The Harvard Scam: How Elite Schools Steal From You — Transcript

Full transcript

1. 0:00Here's a question we've been digging into you for the last few months.
2. 0:02How did Harvard University get so rich?
3. 0:06Take a look at these two data points.
4. 0:08In 1978, Harvard University
5. 0:11had a $1.4 billion pool of money.
6. 0:14They admitted 2200 students to the incoming freshman class.
7. 0:18This year, they have $50.7 billion
8. 0:21and they only admitted 1,942 students.
9. 0:25That's a 3500% increase to their endowment size
10. 0:29and a 12% decrease to that admissions number.
11. 0:32The same is true of the rest of the Ivy League as well.
12. 0:35But it's not true for public universities, which have seen decreased state
13. 0:39funding over the same time period while increasing their enrollment numbers.
14. 0:43Public universities enroll way more low income students too.
15. 0:46The University of California, Berkeley, for example,
16. 0:48enrolls more low income students than the entire Ivy League combined.
17. 0:53In the wake of affirmative action being struck down, there seem to be
18. 0:55two tracks of organizing for equity in higher education.
19. 0:58One is making admissions to elite institutions fairer
20. 1:01by removing legacy admissions,
21. 1:03something that Biden's Department of Education is also investigating.
22. 1:07But it's not enough to just end legacy admissions at elite institutions
23. 1:10that only benefit a very small percentage of Americans.
24. 1:13We need to structurally reform the higher education system.
25. 1:17We're supposed to be the party of the working class.
26. 1:19We ignore what these schools are doing at our own peril.
27. 1:23Schools like Harvard, they should be expanding.
28. 1:25They should be building the second and third campus.
29. 1:27If we taxed the top elite private institutions,
30. 1:31we could get a trillion dollars within a decade.
31. 1:34It's not impossible.
32. 1:35We'll show you by the end of this video some very real ways
33. 1:37we can actually do all of these things right now.
34. 1:41And as a bonus, if you watch till the end, I'll make you a bet that I can show you
35. 1:44one thing
36. 1:45that Donald Trump did that you watching this video will actually agree with.
37. 1:49And it has to do with Harvard.
38. 1:51So let's get into it.
39. 1:52This is The Class Room, from More Perfect Union.
40. 1:54And today we're talking about how Harvard and the rest of the Ivy League got rich.
41. 1:59A financial endowment is basically just an investment
42. 2:01portfolio designed to grow a pool of money reserved for an organization.
43. 2:05The Bill and Melinda Gates Foundation has the largest
44. 2:08endowment in America at $67 billion.
45. 2:12Endowments for universities date as far back as ancient Rome.
46. 2:16Money and education have always been tied together.
47. 2:18Harvard isn't just the oldest institute
48. 2:20of higher learning in America.
49. 2:22It's also the oldest corporation in the entire Western Hemisphere.
50. 2:26Harvard defines its endowment as “thousands of philanthropic gifts
51. 2:29donated since Harvard's early history, many of which were given
52. 2:33to support specific aspects of Harvard's teaching and research work.”
53. 2:37Legal scholar Henry Hansmann writes that the shift to relying on these gifts
54. 2:41came in the 1700s as a way to free Harvard from religious policy pressures
55. 2:47that came with state funding from Massachusetts at the time.
56. 2:50Endowments, quote, served to protect
57. 2:53these institutions from the vicissitudes of the political process.
58. 2:57It did not, however, free them from outside influence entirely,
59. 3:00but rather served to shift the source of that influence.
60. 3:05But it was only recently that these endowments exploded in size.
61. 3:09If you go back to the ‘60s in particular, endowments,
62. 3:13they were mainly managed to maintain the size of the endowment.
63. 3:16Charlie Eaton is the author of Bankers in the Ivory Tower.
64. 3:20In the book, you have a very important moment in the history of endowments,
65. 3:24there’s this report that the Ford Foundation puts out in 1969.
66. 3:28Yeah, in that they say, you know what, really endowments
67. 3:31should be invested to maximize return on investment.
68. 3:35And that lays the groundwork for these major changes
69. 3:39in endowment management that take root in the 1980s.
70. 3:43The 1980s.
71. 3:45The decade that transforms the university endowment as we know it.
72. 3:49One thing that astonishes me about this time period is that this is
73. 3:52when American intellectual society seems to shift away from inventing
74. 3:56transformative new technologies or uncovering medical breakthroughs,
75. 4:00and instead starts inventing financial schemes.
76. 4:03Two of these schemes are hedge funds and private equity funds.
77. 4:07They're both just very high risk, high reward investment
78. 4:10methods that appeal to very wealthy individuals.
79. 4:13Yale University's endowment manager David Swensen
80. 4:16saw an opportunity in these new investment methods.
81. 4:19David Swensen develops this Yale model of endowment investing that involves
82. 4:23putting large shares of the endowment into private equity investments and hedge
83. 4:28fund investments that could yield higher returns on investment than other folks.
84. 4:33The catch was those investments are riskier.
85. 4:37They often also are at the expense of workers.
86. 4:40What are you looking at?
87. 4:40You’re laborers, you’re supposed to be laboring.
88. 4:42That's what you get for not having an education.
89. 4:45By 2019, about 60% of Yale's endowment fund
90. 4:48consisted of investments in hedge funds, private equity and venture capital firms.
91. 4:53Hedge fund billionaire and 2020 presidential candidate Tom
92. 4:56Steyer was a huge fan of Swensen, saying, “What David did was
93. 5:00he pioneered new ways of thinking about investment.
94. 5:04He did it with absolute integrity and honor.
95. 5:07And he did it for a bigger cause than himself.
96. 5:10It just so happens
97. 5:11that Swenson's pioneering ways furthered Steyer's own interests as well.
98. 5:15Both Tom Steyer and David Swensen were
99. 5:19alumni of Yale University.
100. 5:21And at a Yale homecoming football game around 1986,
101. 5:26Tom Steyer says he heard that David Swensen was now managing
102. 5:29the Yale Endowment, and he started a two year courtship,
103. 5:34meeting with David Swensen to say, Hey, if you invest in my fund,
104. 5:38I think I can earn really big returns for the Yale Endowment Fund.
105. 5:42David Swensen said, Well, you know, this is high risk.
106. 5:44How do we know you won't just close your firm
107. 5:46if your hedge fund doesn't make big returns in its early years?
108. 5:50And Steyer said, No, you can trust me.
109. 5:53I won't shut down.
110. 5:54And basically as former Yalies they shook hands.
111. 5:58And as a result, David Swensen, on that trust, gave Tom Steyer around $300 million
112. 6:03in investment, which was about a third of his initial capital.
113. 6:06And that was a secret to Swensen’s success.
114. 6:09Embracing people like Steyer, he would grow Yale's endowment fund from $1 billion
115. 6:14when he took over in 1985 to $31 billion when he passed away in 2021.
116. 6:20The same sort of transaction between college and hedge fund
117. 6:23was happening at Harvard.
118. 6:25Another of the first major hedge funds
119. 6:29is the Baupost Group founded by Seth Klarman and a few other folks
120. 6:34who are hanging around the Harvard Business School in the early 1980s.
121. 6:38They developed their own hedge fund model
122. 6:42that has since earned tens of billions of dollars.
123. 6:44And oddly enough, folks from the Baupost Group have gone on
124. 6:49to sit on the Harvard Board of Managers that manages the investment fund.
125. 6:53Okay.
126. 6:54This is a really important point that Charlie just said.
127. 6:57Seth Klarman went to Harvard Business School,
128. 7:00then he graduated and founded a hedge fund, and then Klarman
129. 7:03and other folks from his hedge fund went back to hold influential positions
130. 7:07at Harvard, and their endowment invested in the hedge fund he had founded.
131. 7:12Fun fact, David Swensen went on a similar journey.
132. 7:15He was a Yale
133. 7:15graduate who went to work on Wall Street at Lehman Brothers and Salomon Brothers,
134. 7:19then went back to Yale to run their endowment fund.
135. 7:22This country club-like revolving door between the Ivy League and Wall Street
136. 7:27was mutually beneficial.
137. 7:28It helped secure hedge funds and private equity firms
138. 7:31with massive early capital that they desperately needed.
139. 7:34And it also led to an endowment boom.
140. 7:36Those schools
141. 7:37that have added the most private equity and hedge fund managers to their boards,
142. 7:41they tend to have higher rates of return on investment.
143. 7:45So let's just recap.
144. 7:46At one point, university endowments were managed
145. 7:48just to maintain their size, only being grown to beat inflation.
146. 7:52Then David Swensen and the Yale model changes everything, pushing towards
147. 7:55investing in riskier assets to maximize growth.
148. 7:59At the same time, people like Seth Klarman graduate from Ivy League schools, go
149. 8:03work on Wall Street, and start populating the board seats of their old colleges.
150. 8:07They apply the lessons
151. 8:08they learned on Wall Street to make as much money as possible.
152. 8:12That's how Harvard and Yale and a whole bunch of other elite
153. 8:16universities got rich.
154. 8:19But what's so bad about colleges having a lot of money?
155. 8:21Isn't that good for the students who go there?
156. 8:24Well, for one thing,
157. 8:25recent studies have shown that the colleges creating the biggest upward
158. 8:28class mobility for their graduates aren't the ones with the most money.
159. 8:32In fact, they're largely public universities,
160. 8:34which have far less resources.
161. 8:36The Ivy League was founded by the rich and the elite
162. 8:39and is operated for the benefit of the original elite.
163. 8:43This is Jane Chung, a Harvard alumni who talked to me about what
164. 8:46it's like coming from a working class background
165. 8:48and getting admitted into an elite university.
166. 8:51I found myself in a place where I was
167. 8:54encountering incredible amounts of wealth, and
168. 8:58I did not know how to navigate a system that was designed for the elite.
169. 9:04Universities like Harvard, where I attended,
170. 9:07have massive amounts of wealth,
171. 9:10and yet students coming out of school
172. 9:13are mired in hundreds of thousands of dollars of debt.
173. 9:17So where's the disconnect here?
174. 9:19The story of public colleges has been starkly different.
175. 9:22If you take an example like UC Berkeley, fantastic public school,
176. 9:27they have 45,000 students in their student body.
177. 9:31They only have $3 billion to operate.
178. 9:34The elite private universities keep their enrollments
179. 9:37very, very small to remain elite.
180. 9:40By definition, an elite is a group of folks that excludes others.
181. 9:44If you admit too many students, you're not going to be elite
182. 9:47because you're not being as exclusive.
183. 9:49That pursuit of elite status
184. 9:50was exacerbated by another innovation of the 1980s, the U.S.
185. 9:54News and World Reports College Rankings system.
186. 9:57Authors Sahaj
187. 9:58Sharda writes about how the magazine and its billionaire owner, Mort Zuckerman,
188. 10:02got so powerful and influential, and his new book, The College Cartel.
189. 10:06U.S. News and World Report has this massive market share.
190. 10:09It is seen as the de facto college rankings by the vast
191. 10:12majority of high school students. Okay.
192. 10:13So I just want to understand this U.S. News formula.
193. 10:16How does it actually work?
194. 10:17There was this clear idea that you needed to make sure
195. 10:21the schools everyone intuitively thought where the best schools come out on top,
196. 10:25or else your ranking wouldn't have credibility.
197. 10:27The aspect of this, which I think is really not understood
198. 10:30well enough, is the sort of implicit bargain that Mr.
199. 10:34Zuckerman made with the colleges was, you have to make it look like
200. 10:37we're the most credible and established ranking.
201. 10:40And in exchange, we're going to continue to rank you really well,
202. 10:43and we're going to develop our methodology to make sure that you come out on top.
203. 10:47And so the essential logic of the U.S.
204. 10:50News and World Report college
205. 10:51rankings is spend as much money as possible on as few people as possible.
206. 10:56The natural logic of this system ends up being
207. 10:59rejecting more and more students every year just in order to climb rank.
208. 11:03You end up with this massive scarcity and all sorts of distortive behavior.
209. 11:07That scarcity of seats is totally artificial, and it's just
210. 11:10another way that the Ivy League country club retains power and prestige.
211. 11:15The billionaire who owns the magazine has donated millions to Ivy League
212. 11:18universities and sits on several of their boards of trustees.
213. 11:22These close ties between U.S.
214. 11:23News and the elite college presidents came in handy in the mid-2000s
215. 11:27when there was a possibility for a government competitor to the U.S.
216. 11:30News rankings model.
217. 11:31You know, in the Obama administration, there was
218. 11:34there was an effort to try and do this, to set up a public option
219. 11:38in the rankings market
220. 11:39and to tie it to government funding for schools and things like this
221. 11:42to make it a real player.
222. 11:44But the elite college presidents were able to convince the Obama administration
223. 11:47to not make the College Scorecard effort a real ranking,
224. 11:50but instead just sort of an aggregation of information.
225. 11:53Part of the reason it's so hard to rein in Harvard
226. 11:55is that despite the fact that they basically operate
227. 11:57like a hedge fund and boast
228. 11:59about being the oldest corporation in the Western Hemisphere,
229. 12:02they're actually legally considered a nonprofit.
230. 12:05Basically what this means is if I'm a nonprofit
231. 12:08and I raise $100 in a year, I don't have to pay taxes on that.
232. 12:12And tax exemption isn't the only benefit that their nonprofit status gets them.
233. 12:17They also get access to additional resources they use
234. 12:19to compound their wealth.
235. 12:21Here's one example that Charlie Eaton writes about.
236. 12:23You've probably heard news stories of massive donations from wealthy
237. 12:27alumni that is meant for a building to be named after them or something.
238. 12:31Well, the colleges don't actually use that money on the building.
239. 12:35They take it
240. 12:35and they put it into the endowment fund where it can grow investment returns.
241. 12:39And then they borrow the money for the building from the government
242. 12:42through markets that are only accessible to nonprofits.
243. 12:46The reason they enjoy 501 (c)(3) status is because they are in name
244. 12:52operating for educational benefit and for the public good.
245. 12:55Are they doing that? That’s arguable.
246. 12:58With legacy admissions and with these donations and close
247. 13:01ties with investors, really what elite universities end up being
248. 13:05is gated communities for the education of elite kids.
249. 13:11And that's not a public good.
250. 13:13Remember how I said if you watched to the end of the video,
251. 13:15I'd show you something you'd agree with Donald Trump on?
252. 13:18Well, here it is.
253. 13:19In 2017, Trump signed into law a 1.4% tax
254. 13:24on net investment income at the richest schools in America.
255. 13:27Yes, Donald Trump has set the blueprint
256. 13:31for how progressives might be able to tackle Harvard.
257. 13:34And it's not just Trump.
258. 13:35So AOC talks about taxing the wealthy.
259. 13:38But the Harvard University endowment pays zero tax.
260. 13:41Harvard has 40 plus billion dollars -
261. 13:43billion - in their endowment.
262. 13:45Excessively large private university endowments.
263. 13:48Senator Tom Cotton posting a 6% tax on endowments of America's
264. 13:53top ten universities would raise $15.4 billion.
265. 13:56Why are we subsidizing this insanity?
266. 13:58These are the richest institutions in America.
267. 14:00They don't pay any taxes. Like why doesn’t anyone say that?
268. 14:02The right wing has co-opted, in the name of culture war or whatever
269. 14:07it is, ideas about making public education more accessible and more affordable.
270. 14:13And that's a real problem.
271. 14:14Because the one thing most people in this country
272. 14:18have as a common experience is education.
273. 14:22And as Democrats, we should be talking about
274. 14:25how to make education more affordable, better and more equitable for everyone.
275. 14:30I talked to two Massachusetts Democrats who want to do just that.
276. 14:34Representative Peter Cataldo and Senator Pavel Payano are two state
277. 14:38legislators who introduced a bill that would punish Harvard.
278. 14:41The bill addresses three different admissions
279. 14:45policies that we found to be pernicious.
280. 14:49Those are early binding decision, legacy preference and donor preference.
281. 14:55Rather than banning these practices,
282. 14:58if an elite school that's highly selective and that has a large endowment decides
283. 15:03to use them, then we are going to place a public service fee
284. 15:08that's equivalent to a very, very small percentage of the endowment.
285. 15:14In most cases, it would probably be less than the capital gains
286. 15:17that are earned on the endowment itself.
287. 15:20And so the school can make a choice that we view as a win win.
288. 15:23Either they stop using practices that hurt working class people
289. 15:28or they pay a public service fee
290. 15:31that goes into a trust fund for community colleges in the Commonwealth.
291. 15:35I live in Lawrence, which is one of the poorest city in Massachusetts,
292. 15:42where attainment of a
293. 15:46four year degree is less than 10% of the population.
294. 15:50And one of the biggest obstacle goals is finances.
295. 15:54When we talk about making community college free for everybody
296. 15:58in the Commonwealth, we're talking about $50 to $100 million.
297. 16:03That's less than 1% of Harvard's endowment.
298. 16:07Now imagine what we could do if we taxed all elite universities in America.
299. 16:13States across the country have proposed legislation that would do that.
300. 16:16The total sum of the Ivy League's endowments is more than twice
301. 16:21the cost of making community college free for all Americans.
302. 16:25We started off this video asking how Harvard got rich,
303. 16:29but the real mystery left to me is why so many people
304. 16:32have been cut out of the benefits those riches have gotten them.
305. 16:36Harvard and other Ivies could be building a second or third campus.
306. 16:39They could quadruple their enrollment if they wanted to.
307. 16:42But they won't because their prestige is founded on excluding
308. 16:46millions of working class Americans from their country club system.
309. 16:50That won't change unless we get serious about tackling their endowments.