Drew Gilpin Faust and the Incredible Shrinking Harvard

Guiding a university through this recession would challenge any president, and some of Harvard’s competing institutions—Yale, Princeton, Stanford, MIT—also find themselves under financial duress. But the situation at Harvard is worse and the consequences will be more dire.

One reason is the growth in university spending, most notably in the Faculty of Arts and Sciences. The last time the endowment stood at $25 billion, in 2005, the FAS budget was $812 million. Now it’s $1.2 billion—a particular problem because FAS depends on the endowment to provide more than half its annual budget. During the past decade, FAS embarked on a giddy hiring binge—according to Harvard Magazine, the number of FAS professors has increased by 126, a 22 percent jump—and a building spree including some $800 million in science labs alone.

Those labs were funded by taking on new debt, which has doubled from $538 million to $1.1. billion since 2005, a now-regrettable change of course for Harvard. In the past, the university would first find a donor, then erect a building, but its confidence in the endowment’s ability to beat the market made taking on debt seem safe. Servicing that debt now costs FAS about $85 million a year.

Then, of course, there was the hugely ambitious plan, driven largely by Summers, to develop a second campus across the Charles, in Allston. The land purchases and the planning cost millions and millions; the actual construction of the 350 acres of new housing, laboratories, museums, parks, and athletic facilities would cost billions and billions. Just the projected maintenance for the first building under construction, a $1 billion new home for the Harvard Stem Cell Institute, has been said to be $100 million a year. This February, Faust announced that the university would finish the basement, then stop work on the project. She has said the halt is temporary, but few are convinced. Allston residents worry that their neighborhood will be left with a massive hole in the ground.

Some of the scientists who had been looking forward to working in shiny new labs are also upset, muttering about leaving Harvard for greener pastures—not a threat that the university has heard much in recent years. But the fact is, the investment strategy that was to have paid for Harvard’s kudzulike growth was unsustainable.

The roots of Harvard’s fiscal crisis go all the way back to 1990, when money manager Jack Meyer left the Rockefeller Foundation and assumed the reins at the Harvard Management Company (HMC). Breaking with the traditionally conservative approach, Meyer was in the forefront of university portfolio managers who integrated complicated financial instruments into endowment investments. He reduced the amount of stocks and bonds in Harvard’s portfolio to less than 30 percent and diversified into illiquid assets such as commodities, real estate, timber, hedge funds, and private equity. He also ventured into financial tools such as derivatives and emerging market debt that carried more risk than stocks and bonds but promised much larger returns. "There’s not much plain vanilla in our portfolio," Meyer told BusinessWeek in late 2004.

When Meyer came to Harvard, the endowment stood at $4.7 billion. When he left 15 years later, that number was $22.6 billion. From 1995 to 2005, the endowment averaged a nearly 16 percent annual return, beating the benchmark for peer universities by more than 50 percent. During that run, Harvard’s financial success became a source of fascination for the nation’s business press, generating countless articles with titles such as "How to Invest Like Harvard." Harvard may or may not have been the world’s best university—there were nagging questions about the commitment to teaching and the coherence of the undergraduate curriculum. But those concerns were always eclipsed by the fact that Harvard was the world’s richest university. The wealth glossed over its imperfections like fresh paint on an old house.

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  • Fearful

    Harvard Law School is in dire financial straits with crushing financial commitments–a tuition-waiving public service initiative, an expensive, perhaps unnecessary building project, and faculty expansion–necessitating a staff layoff in the several dozens this summer, with more to come next year, and slashed budgets. This despite the School's completing a successful, record-breaking fund raising campaign last fall.

  • Lisa

    Faust is not only from Virginia, she is from money in Virginia. In my interactions with her, I got the sense that this background made her quite bored and dismissive when discussions of money came up. I'm talking about mundane things — childcare subsidies, negotiating faculty salaries, etc. For all her commitment to diversity, when any of these issues turned to talk about money, she appeared quite disdainful, as if all this were quite crass and not worthy of Harvard faculty. If my read is correct, she must be incredibly uncomfortable dealing with the current situation — not to mention uniquely unqualified to handle it.

  • Schuyler

    It is insane that Harvard is cutting funding for science and the rest of its campus while granting free tuition to those who are in the middle class and above.

  • danny

    Harvard ought to feel what it's like to suffer. That dumb school deserves this completely. Stupid Harvard, like anyone should give a darn what happens to that dumb school. It's really good to be honest to all you readers there, Harvard stinks and it ought to be. It's undeserving of its fame and it deserves to be poorer than poor. Poorer than the lowest college there is in the country. I hope Harvard burns in hell.

  • Christine

    Thoughtful people are trying to digest the degree to which Harvard was complicit in the financial meltdown in the larger economy, with its graduates enlisting so readily in the group- think of Wall Street that has caused so much human suffering. One is inclined to beleive that Harvard selected a particularly compliant sort of thinker who jumped through all the hoops to present Harvard with a Harvard-eligible resume. With all the emphasis on the status of Harvard, it is not surprising that the next career step would be high-flying Wall Street, where arrogance knew no bounds: the Best and Brightest they claim to be, as though an Ivy League degree were some sort of certification. Harvard has sustained a major hit to its reputation. Obviously, it selects for herd-thinkers and it's undergraduate education does nothing to change that. In the current state of the world I am very grateful for the luster a UC Berkeley College of Engineering degree confers. It's a question of values. Harvard

  • Xi

    The level of bitterness in these comments makes you wonder…

  • Saddiq

    the welcoming ice cream party you spoke of? They ran out of ice cream moments after it started….the crowd was underestimated. Perhaps a metaphor for her presidency.She acknowledges she got the job because she is a woman. At least two people on campus will say it.

  • Christine

    Second Wow. The "luster a blah blah blah degree confers?" Just can't resist a snicker there–it never ceases to amaze me how it's always these types that won’t ever miss an opportunity to grandiloquently name drop whatever school they attended who are the most eager to denounce the name brands located one tier of prestige above their own. Guess their not as lustrous degrees didn't buy them the self awareness to detect the irony in how their petty resume flashing in fact attests to the hold of status symbols like Harvard over the collective consciousness. Which offers insight on another point addressed in the article. Might Harvard have overplayed its hand in its spending ambitions not simply because it was rich and thought it could afford to but because being the anointed holy grail of the aspirational elite means it couldn’t afford not to? Perhaps behind the drive to have it more and bigger than everybody else is the fear that without display of overwhelming dominance, Harva

  • Average

    Wow, you're a jackass. Harvard produces some of the WORLD'S most important science and technology. It employs a huge percentage of people in Boston (hundreds of thousands). Do us all a favor and go kill yourself. You're a useless vestige.

  • Joe

    Harvard made a ridicule of itself by ousting Summers. That points to a deep problem with many on the faculty who made that happen knowing full well that it is not an honest endeavor. Harvard is in for years of trouble independently of the financial situation.

  • Joe

    Larry Summers bankrupted America, he bankrupted Harvard too.

  • Peter

    With City Councilors like Marjorie Decker, who has proposed that Cambridge reduce Harvard's in lieu of tax payments so that 9 janitorial jobs at Harvard can be saved, it would appear that Pres. Faust has already found a sugar daddy.

  • Jeff

    It's not really bitterness, it's just that, when the Emperor has no clothes, people aren't inclined to believe you when you point it out, especially when the Emperor looks so good in Crimson.

  • c

    It's pretty clear that many of the key people who led to the current crisis had Harvard (and other Ivy League) backgrounds. Hopefully our society will get over the fascination with institutional brands and realize that reputational inertia and pedigree cannot be a substitute for performance. Many of these supposedly top notch professionals have proven themselves to be as incompetent as anyone else but the tailwind that Ivy educations provided put them in positions of responsibility for which they were unprepared, the result is before us.

  • Bill

    Why didn't Harvard's auditors note the risk? How come they didn't detect Madoff?Bill Drissel

  • Neeraj

    This author seems lazy. The "common touch" thing Faust does (taking handshakes at the freshmen ice cream social) is an annual tradition that every President does every year — the author could have learned that by speaking to anyone other than a single employee present at the time. The author acknowledges he couldn't get anyone to speak badly of the current president on record, but then didn't critically examine the positive comments. She is a total non-entity on campus — they should have hired Kagan. As for the author's thoughtless knee jerk animosity towards Summers, it has already been said many many times that if you simply google Summers' speech about reasons for the lack of tenured women in sciences then you'll see his comments in context have been mischaracterized by lazy reporters such as this author. In addition, the below is a fun article about Summers. He wasn't such a bad guy, and some people who were on campus at the same time he was remember him fondly.http://www

  • mike

    Beware of anyone who begins a sentence with the word "might:"
    Might Harvard have overplayed its hand in its spending ambitions not simply because it was rich and thought it could afford to but because being the anointed holy grail of the aspirational elite means it couldn’t afford not to?
    …and then doesn't know how to end it.
    Christine, I take it, is a graduate of the Great University.

  • Dwight

    Since most major universities depend on endowment funds, and all investments were hurt by the recent recession, why should the quality of Harvard decline any further than any other comparable institution? Why should the relative ranking of universities change at all as the sinking tide lowers all boats?

    The Harvard I knew as an undergraduate in the seventies was anything but an institution cultivating a 'herd mentality,' as some posters believe. I have been associated with five other universities since then, and I never enjoyed greater freedom of thought than at Harvard.