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.


  1. Thanks for an outstanding, information-filled report post.

    Your mantra has certainly been "Let there be light."

    That's a welcome and necessary change from the Brodhead/Steel mantra: "What you don't know won't hurt you. Just trust us."

    On one point I disagree with you: Brodhead and Steel's credibility was pretty well shot long before their latest refusal to "openly and honestly" discuss a matter critical to Duke.

    Most of the Duke community have known for quite some time that Brodhead and Steel were bungling and covering up their "management" of the fallout from the lies of Mangum and Nifong even as Brodhead and Steel were sending us emails and letters telling us everything was just fine.

    One more time: It's great to see you publishing again.

    John in Carolina

  2. There has never been a satisfactory explanation why Duke alumni have allowed the Brodhead administration and the Steel BoT to get away with it.

    "It" is a long litany of disastrous acts and failures to act including the Lacrosse Hoax; funding and lack of transparency; student life policies; staffing decisions which have apparently eliminated genuine scholarship and intellectual ability as a pre-condition for tenure at Duke; and, others.

    True Blue may be the light at the end of the tunnel.

    Good Luck

    Jim Peterson

  3. Duke was quick to publish its distorted "Spring of Sorrows" article in the aftermath of the media hysteria of the LAX hoax, but never ran a clarifying reassessment once the facts were known.

    Perhaps it is time for another article, which could be called, "Years of Calamity", to describe the Brodhead/Steel mismanagement of Duke University.

    Thank you for your clarifying light.

  4. Who has fiduciary responsibility for the hedge funds and private equity investment decisions? The BOT?

    Do donors need to approve investment in hedge funds and private equity?

  5. Thank you for the reporting and analysis. Though the downturn in the economy is surely at fault for Duke's declining endowment - it will be intersting to see (should that information be able to see the light of day) just what percentage that Duke took (and has taken) as a result of the lax frame-up. Also, where is the accounting regarding the funds paid by Duke to RCD and Pressler as part of the settlement that was reached? The money had to come from somewhere.

  6. I an not a Duke alum, employee, or donor, so I have no dog in this hunt. That said, I don't see anything in the description of the recent financial calamity at Duke that's different from the situation at nearly every other private university with a large endowment. As a career higher education administrator and consultant, I believe that "best practice" in endowment management has been defined by David Swenson, manager of the Yale endowment and author of Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. Non-traditional investments, such as hedge funds, have been key to the success of Duke and its peers/competitors over the past decade.

    As to the calculation of Duke's "losses," I think it's erroneous to add this year's endowment payout. In modern endowment management thinking, a given year's payout has little do to with that year's endowment earnings. Otherwise the annual operating budget would be either (a) whipsawed by market functuations, or (b) held hostage to overly conservative investment strategies to avoid the whipsaw effect.

    All of us who care about our privately-endowed universities (and museums, foundations, and other public trusts) are justifiably alarmed by the current situation. Let's be sure in our calls for transparency and responsibility that we keep the facts straight.

    Best regards

  7. I too thank you for the report and analysis. I loved Kristin's writing on the Lax fiasco and am glad she is still into journalism.

    I too am not an alum, etc., and don't have a vested interest, so I am interested to know whether Dukes response is different from other major universities in a similar mess.

  8. Way to go Kristin! I am looking forward to the day you are admitted to the Bar!

    Duke, how's that Central Campus coming along?


  9. It is interesting that neither the Duke University Endowment nor the Duke Endowment have provided a public annual report for 2008 (period ending June 30, 2008). They did provide at least a value of 6,123,743,000 to NACUBO and most likely provided them their annual report as well. This figure was a 3.6% increase from the previous year compared to an average loss of 3% by the Universities that did give figures to the NACUBO. Why would they not publish a report that exceeded industry standards for that fiscal year? Duke University may have also provided numbers to a follow up study from July through November 2008 that showed an average loss of 23% among Universities that responded. Perhaps they are concerned about a close examination of their accounting practices and investment strategies as well as questions regarding how the values of some of these hedge funds were estimated.
    I am also concerned about the group DUMAC, LLC that manages both the Duke Endowment and the Duke University Endowment. This group can fairly be described as an in-house investment firm. It would be very unlikely that Duke University could have legal recourse for mismanagement of funds, in my opinion.
    As far as the Chronicle goes it does not seem that they are asking hard questions. In the one editorial that could be considered a direct criticism of Duke's failure to provide facts and information, the editor (Chelsea Allison) recused herself. This is very interesting to me as the new editor (May 2009, Will Robinson) is the son of the chair of the Duke Endowment and he did not recuse himself. Surely he could get access through this family connection to the actual reports.
    All this secrecy just leads to speculation and worry on the part of all who love Duke.

  10. This is a great example of "country club management". Broadhead and Steel run the school. The rest of the trustees are puppets. Parents and students don't count. Wonder when the natives will get restless and realize that the Emperor's New Clothes aren't clothes at all?

  11. While I don't agree with many of Broadhead's decisions, I am not quite sure what this article tells us except that Duke's investments have declined in line with those of most major universities - 25% or so is about average.

    Many institutions, including the University of Chicago, have failed to post their annual reports on their website this year. I am not sure why, but it seems that during this period of nearly unprecidented market turbulence, the financial situation of their portfolios are changing so quickly, that the informnation would likely be out of date by the time it was collected.