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Downgrading Harvard

If they're so rich, why aren't they smart?

The sturdiest superstition in American life holds that great wealth is a hallmark of genius. So much of what’s wrong with this country is neatly summed up in the throwaway taunt If you’re so smart, why aren’t you rich? For us, money is so much more than a means of keeping score in the various bogus tournaments and glorified beauty pageants of adult life; it’s the bedrock measure of character, initiative and, most of all, intelligence. Why else, after all, would we have bestowed the awesome power of the presidency on a Grade-A moron who can’t make it to the bottom of a standard security briefing, and remains terminally clueless about the basic functions of the government he putatively runs? Sure, he also routinely lies about the scale of his fortune, but he is undeniably rich—and therefore possesses the main qualification to hold maximum power in these United States. And if you don’t like it, pal, well, you must be an envious, bitter expropriator on the make. After all, if you’re so smart, why aren’t you rich?

To begin to unravel this toxic shibboleth, we’d do well to ponder the epically disastrous management of what is surely one of the most revered storehouses of wealth and prestige on the American scene: the endowment of Harvard. The leafy Cambridge knowledge factory is of course treated as the most accomplished and bedazzling institution of our higher learning because it’s one of the most expensive colleges on the planet. But when we tee up the numbers on the school’s investment performance, something strange becomes plain: the financial wizards managing the school’s multibillion-dollar pile of investment capital really have no fucking clue of what they’re doing. Per a revealing report in Bloomberg Business Week, the school’s endowment frittered away more than a billion dollars on a misguided bet on global agricultural and natural resource markets, while also conducting a panicky sell-off of private equity holdings in the immediate wake of the 2008 financial crisis, before they had a chance to recover their value.

Presiding over much of the recent ruin was former Harvard endowment manager Jane Mendillo. In her earlier tour as a senior investment officer under former endowment chief Jack Meyer during the go-go nineties, Mendillo made out handsomely in some trades in U.S. timber markets. So when she was appointed as CEO of the Harvard Management Company in 2008, she figured that while margins in domestic timber had narrowed, she could deploy her team’s rarefied genius on the resource markets of the world at large. Like a colonialist princeling of the nineteenth-century resource wars, Harvard went about gorging itself on the raw booty of the globe: a Uruguayan eucalyptus plantation here, a Romanian lumber empire there, and—oh look!—an Australian cotton farm. These commodity bets are risky, but Mendillo’s thinking was that, over the long term, Harvard could weather some short-term reversals and come out with a generously padded bottom line.

Harvard’s endowment frittered away more than a billion dollars on a misguided bet on global agricultural and natural resource markets.

Boy, was she ever wrong. Consider one pet Harvard resource outlay, in the rural northeastern hinterlands of Brazil. In tandem with a Brazilian private equity firm, the endowment set up its own Brazilian company, which would charge into this underdeveloped region with a cool $1.5 billion to erect sophisticated “agricultural complexes” centralizing irrigation and harvesting operations. The projects have been stagnating, the Brazilian government has become mired in corruption scandals and middle-class revolt, and six years after its ballyhooed Brazilian franchise was launched, Harvard indecorously pulled out of the investment, bidding farewell to $150 million in the process. And that sunken cost was but a fraction of the bloodletting on the resource balance sheet; Mendillo’s successor, N.P. “Narv” Narvekar was forced to write down $1.1 billion from the school’s resource investments.

What’s truly striking about Harvard’s recent woes, though, is how unexceptional they are. The school took a nasty beating during the great 2008 recession because the geniuses then managing the fund had become besotted with the trendy derivative markets that played no small role in pitching the global investment economy into the abyss. Mid-way through the dismal year of 2008 (still before the great market reckoning in September, recall), Forbes noted, Harvard’s fund was essentially out of liquid cash:

That was because these supremely self-confident money managers [controlling the endowment] were more than fully invested. As of June 30 they had, thanks to the fancy derivatives, a 105% long position in risky assets. The effect is akin to putting every last dollar of your portfolio to work and then borrowing another 5% to buy more stocks.

It was, indeed, this self-induced crisis that prompted the disastrous self-off in the fund’s private-equity holdings as now-panicked fund managers “unloaded two-thirds of a $2.9 billion stock portfolio into a failing market,” as Forbes marveled at the time. It was against this backdrop that Mendillo fatefully cast her eyes across the global resource markets and resolved to order up yet more risk on a ten-figure scale.

And why not? Harvard being Harvard, and the financial industry being the financial industry, these merchants of misadventure were comfortably insulated from the consequences of their bad counsel. The endowment’s top money managers pulled in $242 million in compensation from 2010 to 2014—a remarkable study in failing upward for a fund whose valuation has been essentially flat at $37 billion over the past seven years. The past decade’s performance has Harvard firmly bringing up the rear of university-backed investment. It has, indeed, lagged the most randomized and passive approach to investing—a cautious index fund made up of 60 percent stocks and 40 percent bonds—by a full 2 percentage points. Mendillo pulled down as much as $13.8 million for a year’s worth of this anemic activity, while the manager of the resource investments netted $25 million over four years, according to Bloomberg Business Week. (An earlier Bloomberg report from 2016 quoted an internal study by the McKinsey consulting firm that noted the disconnect between high pay at HMC and low returns, using the terms “lazy,” “fat,” and “stupid” to describe Harvard’s investment management under Mendillo.)

Small wonder, in other words, that these swindlers should feel a natural affinity for the resource-guzzling political leadership of Brazil. Stripped of all the self-flattering talk of carefully modulated risk and reward, the swashbuckling Harvard investment strategem resembles nothing so much as the freebooting era of old-school colonial exploitation. All those ripe farmlands and resource reserves are there for the taking—provided of course, that the boodlers in question possess the proper quantities of imaginative daring and world-conquering brilliance. As Bloomberg writers Michael McDonald and Tatiana Freitas note:

Harvard made many mistakes over the last decade, according to Thomas Gilbert, a finance professor at the University of Washington, but almost all of them boiled down to a single miscalculation: the belief that its top money managers . . . were smarter than everyone else and could handle the risks almost all other endowments avoided. “They became loose cannons,” Gilbert says.

Ah, but smart loose cannons—after all, they’re rich, aren’t they?