The Economic Crisis & Universities – my take on why it’s different

As with just about any financial entity in the country and possibly the world, Santa Clara University has been dealing with the ramifications of the economic crisis that the entire nation is facing right now.  Frozen credit markets, liquidity concerns, dissolution of various funds which were the basis of our wealth – they are all on our minds whether we work at a university or a for-profit corporation.

However, something struck me while walking into work today.  While there is a liquidity concern here and probably at most universities (all are at least mostly tuition-based, though the percentages vary), the fact is that we don’t utilize debt to fund our operations.  A university uses cash assets in the form of tuition income, then a percentage of the return from the endowment.  Now, if the endowment loses money – as almost all have in the last several months (Harvard’s endowment was nailed for $8 billion as of early December) – a major problem is a-brewing.  But the credit freeze itself, which has massively hit corporations doesn’t, it seem, have much of an impact on schools themselves.  We just don’t rely on debt to finance things.

NB – I’m not sure if we make much use of the commercial paper market, but I didn’t hear anything about it (and we heard a lot about a lot of things) so I’m thinking not.

On the other hand, if you look at something like the endowment of major universities – Harvard’s was about $35 billion when things went south – the issues that many hedge funds face are magnified maybe 3 fold.  $10 billion would already be a pretty big hedge fund and one of the issues with funds that large is that if they want to make major stock investment moves they risk affecting the market with their own actions.  Let’s say that they want to sell because the price is right on a stock.  Well, if they have, say, $500 million in that stock and try to sell it all off at once, the price will fall due to at least a perceived decrease in demand (why else would someone be selling so much??) and and definite increase in supply.  

Now, imagine that this same hedge fund is $35 billion rather than $10 billion.  Harvard Management Company (they are one of the few that manage their own endowment as if it was a hedge fund – Santa Clara, I believe, outsources via investments in other funds) has a major problem trying to move its positions on longs, shorts, bonds, etc.  

So, on the one hand, we aren’t hit by the credit freeze, which is one of the biggest issues that has been affecting our debt-driven economy.  On the other hand, we have major liquidity issues when our endowments get hit hard.  And SCU’s endowment, by the way, is not $35 billion.

Comment (1)

  1. Pingback: blog of kaiyen » Universities - why not take on debt..?

Leave a Comment

Your email address will not be published. Required fields are marked *