University of Capital

by zunguzungu

The short version of this story is that the UC regents are controlled by a cabal of corrupt financiers who are strip-mining the nation’s premiere public university. The long story is — since you already knew that — they’re doing so in even more nakedly unethical ways than you realized. In 2003, as Peter Byrne reports, regents Blum, Wachter and Parsky began to steer the UC’s investment strategy “away from investing in more traditional instruments, such as blue-chip stocks and bonds, toward largely unregulated and risky “alternative” investments, such as private equity and private real-estate deals.”:

Bypassing the university treasurer’s in-house investment specialists, the regents investment committee hired private managers to handle many of these new kinds of transactions. This action increased management costs and limited transparency (since these external managers are not subject to public record laws). [And] unlike deals that take place on public stock exchanges—where sales and purchases are public information and regulated by the U.S. Securities and Exchange Commission—the realm of private equity is opaque, largely unregulated and extremely difficult to exit should a deal go bad…by March 2009, the university’s books carried a balance of $6.7 billion in 212 private equity partnerships, which consist primarily of leveraged buyout funds—more than 10 percent of the investment fund total of $63 billion.

These have not proven to be prudent investments. UC’s private equity returns, as of spring 2009, were running at a negative 20 percent since the inception of the investment, according to the treasurer’s most recent annual report. According to operating reports made to the investment committee by the current UC treasurer, Marie Berggren, much of the loss to the portfolio was tied to the souring of leveraged buyouts during the recession.

Am I wrong to calculate 20% of $6.7 billion as $1.3 billion? In one year? I can’t tell because I can only see red. But Bob Samuels has done the numbers:

…while UC administration has argued that since the state reduced university funding by a combined $600 million in 2008 and 2009 (after we account for $718 million in federal recovery money), the system had to raise fees 41%, furlough employees, and layoff teachers. However, during this same time period, the UC lost over $23 billion in its investments.

This means that the investment losses were more than forty times greater than the state reductions, but the university administrators never talk about these huge investment losses. In fact, at the last UC Regents meeting, after I brought up the lack of discussion concerning the UC’s investment losses, the head regent, Russell Gould, exclaimed that, “Our investments have outperformed our peers in the last twenty years.” Not only was this statement incorrect, but it shows how the people overseeing the university do not want to deal with the real issues. Rather than looking at their own internal problems, the UC administration’s central strategy is to blame all problems on the state.

Are Blum and Wachter chastened? Have the learned their lesson? Well…

…in the face of the disastrous performance of private equity and private real estate, Wachter and Blum have continued to advise Berggren to increase UC’s investments in these two ailing sectors.

At the February 2009 meeting of the regents’ investment committee, Wachter, then the committee chair, observed that although private equity and real-estate investments were already “overweighted” in the portfolio, they should be “even more overweighted.” At an investment committee meeting three months later, Blum, who was then the chairman of the board of regents, urged his colleagues to continue on the same questionable course. According to the meeting minutes, “Chairman Blum expressed concern that the University might become too risk adverse.” At the same meeting, Wachter suggested that UC buy bundles of distressed real-estate and mortgage debt to profit off of the collapse of the housing market. (Though a matter of continued debate, experts say such investments are a risky undertaking, since another wave of home foreclosures is expected.) Recently, Wachter has championed increasing the volume of UC’s investments in risky timber and oil ventures.

Now, why would such people keep throwing good money after bad? Could it be because they have are themselves financiers and the UC has “$750 million in private equity deals involving a number of firms where Blum, Wachter or both had financial interests”? Perhaps. Or maybe they’re just idiots. In any case, the Sacramento News Review has the details of four cases where the regents had clear conflicts of interest between the UC’s money they were investing and the firms they were investing in. But here, from California watch, a summary of just oneof the more egregious examples:

In one example of the private equity deals where Blum or Wachter’s financial interests and the UC’s investments crossed paths, investment firms TPG Capital, Apollo Management and the Blackstone Group partnered in a leveraged buyout of Harrah’s Entertainment for $30.7 billion, placing billions of acquisition debt on the casino empire’s books as a result. At that time, Blum had investments worth more than $1 million in TPG funds, and Wachter had investments worth up to $1 million in two Apollo investment funds. The UC – through its general endowment and retirement funds – had $200 million to four private equity funds that financed the Harrah’s buyout. Since the deal, the Las Vegas-based casino empire has not been able to generate enough cash flow to pay off its debts – including payments to UC. The university’s investment in these private equity funds had lost up to 40 percent of its value as of March 2009, according to the story.

Update: the UC is far from the only university run by financiers getting their clock cleaned on the market and then making their schools bail them out.