Harvard — and this applies to all the elite schools — does not manage a lot of this money itself. A hotshot private equity guy comes in and says invest in our fund, and Harvard gives him $100 million. He goes out and invests in new ventures or buys companies; whatever he does, he marks it to model and Harvard accepts his numbers. Now the fund manager has every incentive to jack up his valuations, just as Fannie Mae and Citibank did, and just as everybody else who was using mark-to-model did. And Harvard loves to accept the numbers with pride.
All of them, in the bull market, thought they were making huge amounts of money. They spent. They gave everybody raises. Harvard went out and bought huge amounts of acreage in Boston. Yale bought a lot of acreage. They thought: We have all this money; it is time to expand; we can be generous. Then they all got hit with the truth — the financial meltdown — and what some of them did was start borrowing. They started selling bonds to the public, based on their respectable names and their AAA credit, and the market bought into it.
Several universities, for the first time in their histories, now have debt on their balance sheets. They have bonds they have to pay off. At the same time, many of the portfolio managers have leveraged the portfolios. They have bought things on margin. It is a classic case of how companies and institutions get into trouble. They borrow things, being told that there is no problem. Things go bad, then things get worse, and they realize that this is a permanent state, that they have a serious problem. It is especially a problem in academia because they cannot cut their expenses. They have unions, tenured professors.
Some of the people running these university financial departments are not terribly clever. The same is true of many pension plans. Many state and city pension plans are bankrupt. In the next bear market, whenever it comes (and it will probably hit pretty soon), you are going to see more of the same.
It will come as a huge shock to the world when Harvard University or Princeton or Stanford goes bankrupt, when these institutions that have been around for decades, for centuries in some cases, understand how bad their finances are.
Jim Rogers is a smart investor who co-founded the Quantum Fund with George Soros in 1973. By 1983 the fund gained more than 4000 percent.