not like that, but if they already know everything that the article is talking about, then it’s not aimed at them anyway. One of the biggest lessons that financial journalists have learned over this crisis is that we collectively spent much too much time writing about deals for bankers and lawyers, and much too little time writing big-picture articles for the general public which would require broad, rather than narrow, understanding of what was going on.

Finally, Fuller asks when sources become insider trading: the simple answer is never, if you don’t trade, and there’s really no reason for journalists to engage in such activities. More generally, the only insider information that journalists ever really have is the inside information of what is going to appear in tomorrow’s paper. If you trade in advance of a market-moving story appearing, that’s very bad. In other cases, you’re not an insider, so you can’t be guilty of insider trading.

But that’s just Fuller’s ideas. What other ones are there? I’d be interested in looking at the difference between the trade press and the consumer press, for starters, and how they can learn from each other. I’d also be interested in asking whether there’s a fundamental conflict of interest in the financial-press business model: how can we financial journalists be expected to hold the industry to account if we’re ultimately being paid by that very industry?

And does anybody know of any other PhD programs in financial journalism? What have the results been to date?

Bloomberg takes a dive into the Harvard swaps fiasco today, and uncovers some pretty juicy information. For instance, check out Larry Summers’s state of mind when he was entering into the swaps:

Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.

“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”

Money? Don’t worry about money. Larry can take care of all that. He’s Larry! And Larry was certain of two things: firstly that his beloved Allston project was a go — despite the fact that he hadn’t raised the funds for it, and secondly that interest rates would rise by the time construction started. Therefore, he decided to lock in funding costs by using forward swaps.

At the same time, Larry decided to be cheap (in a move which turned out in the end to be incredibly expensive). He could lock in funding costs simply by buying an option, but that would, you know, cost money. The swaps, by contrast, required no money up front. So, that makes them better!

We all know what happened next: Summers was ousted as president of Harvard, interest rates plunged, and the university decided to issue new bonds in order to be able to pay a billion-dollar ransom to get out of the swaps contracts.

You can’t blame Summers for the timing of the exit, which couldn’t have been worse: Bloomberg quotes swaps adviser Peter Shapiro as saying that “December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money. Not only was the 30-year swap rate a mere 2.69%, down sharply from 4.25% in November, but the credit spread for non-sovereign AAA-rated issuers like Harvard also hit an all-time high, maximizing Harvard’s borrowing expense.

In hindsight, the decision to exit the swaps was just as disastrous as the decision to enter them: swap rates are now back up to their December 2004 levels, which means that had Harvard simply waited, it could have exited at no cost whatsoever.

The big winner here is JP Morgan, which both wrote most of the original swaps and which underwrote the bond deal which allowed Harvard to exit them. After the bond deal closed, JP Morgan bankers went out to dinner at Mistral in Boston to celebrate with Harvard officials.

Not that they picked up the bill. To the contrary, JPMorgan invoiced the Massachusetts state finance agency $388.78 for three employees who attended. Classy, that.

(HT: TED)

Most people, if they’ve hired a legendary fund manager on a multi-million-dollar salary to look after investments and liquidity, would listen to the advice of that person. But most people aren’t Larry Summers:

It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing – or mismanaging – its basic operating funds.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears.

Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%. No wonder Meyer and El-Erian tried to talk him out of it: the Harvard endowment was never designed as a place to invest sums of cash which might be needed immediately. Instead, it’s designed to invest for the very long term, taking advantage of the higher returns on illiquid investments.

Summers was playing a high-risk carry-trade game with Harvard’s cash:

The aggressive investment of cash accounts is part of how the university has long run its “central bank,’’ an account that holds funds from its various schools and pays them a modest US Treasury rate of return. The “bank,’’ in turn, has invested the lion’s share of that money with the endowment, generating returns that are used to pay for shared needs, like graduate housing and financial aid.

No one had the stones to stand up to Summers when it came to this high-risk strategy of essentially borrowing at Treasury rates and investing the proceeds in an illiquid long-term endowment — certainly not James Rothenberg, Harvard’s part-time, unpaid, California-based treasurer.

After Summers left, sheer inertia took over, and nothing happened — maybe because El-Erian was soon on his way out as well. The result was that the university ended up losing 27% of its $6 billion in “cash”: a whopping $1.8 billion. There’s no indication, of course, of any kind of apology from Summers.

Update: Brad DeLong, in the comments, does some back-of-the-envelope math and reckons that Harvard came out ahead of the game, on net, even after accounting for that $1.8 billion loss. But that’s exactly the difference between a long-term endowment, on the one hand, and a “cash account”, on the other. If you have money in a cash account, you spend it. And money you’re spending should be liquid, not tied up in an endowment which can drop 27% in one year.

And Viyada York says that Harvard’s investment committee, rather than Summers, should be held responsible for the loss. It’s true that the managers of the endowment are responsible for its performance. But they’re investing for the long term. Summers should absolutely be held responsible for the decision — which was entirely his — to invest the Harvard cash account alongside the endowment, despite the fact that the cash account required much more liquidity than the endowment as a whole.