It was mildly disheartening to read in Monday’s Spectator about our university’s $7.2 billion endowment and get the vague impression that theoretically things could go very wrong.
To say Columbia depends on the money generated in its endowment is an understatement. A poorly performing portfolio from Columbia’s Investment Management Company diminishes the quantifiable value of our school and, depending on the severity, threatens those 5 percent of earnings they pledge to siphon off each year.
Assuming the second Great Depression is avoided, no one expects Columbia to start selling the furniture in Butler Library. But to think our campus is immune to a financial crisis of this magnitude is to disregard our endowment’s indisputable ties to the banking system, and ignore that financier’s dependence on investment returns.
In 2007, Columbia University proudly boasted a $1.3 billion gain in the net assets it controls. Out of this impressive figure, $1.2 billion of it, or roughly 90 percent, came from returns on Columbia’s investments. In terms of net worth, Columbia derives about 65 percent of its value from the endowment fund. What does this mean? Columbia is rich, but your tuition hardly has anything to do with it.
The endowment is essentially a pool of donated money that the Columbia Investment Management Company, or IMC, tries to make bigger. Their investments are vulnerable to market volatility, institutional collapse, and a host of other issues that are becoming commonplace in recent weeks and months.
This suggests that it’s entirely possible that Columbia’s endowment could shrink. In fact, it has suffered losses in the past. For the fiscal year of 2007, the IMC posted a $14 million loss on its hedge fund investments, according to long-term investment data provided by the school’s Financial Report.
For one thing, the endowment’s exposure to risky industries threatens the money alumni have graciously given to the school. There’s no reason their donations should decline along with hedge funds, which as a group have had returns in the negative throughout 2008 according to the New York Times.
Harvey Zeidwerg, the vice president of Goldman Sachs’s Investment Management Division, recently said in a company-wide e-mail, “The best protection for a portfolio in the long run is diversification.”
Fortunately, as Lee Bollinger reminded us earlier this week, the IMC’s portfolio is diversified, and along with its long-term strategy, it should provide a buffer to the economic calamities of the past months.
The connection between the IMC’s success and the happenings on Wall Street is an even more pressing issue, shining light on Columbia’s potential vulnerability. That connection forms a definitive link between the financial crisis in the news and specific aspects of Columbia’s daily operations.
The University allocates money from the endowment to support various functions. Endowment funds can cover the bill on entire faculty-led research ventures and financial aid packages. So not only does the endowment quantify Columbia’s long-term stability, it finances some of the things that make this an elite university.
Therefore, as far as Columbia University is concerned, the $700 billion included in the financial rescue bill signed into law last week is sure to be money well-spent. Given that the majority of its assets are valued at market prices, Columbia simply can’t afford to see those markets collapse. For a good idea of how close they actually came to collapsing, you’d only have to turn on the television.
The dedicated student of C-SPAN might have watched Richard Fuld, the former CEO of Lehman Brothers, sit in front of a House committee Monday night as a preamble to his firm’s $600-billion bankruptcy filing. Fuld looked somber and defeated, speaking cautiously with hints of guilt and struggling pride.
The House also seemed ready to give in to the enormity of the situation. At one point during last week’s emotional congressional deliberations, Rep. Spencer Bachus of Alabama had his hand pointed to his head like a gun, reflecting the position of the American people.
Even CNBC’s Jim Cramer isn’t throwing around as many “booyahs” these days.
So considering the gravity of our economy’s problems and Columbia’s exposure to and reliance on that economy, increased concern for the future, and possibly a strategy to minimize risk, are only prudent.
Ultimately, whether or not Columbia’s financial backbone is strong enough to withstand the extraordinary pressures of the current economic era remains to be seen. Thanks to the government’s intervention, however, Columbia’s endowment should survive the shockwaves of the financial crisis. So for now, it seems that Columbia’s endowment is secure and that our trust hasn’t been placed in a house of cards.
The author is a Columbia College sophomore.
