Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System (A Study of Six New England Schools)

Abstract:     
Provides comparative analysis of six New England college endowments (Boston College, Boston University, Brandeis, Dartmouth, Harvard, and MIT) during the financial crisis of 2007-2009. The paper identifies deep-seated problems with the influential, radically diversified "Endowment Model of Investing," pioneered by wealthy schools such as Harvard and Yale. It argues that endowment "performance" must be measured beyond portfolio-level risks and returns, and to that end it explores endowments' contributions to systemic risks in the "shadow banking system" and estimates social costs (job losses, project delays) of endowment declines on local communities and regional economies in the Boston metropolitan region and the Upper Valley of New Hampshire and eastern Vermont, using RIMS II. We analyze freshly aggregated data panels on endowment growth, asset allocation, illiquidity (making novel use of Fair Value Hierarchies), borrowings and debt ratios, board composition and conflicts of interest, workforce and compensation trends, payments in lieu of taxes (PILOTs) on exempt property. The paper includes detailed appendices of identified investment holdings at each school, within limits of transparency (2008/2009).

Number of Pages in PDF File: 104

Keywords: Endowments, Finance, Investment, Risk, Systemic Risk, Social Costs, Unemployment, Social Impact, Sustainability

working papers series