Unanswered Questions: Thinking For Ourselves
The Promis-Like Profits Of The Harvard Endowment
by Scoop’s Real Deal Columnist Catherine Austin Fitts
The Boston Globe's article of September 23, 2000 (Click to read
) is an interesting follow up to Catherine Fitt’s “Money Lords of Harvard” (Click to read
) and NewsMakingNews’ “Harvard Series” ( Click to read the series
). Here are seven points worth noting:
1. The article describes Harvard Endowment's above market performance of the last year, 32% for Harvard relative to 7.3%
in the Standard & Poor 500. This is attributed to a 155% increase in private equity portfolio, which is 15% of the total. This is an
astonishing performance for the private equity portfolio, particularly coming as it has from a sustained above market
run from 1996 on.
2. When I was a partner at Dillon Read, Dick Bianco, my partner who ran Capital Markets, insisted the accountant for
the trading groups sit in his office, providing him with a continuous feed of how we were doing. Whenever anyone would
outperform the market within a 24 hour period, Dick would emerge and boom out his demand for an immediate explanation
"Tell me, why am I so lucky?"
3. Now that the Harvard Endowment has outperformed the market, not for 24 hours, but for five years, the question
remains unanswered "How is Harvard so lucky?"
4. In the two investments (NHP, Inc. and WMF, Inc.) in which I experienced the investment strategies of the private
equity group, my impression was there were reasons for why they were so lucky that warrant a deeper look by the Harvard
community. See my article, "The Money Lords of Harvard, How the Money Works at the World's Richest University" in
NewsMakingNews. I quote, in particular, one sentence:
"What was most surprising to me was how much money taxpayers and homeowners had to lose to satisfy the private housing
industry's appetite for short term capital gains --- when alternative policies and business plans were available that
could have ensured success for all concerned."
In short, certain kinds of coordinated behavior by private investors results in a world where the rich get richer and
the poor get poorer, and in a manner that destroys total social and economic wealth. This is why various forms of
financial fraud, so hard for the public to discern, can exact a heavy toll on a society and economy.
5. My recent research on Harvard Endowment was inspired not by my own experiences with the Harvard private equity
portfolio and its manipulation of government policy to serve its endowment profits, but by allegations by members of the
media and intelligence community about:
- Harvard's private equity role in Harken Energy and Harken's role in promoting George W. Bush --- and in a number of
Iran-Contra financial frauds.
- The role of Pug Winokur, a member of the board of the Endowment and the Harvard Corporation, and his investment
company, Capricorn, in a defense contractor, DynCorp, involved with the management and development of PROMIS software.
PROMIS provides access to worrld- wide banking and government data that is supposed to be subject to privacy laws.
Allegations regarding the use of intelligence from the PROMIS system for insider trading and market manipulation are a
bit like the gopher in the movie Caddy Shack ---- they just keep coming up. Capricorn does not disclose its investors,
so it is uncertain whether Capricorn is a vehicle for Harvard's private equity portfolio.
6. Harvard Endowment dedicates a relatively small portion of its earnings to fund education. The majority of profits
are reinvested and rolled over tax free. This retention policy means the Endowment's mission is not primarily education,
but to serve as a multi-generational tax free private investment club. If the American people are going to offer
substantial tax benefits to small private investment groups who invest, profit and reinvest for their own private
benefit, the time has come that they been held to the Securities and Exchange Commission disclosure standards applied to
numerous investment vehicles.
7. The spectacular above market returns of Harvard Endowment since 1996 call for an analysis of how it is that Harvard
is so lucky, and whether Harvard's luck benefits a wider community, or simply a few. One place to start is to (i) review
who has been buying the private equity portfolio positions, (ii) examine how do their purchase prices compare to market
valuations and (iii) look at the impact of government policies on the valuations. For those not familiar with the use of
above-market purchases at the top of a bull market, see Pete Brewton's book on the S fraud in Texas, "The Mafia, CIA and George Bush."
HARVARD ENDOWMENT ZOOMS A THIRD TO $19.2B
Author: By David Abel, Boston Globe Correspondent.
Date: 09/23/2000 Page: F1 Section: Business.
Patrick Healy of the Globe staff contributed to this report.
Harvard, already the world's richest university by far, last year added significantly to its
fantastic wealth: The school's endowment jumped nearly a third, to $19.2 billion from $14.4 billion.
That's larger than the annual budgets of 142 countries, including Cuba, Jordan, and Lithuania.
The $4.8 billion dollar increase alone is larger than the total endowments reported last year by some of the nation's
other top universities, including the Massachusetts Institute of Technology ($4.3 billion), Columbia University ($3.6
billion), and Dartmouth College ($1.7 billion).
Many institutions expect to see a significant increase in their endowments this year, but Harvard's will likely extend
its financial lead over other top universities.
What does such a significant increase mean for Harvard's 18,000 students and 2,000 faculty members?
"I don't think this should signal any kind of sea change," said Joe Wrinn, a Harvard spokesman.
"A university has to think long term and about the cyclical nature of the economy. We don't know what our future needs
will be. But we're very appreciative of what the management company has accomplished."
The 32 percent return on the university's more than 8,600 investments was higher than in any other year since 1983. The
Standard & Poor's 500 index rose 7.3 percent over the same period.
The principal reason for the jump was a 155 percent return in private equity investments, which includes venture
capital. Harvard is one of the few colleges that has enough money to invest in such accounts, which are considered
speculative. Still, those investments represent only 15 percent of Harvard's portfolio.
"We've always maintained a well-diversified portfolio," said Jack R. Meyer, president of Harvard Management Co., which
oversees the endowment. "We're happy about where it is, and we'll be happy if venture capital does well again. But we're
not planning any changes."
Most schools have yet to report their endowment returns. Last year, 34 colleges reported endowments above the
billion-dollar mark, and the average rate of return was 11 percent. The highest return was about 29 percent, according
to an annual study by the National Association of College and University Business Officers.
"Obviously Harvard has done extremely well," said Damon Manetta, a spokesman for the association. "That's probably an
indication of how the rest of the institutions are doing."
The real question now for Harvard deans is what percentage of the endowment they will devote to the university's
Traditionally, the average spending rate for colleges is about 5.5 percent. Harvard, which provides generous amounts of
financial aid but now costs students an estimated $33,110 per year, devotes 4 percent to 5 percent of its endowment to
its operating budget.
"The critical question for Harvard is what are its priorities," said Gordon Winston, an economics professor at Williams
College and director of the school's Project on the Economics of Higher Education.
"If they use it to significantly increase access to a superb education like Harvard, that's not faulting them. But it's
also questionable whether children of the wealthy should get a Harvard education for nothing."
Harvard's endowment comes from donations as well as investment income.
In December 1999, the university ended a seven-year capital campaign that set a record in higher education philanthropy
by raising $2.6 billion.
In total through fiscal 2000, the endowment surpassed investment benchmarks in almost every account. Returns failed to
beat benchmarks only in emerging markets investments and inflation-indexed bonds.
Last fiscal year's increase more than doubled the previous year's 12.2 percent return and is higher than the 23 percent
average return between 1996 and 1999.
For now, Harvard officials say they don't expect their success to change next year's investment strategy.
"The lesson, I would say, is that it's possible to earn substantial returns while still maintaining a pretty diversified
portfolio," Meyer said.
(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed
a prior interest in receiving the included information for research and educational purposes.)
Author: Catherine Austin Fitts © 2000 (All rights reserved) http://www.solari.com
Catherine Austin Fitts is the President of Solari, Inc. She is a former member of the Board of Directors and partner of
Dillon Read & Company, a former Assistant Secretary of Housing in the Bush Administration, and President of The Hamilton Securities
Group. Ms. Fitts is a member of The Economics Club of New York and the board of the Friends Select School. She is a
graduate of the University of Pennsylvania (BA) and the Wharton School (MBA).