Wednesday, February 25, 2009

Duke has now lost $3 BILLION in financial crisis

Duke University has so far lost a staggering $3 billion (yes BILLION with a B) in the world-wide financial meltdown. And if you are asking right away why you are learning this from us, and why you did not hear it from the Brodhead Administration, you have identified an additional dimension of the crisis on this campus.

The communications debacle began with an October e-mail from President Richard Brodhead. As other universities were reporting huge declines in endowment, Brodhead pronounced Duke's finances "stable" and "secure." Chair Robert Steel echoed this reassurance after the December Trustee meeting, repudiating the "no reporter's" rule he initiated just two months earlier and beaming "good news" to The Chronicle.

That's why we were so shocked nine days later to hear again from Brodhead, this time under cover of the exam period, when he admitted our endowment -- once $6.1 billion -- had lost 19 percent.

Executive Vice President Tallman Trask has now been sent out twice with updates: the decline tweaked to 20 percent in mid-January and by early February it arrived "in the mid 20's." We'll say 25 percent to make our work easier, though our source tells us it's closer to 27.

Trask's percentages equal a loss of $1.5 billion in the endowment. Unfortunately, Steel, Brodhead and his administrators have given no nuggets of information about other classes of assets, which have also been hit hard. So we will calculate.

There are additional billions in the same investment pool as the endowment -- subject to the same percentage loss. One good source says $3.7 billion more, but we cannot confirm that. Here's what we do know:

-- Trask has confirmed the pool holds surplus (dare we say profits) from the health system. Total: $1.4 billion.

-- And the pool apparently includes Duke's pension fund, confirmed at $1.3 billion.

A 25 percent loss here $680 million.

There's an additional nugget of $651 million (as valued at the start of fiscal year on July 1, 2008) counted as a university asset, even though it technically is under the umbrella of a separate entity, The Duke Endowment, which holds approximately $3 billion for all its beneficiaries. The 25 percent loss applies here too, and that's an additional $163 million gone from the list of university assets.

Lastly, we want to consider the portion of the university endowment that we spend annually. We calculate that Duke used up $418 million in the last fiscal year, and it's believed this year's secret budget calls for $450 million. Normally this spending is covered by earnings -- dividends, interest and capital gains. But with current capital losses, there are no net earnings, meaning this year's endowment spending must come out of principal.

In a liquidity bind, Duke borrowed $500 million two weeks ago to meet this cost in the next 12 months. The alternative would have been to sell assets at current depressed prices. In retaining the assets, Duke is gambling prices won't go down more. And it's a further gamble that prices will go up enough to justify interest costs -- but that's an analysis for another post.

An invasion of principal will be repeated every year until the crisis is resolved; last week Trask said projections of where this might lead "become rather terrifying."

In addition to the $450 million invasion by June 30th, which is the same as a loss, interest on the five year bonds that Duke issued will be $80 million or more.

Trask did announce $150 million in spending cuts last week -- formulated with hardly any consultation with faculty, students and alumni. This move will hardly ameliorate Duke's crunch, because other sources of income -- contributions, grants for research, and on-time payments by patients in the health system, to cite just a few examples -- are also drying up. Initial plans for these cuts were laid weeks ago -- with no indication the intensifying deterioration in the economy has changed them.

Returning to Duke's assets -- so far we've discussed a loss just short of $3 billion and the hemorrhaging is not over. The pace of Trask's advancing our loss from 20 to 25 percent suggests we're dropping more than $100 million a week.

(We do not have the precise date of Trask's February update because The Chronicle did not bother to file a story when told of this deepening loss. Ten days ago we gave The Chronicle access to the information you are reading now and the newspaper has not utilized it in any way. We will review the newspaper's performance in a comprehensive, future post. Similarly, Steel has not reappeared since the "good news," and we will profile his actions separately at a later date.)

The news gets worse when we consider the Harvard Factor. In initially reporting a 21 percent loss on its endowment, Harvard officials noted that investments in private equity and hedge funds were still on its books at overly optimistic prices. When these investments are "marked" at true value, to use the Wall Street term, Harvard anticipates its loss will be 30 percent. Barrons, the weekend magazine of the Wall Street Journal, estimated many universities would see a 50 percent decline.

Beware. This is precisely where Duke has concentrated its investments. On July 1, 2008, just before the meltdown began, Duke had 42 percent in hedge funds and 23 percent in private equity situations. (There are minor variations on these percentages in various reports.) Typically such investments are locked in place for the long term by contracts.

Duke faces an ominous downside potential here, and it is going to grow. We believe Duke has contractual obligations to invest $2.3 billion of new money in hedge funds and private equity in the next two years. Such continued investments are routine in these kinds of deals.

Those are big numbers. Lest we become desensitized, we invite some perspective on how significant the losses really are. In a recent year, Duke added $125 million in contributions to its endowment. Our $1.5 billion loss in the endowment alone -- so far -- wipes out 12 years of giving.

Similarly, Brodhead's Financial Aid Initiative eked out $308 million over four years (three of them in public). Duke's endowment loss means that five times
as much has disappeared in the meltdown.

And more. The loss of $1.5 billion in endowment will reduce our annual spending under the Trustees' five percent rule by $75 million. The much ballyhooed increase in need-based undergraduate financial aid this year involved only $11 million.

A substantial loss in pension fund assets will necessitate larger annual contributions to maintain the funding status of the plan, putting more strain on the annual budget.

As the economy continues to droop, so does Brodhead's profile. He did speak at a meeting of the faculty senate at the start of the academic year, appending to his previously scheduled annual message in a open session that was held in a sub-sub basement room in the Divinity School, a room that seats 117.

Last week Brodhead returned for an executive session of the senate, known as Academic Council.

The president has not reached out at all to students, parents nor alumni.

The nadir of the leadership's response was a clandestine retreat that Brodhead and Steel put together ten days ago, with a rebuff to The Chronicle's request for names of principals and advisers. We can only hope the agenda embraced the increasing certainty that we will not somehow jolt out of this quickly.

Our commentaries about Duke's governance have had a consistent mantra: Let there be light. Let us have transparency and accountability. That message was important in boom periods, it is greatly magnified by current conditions.

By refusing to even acknowledge the extent of the calamity -- much less to discuss it openly and honestly with all stakeholders -- Duke's president and chair have eviscerated their credibility.

Note: the preparation of the above report was made more difficult by the Brodhead Administration's failure -- unprecedented in Trinity College and Duke University history -- to produce an annual report for the 2007-2008 school year; material that is on line is for the period ending June 30, 2007. Policy also made our work difficult: Vice President for Public Relations Michael Schoenfeld has consistently told us we are entitled only to public reports, with no help in understanding or interpreting them.

Sunday, February 22, 2009


Welcome to our blog! We hope to provide information and analysis that will empower students, parents, faculty, staff and alumni to participate more fully in the governance of Duke.

Some of our posts will be long because our material is very detailed. We will often post original documents. We will tell our readers when we seek information and cannot get it.

When we wrote a joint column in The Chronicle in the fall semester, President Brodhead and Executive Vice President Trask refused our requests for interviews. Vice President for PR Michael Schoenfeld said we were entitled to public reports -- and no help in understanding them. In this antagonistic atmosphere which some administrators created and continue, we do our best to carefully source all information.

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