Study: Colleges Caused Financial Crisis

A report written by Harvard Lecturer Joshua Humphreys and issued by the Center for Social Philanthropy at the Tellus Institute suggests that the “higher-risk, higher-return” manner in which the University invests its endowment has worsened the financial crisis.

In the 2009 fiscal year, Harvard’s endowment decreased 26 percent—roughly 11 billion dollars—due to the national market crash in the fall of 2008.

The report, titled “Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System” states that university endowments that engaged in high-risk investments “played a role in magnifying certain systemic risks in the capital markets.”

The paper, which was released on Thursday, examines five other private universities in New England in addition to Harvard. Funded by the Service Employees International Union, the report alleges that university administrators have often allowed members of the finance and alternative investment industries to become trustees with authority over the university’s endowment, representing a conflict of interest.

But according to University Spokesman John D. Longbrake, these concerns are “not new.”

“Virtually every issue raised by this report about endowment management practices has been addressed and continue to be addressed by the current leadership team at the Harvard Management Corporation,” he wrote in an e-mail. “Harvard’s large and positive economic impact to the region is well documented, and we consider it an important outcome of fulfilling our teaching and research mission.”

But Humphreys disagreed. “I’m delighted to have our diagnosis of the many problems with the endowment model ratified, but it’s just not true that everything is being addressed,” he wrote in an e-mail.

The report suggests that risky investment practices have already had both short-term and long-term consequences for local communities.

The report proposes that Harvard’s 310 cost-reducing layoffs resulted in a $53,709,863 loss and deepened the recession for the local economy.

The report also estimates that Harvard’s halt on the construction of the Science Complex in Allston will result in more than $860 million in losses in expected economic activity over the next three years.

Allston resident Harry Mattison said that the report’s findings were not surprising to him, because “Allston residents see and live these broken promises every day.”

“Walking past the empty buildings, it’s more depressing than the numbers of the report,” Mattison said. “It’s seeing the abandonment of the neighborhood—that’s experiencing it in the flesh.”

Wayne M. Langley, director of higher education for SEIU Local 615, said that SEIU commissioned the report to determine the implications of major universities’ financial situations, which affect many of the union’s members.

Langley added that he believes the universities were not the “victims that they pretended” to be in the financial crisis. “I hope it leads to real debate about who was responsible and how to protect loyal staffs, both union and non-union, who bore the brunt of this.”

—Staff writer Sofia E. Groopman can be reached segroopm@fas.harvard.edu.

This article has been revised to reflect the following correction:

CORRECTION: May 24, 2010

An earlier version of the May 24 news article "Study: Colleges Caused Financial Crisis" stated that in the 2009 fiscal year, Harvard’s endowment decreased by about 11 million dollars. In fact, the endowment decreased by about 11 billion dollars.