Picture of Harvard University
I have been following the cascading financial crisis with some interest especially as it pertains to the business of higher education — and what a business it is! The Wall Street ‘crisis’, or bankster fraud, has not only changed the economic geography of Wall Street, housing, credit, health care and employment since it reared its ugly head in 2008, but it has gobbled up colleges and universities in the process leaving both students and faculty financially and socially shipwrecked. Colleges and universities that once boasted as serving our nation and our children have been transformed in many cases into ‘mini-investment’ banks with highly questionable profit-driven intent replete with suspicious players and shadowy characters in Armani suits. The privatization frenzy that began with Reagan and saw its muscular rise and hefty fruition in the Clinton years has swarmed many of the nation’s leading universities and state colleges with devastating results for students, faculty, staff and of course the nation as the colleges now are swimming in a sea of debt as are the students. The privatization efforts have been led by the presidents or as they would prefer to refer to themselves — ‘enlightened CEO’s’ — of the colleges and universities. They are little more than charlatans and at best either hand tools for the crime syndicate that is American economics are worse, perpetrators.
At issue is the matter of tuition fees paid by students throughout the years that have been redirected from investment by the colleges and universities in funding traditional loans that pay moderate interest, to risky capital construction loans (often fueled by ‘hard money’) and questionable investments into hedge funds and derivatives that ultimately leave the banks as beneficiaries and the student-faculty-workers as victims.
Before we look more deeply into the situation at Sonoma State University in California, home of Project Censored and my alma mater, it would be helpful to see how the colleges and their foundations, boards and presidents have conducted the affairs at various colleges. This will then give readers an idea as to the complexity and often criminal if not suspicious practices of some of our nation’s leading universities and colleges and just show they have pledged student fee increases to the capital bond markets and shifty real estate deals while at the same time honing false reputations as competent stewards of our nation’s higher educational facilities.
In this three part series we will look at the practices of three universities (Harvard University, Brandeis University and Sonoma University to gain some semblance of understanding of how our system of higher education has become transformed into a vehicle for financial investment and higher profits and bonuses, forcing the colleges to continually raise tuition and fees for campus capital construction projects while slicing salaries and student services to pay the cost. This is all owed to the erosion of public funds for the universities and colleges and their naked reliance on private investment to stay afloat and ‘compete’ in the free-market.
The Case of Harvard University: ‘Borrow to Build’ and the Allston Science Labs
As I wrote in my article back in April 2010 at Daily Censored:
“Larry Summers, the Obama administration economic advisor could be responsible for unilaterally destroying the Harvard University endowment fund (Harvard Corporation) as a result of the Milton Friedman market advice he gave the Harvard fund’s management during his awful tenure as Harvard University president from 2002 to 2006.
Summers, who up until recently operated as the director of the White House National Economic Council, called for the fund to engage in casino gambling as an economic strategy – debt and derivatives. As a result, the Harvard endowment fund engaged in derelict investment strategies, including derivatives that have now chained the nation’ largest university endowment with billions of dollars in un-coverable toxic assets and knee-bending debt. The consequence is that the Harvard endowment, which had climbed to $36.9 billion in June 2008, has since lost 30 percent of its value, dropping to $26 billion, according to Bloomberg News. That’s a steep loss and will be paid for in the lives of the Harvard community, students, working people and the general public; in fact it already is.
In October 2009, Harvard University paid $497.6 million to investment banks to get out from $1.1 billion in interest rate swaps that were intended to hedge variable-rate debt for capital projects, Bloomberg reported. This has been the strategy of the high-end universities, to invest their student fees and exorbitant investments into buildings and capital structures with Wall Street banks, not students and education. The large ATM style investment strategy has left Harvard with bleak prospects and downsized any chances the giant university will get off its knees” (Dereliction of Derivatives and the deliquescence of Harvard, April 22, 2010. http://dailycensored.com/2010/04/22/dereliction-of-derivatives-and-the-deliquescence-of-harvard/).
The result of the toxic economic advice Summers gave the fund was that the average yearly expenditures for the facilities jumped from under $150 million in 1995-2000 at Harvard, to $495 million from 2001-2005, to $644 million in 2009. Why? The building campaign unleashed by Harvard. This is the great real estate investment scam that no one knew about under the tutelage of the great prevaricator, Summers and is in keeping with the same toxic financial advice given many other pension funds and institutions of all sizes throughout the nation.
As the Boston.com online newsletter reported:
“The story goes back to 2001. With much fanfare about President Lawrence Summers’s bold vision, Harvard started a building campaign, mostly to grow the size of its science facilities by more than a third. Average yearly expenditures for facilities jumped from under $150 million in 1995-2000 to $495 million from 2001-2005, to $644 million in 2009. The Faculty of Arts and Sciences - about half the university - grew from about 600 professors before 2001 to 700 in 2006 and was projected to reach 750 by 2010. With this growth spurt already underway in 2004, Summers told the faculty not to think small. Its ambitions were limited only by its imagination, he said - Harvard could always come up with more money from its “deeply loyal friends” (Shrouded in Secrecy, decision makers gambled and Harvard Lost, Abernathy, F. Lewis, H. December 12, 209 http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2009/12/12/shrouded_in_secrecy_decision_makers_gambled_and_harvard_lost/).
So, Summers steered the university into debt, borrowing from major Wall Street banks based on projections of growth that were hideously absurd and laced to incorrect assumptions about the US economy. So much for his claim that men are more intelligent than women. Now, with the collapse of Wall Street and the toxicity of capitalism, all this growth has come to a crashing halt and the university finds itself with long-term investments down a whopping $11 billion; another $1.8 billion lost by top management speculating with cash accounts; another half-billion gone in an untimely exit from a debt rate gambit. The institution is so illiquid that it was forced to sell assets and issue bonds at the worst possible time, just to pay the bills (ibid). The Allston Science Laboratory, the construction dream of Summers and others has been shelved. The building remains ‘under construction’, much like the economy that birthed it. But not to be chagrined: Summers and crew have new construction plans.
This January 2011, Allston residents expressed both excitement and distrust at the Allston Task Force meeting which focused on the Harvard Business School’s plan to build an Innovation Lab in their neighborhood. Allston Civic Association President Paul Berkeley suggested at the January 2011 meeting that the new I-Lab project has the potential to compensate for the businesses lost in the past decade as a result of Harvard’s decision to halt construction on the Harvard Allston Science Complex, the $1 billion dollar boondoggle project. According to Gabe Handel, managing director of Business School Dean who was also present at the meeting, a timeline is now in pace and at a January meeting he highlighted the benefits local businesses and entrepreneurs will gain from the I-Lab—a space where locals and University affiliates could discuss and realize their business plans through collaboration. What about the students and faculty? It seems that now that Summers is back business can proceed as usual and the same old dusty rhetoric of prevarication and lies will be conjured up with new language and presented in a power point presentation that will of course serve to benefit the elite Wall Street kingpins and deal-makers (http://www.thecrimson.com/article/2011/1/21/harvard-allston-project-community/). And as to students; with costs out of range for most the new Wall Street shuffle will most likely be done by the burgeoning middle classes of China and Asia, for after all with wages falling, jobs scarce and student loans now totaling close to one trillion, with a ‘T’, American students have no chance of getting into the school anyway.
The Elite were warned but gambled recklessly
Summers and the administration at Harvard were warned of the huge deficits that Harvard was running up for construction projects. Professor Caroline Hoxby addressed the Faculty of Arts and Sciences on behalf of a committee charged with scrutinizing the administration’s plans. According to Hoxby, the Arts and Sciences budget - roughly $1 billion - was in balance, but with all the growth that was underway, she said, by 2010 it would be in deficit by at least $108 million (ibid).
The largest part of the looming deficit was the interest payments to Wall Street banks for the massive loans taken out by the university to fund the construction projects and the Allston Science Lab. According to the Boston.com, the buildings were mostly debt-financed. This was not keeping with Harvard’s past record of assuring they had the money before authorizing construction. Add to all this the cost of the salaries of the new faculty that was hired and the costs associated with developing the Allston science labs and the shortfall was obvious to anyone who wished to look. But Summers did not, nor did the Harvard Corporation.
According to the Boston.com article, The Faculty of Arts and Sciences that had managed to save up $73 million couldn’t cover the new and future costs of construction, salaries and overhead, but their monies were used to balance the budget. The practice of selling endowment assets wouldn’t work either, because almost all those funds had to be used as donors had stipulated when they donated the monies. The Harvard administration could not just use this money for willy-nilly construction projects. So there remained only a few possibilities left to Harvard to raise the costs needed both in the short term and in the future: they needed to get a lot more money from donors, they needed to raise fees and cut back on salaries, raise tuition, cut pensions and services and they needed to assure that the university got very high investment returns.
The collateral damage has already been felt by faculty and staff. More than 1,600 of Harvard’s staff were offered early retirement in spring of 2009 (more than 500 accepted, taking invaluable knowledge with them). It is why 275 Harvard workers were terminated last summer. And it is why the magnificent Harvard library will buy fewer books next year (ibid).
The Boston Herald noted March 18, 2010 that tuition fees were rising at Harvard by 3.8%. The school announced in March that tuition and room and board will now cost $50,724 for the 2010-11 academic years. Fees will make it even more expensive (Harvard Hikes Tuition by 3.8%, March 18, 2010 Herald Staff. http://news.bostonherald.com/news/regional/view/20100318harvard_hikes_tuition_by_38_percent/srvc=home&position=recent).
Steering Harvard into debt is something that Larry Summers not only did well, but he continued to propose similar rancid economic policies as an advisor to the Obama administration. He is now ‘returned’ to Harvard, roaming the halls of ‘higher education’ with the same peripatetic hubris and ego-centric arrogance that got the school and indeed the country in such a fine economic and political mess. In spite of all this congratulatory handshakes and giddy corporate press coverage the corporate press has now served to cover up his crimes for most Americans. Isn’t it great to know that he is now back at Harvard?
In part two we will look at Brandeis University and its economic collapse. Part three will finish the series with a look at Sonoma State University, home of Project Censored.