Introduction to Our Collection “On Financialized Higher Education”
Welcome to Recognitions, the writing platform of Pattern Recognition: A Research Collective.
What We Stand For
Our goal is to move beyond financialized higher education toward more inclusive, democratic, and sustainable approaches to governance, as opposed to the top-down and increasingly autocratic approaches that have lately come to dominate at colleges and universities. Within the current highly financialized context and especially after the financial crisis of 2008, the imposition of austerity measures has become a default mode of governance, control, and discipline. Too frequently these days, trustees and upper administrators decide simply to follow TINA (there is no alternative) templates, often aided by outside consultancies that help diffuse responsibility for unpleasant or unpopular actions. Groups with orientations and interests that have often been divergent (other administrators and faculty, alumni and students, workers and communities) can often find themselves made equal – if not united - by their shared exclusion from power and control.
Increased financialization is a key component of this development, allowing more corporate, top-down approaches to dictate the conditions under which a key public good is provided. Though private and public institutions face somewhat different challenges, both have been affected by the ever-increasing pressure of providing “ROI” (return on investment) - a concept not coincidentally borrowed from the world of finance, whose strictly monetary measures of value threaten to eclipse all others. We do not think that is desirable, much less sustainable, even by the measures of finance: any other “industry” increasing the price of its product far, far beyond the rate of inflation at the same time it was worsening the quality of that product (by, say, increased casualization of labor) would be doomed to fail. As it stands, we are looking at a healthy luxury/elite niche market sector that will likely endure, even as the rest of the higher education system is continually threatened with collapse. This is no way to uphold and strengthen a public good, but it is a good recipe for a very public catastrophe.
Many institutions of higher ed also have endowments loaded up with risky private “alternative investments” such as private equity, hedge funds, and real estate investment trusts, in keeping with the so-called Yale Model pioneered by David Swensen. As the saying goes, these institutions have basically made themselves over as “hedge funds with a university attached.” This development has further enmeshed our institutions of higher education in the private, secretive, and competitive interests of the financial world, to the detriment of the public good.
We argue for transparency as to potential conflicts of interest between trustees, endowment managers, consultants and the private-equity or hedge funds in which endowments are invested. We also advocate for transparency about endowment holdings and the enormous fees paid to funds and their managers. We believe alternative investment valuations are frequently problematic at best, and support the use of independent valuation specialists or forensic auditors to gain clarity with respect to an endowment’s actual positions. At present, disclosures concerning investment sectors, fees and costs, and even real (as opposed to internal) rates of return are not required. This means that stakeholders simply do not and indeed cannot get enough information to assess an endowment’s performance and, consequently, an institution’s overall financial health. In an environment increasingly beset by all sorts of metrics for performance, quality, or “excellence”, money managers remain free from obligations to disclose needed information that would allow the rest of us to see how well or poorly they are doing their jobs.
We believe that the “necessity” of cutting costs often derives from the misallocation of resources required to implement and maintain Yale Model investments, as well as from the excessive growth of administrations (partly but not entirely in response to ever-expanding requirements in compliance and risk-management).
We oppose campaigns to weaken or eliminate programs in the humanities and social sciences, and think the performance metrics often used to wage such campaigns are deeply problematic.
We defend education in the humanities as fundamentally important for citizenship and for any hope of a functioning democracy. Our work draws on our training in history and our consequent appreciation for the contingent, especially when is masquerades as the necessary. We think of it as a defense of the humanities.
We advocate re-centering the educational mission and putting education, not consumption, at the center of “the student experience.”
How We Will Proceed
Critical Analysis
If we are to move beyond financialized higher education, we first have to understand it. We see our synthetic and critical work as contributions to that end. There are considerable bodies of writing already about these problems from perspectives of both higher education and finance that we can draw on and combine, interpret, and re-interpret. Going forward, we anticipate expanding into reviews of new material and conversations with the people who make it, in addition to producing original research, as resources and time permit.
Organization
As the reader will see in the collection of documents we offer below, political organization is important to us, and writing about efforts to organize is central to our approach. We hold that organizing efforts against “austerity” and the other pernicious effects of financialized higher education are fundamentally important, not only in themselves, but also for the ways they articulate spaces beyond what they oppose. This can manifest in particular demands as well as the ways people organize themselves.
Concentration of power in the hands of trustees and upper administrators has the potential to bring together constituencies whose interests may previously have diverged because of their common exclusion. This situation creates opportunities for new and innovative types of cross-sectoral organizing. We think that the current desire for more democratic approaches to governance should be reflected in how new organizations present and represent themselves and in how they work.
We hope to keep writing about such efforts, to put people facing shared challenges in touch, and to connect with and learn from our readers.
Moving Beyond Financialization/Consultancy
We need to move beyond financialization—but there is at present no obvious successor, only a range of possibilities from ESG to sustainable investing, degrowth to mindfulness. Our goal is to actively contribute to discussions around these topics and help develop a workable way forward.
Because we are interested in change rather than simply remaining permanently in a critical posture - pointing to things that do not work in order to complain about them - we envision Pattern Recognition growing into a consultancy available to help trustees, upper administrators, and other interested stakeholders transition into more inclusive, democratic, and functional modes of governance. The current system is broken, and we badly need a replacement – one that is capable of making higher education more available, not less. The so-called “demographic cliff” needn’t be one if we as a country could collectively aim to provide a quality, low-cost education to all who want it. Rising debt and rising tuitions do not serve the public good – they erode it.
Introduction to the Collection of Documents
By way of introduction to our concerns and political orientations, we present a freely-available collection of some of our writing on financialized higher education. The thread that links these documents together is the so-called Yale Model of endowment management, which expanded the field of asset types in which an endowment could invest to include “alternative investments,” notably hedge funds and private equity. Most colleges and universities with endowments valued at $1 billion or more use the model to guide their investment management. Adoption of the model has consequences for how resources are allocated (upward), how power is distributed (concentrated in activist trustees and upper administrations), how management is conducted (autocratic and secretive), and in who bears the brunt of the inevitable calls for “austerity” (everyone else). The model also exposes colleges and universities to opaque, illiquid, hard-to-value and exceedingly expensive “alternative investments,” the problems with which we begin to detail in this collection.
Over the past year, we have been talking to students, faculty, alumni, and administrators from across the country about the problems of “austerity” and their causes. In the course of these discussions, it became clear that, for many people - particularly in the humanities – both finance as an industry and the financial instruments in which that industry traffics comprise a mysterious world apart. One objective with our work is to demystify finance. We try to strike a balance in the pieces below in the hope that readers with no background in finance will find them a helpful introduction while, at the same time, offering insights that may be of interest to readers with more background. The simplest way to strike that balance here at the beginning of our project seemed to be immersion: whence our decision to post a collection of texts. If the reader reads the material straight through, they will acquire a pretty clear sense of our approach and how we see things. But we hope you will also feel free to read around, at your leisure.
Table of Contents
Our collection of documents is comprised of 5 pieces.
a. Letters to SEC on a proposed rule change for private-equity disclosures and an article on governance and financialization focused on Oberlin
We decided to follow this thread on financialized higher ed in part by happenstance. Early last year the Securities and Exchange Commission (SEC) requested public comment on a proposed rule change that would require private funds like private equity and hedge funds to disclose fees, possible conflicts of interest and so on. Up to that point, PE funds were exempt from making any disclosures because of the 3c1 exemption to The Investment Advisor Act of 1940. This exemption was problematic in a number of ways, some of which we discuss. One effect has been the opacity of these funds; another has been a remarkably extractive array of fees and expenses that are borne by investors, most of which are institutional investors, public and private pension funds, and endowments in particular.
Disclosures are pieces of information entities are required to provide investors so they can understand the investment and, in the case of a share of stock for example, get an accurate representation of the issuing entity’s financial situation. Disclosures are characteristic of instruments like stocks and bonds that are offered to the public. Private funds are, as the name implies, private. Investors do not rely on advertising for information about private funds. Rather, it travels mostly by word-of-mouth (this was one justification for the 3c1 exemption). Private funds range from mostly to entirely opaque, depending on the social relations that connect funds to endowment managers. They (or shares) in them do not trade or are illiquid and this contributes to the significant valuation problems.
We submitted two comment letters to SEC, one as Oberlin College’s 1833 Just Transition Fund, an alumni organization founded to resist austerity in the form of outsourcing custodial and dining work during a pandemic. Of the 100+ comment letters submitted to SEC, this is the only one that addresses the concrete non-financial consequences of finance-driven decision-making, and it is the only one written on behalf of an organization in higher education from a critical perspective. The other letter is from Pattern Recognition, and addresses the rule-change from a more finance-facing perspective.
PRRC partner Kelly Grotke expands on the intertwined relations between financialization, problems of governance in her article “Standing Up to Money and Power with Cross-Sector Organizing around Endowments.” The piece was published in October 2022 in Academe, the American Association of University Professors in-house magazine. The piece introduces fundamentally important questions of the politics that attend financialized higher ed (“austerity” imposed via the rhetoric of necessity as their most visible expression). The article’s center lay with its descriptions and analyses of efforts in the organization of resistance at Oberlin College across traditional professional, sectoral divisions as a positive appropriation of the fact that the concentration of power characteristic of financialized higher ed has rendered these sectors equal in their exclusion.
The two letters reflect our orientation: toward higher education under autocratic financialization on the one hand, and toward the finance industries and their instruments on the other. The AAUP article makes concrete the importance of such a double orientation in how it discusses relations between financialization, problems of governance and efforts to politically organize to resist or reverse them.
Two Articles by Kelly Grotke published in The American Prospect
This same double orientation informs the articles written for The American Prospect by PRRC partner Kelly Grotke as well.
The first outlines connections between endowments invested on the Yale Model and a new, autocratic style of management. It also details efforts to organize at Oberlin to protest the administration’s austerity-driven decision to outsource dining-service and custodial functions, which cost the workers their livelihoods and insurance in the middle of a pandemic.
The second looks at the enormous damage done by the interest-rate swaps that leading banks sold to pension funds, endowments, public school districts, and municipalities in the early years of this century. Swaps are contracts that allow an entity that holds bonds issued with variable interest rates to exchange them for a fixed rate (or vice-versa). Most of the swap contracts included prohibitively expensive exit provisions; some were even written for durations that exceeded the maturity date of the bonds. These swaps were sold by investment banks that presented salespeople working on commission as “advisors” – a clear conflict of interest. The key feature of a swap, the thing that does or does not justify the expense, is the bet it represents on where interest rates will be going into the future. When the financial crisis came in 2008 and the Federal Reserve took rates to zero, all bets these entities placed turned out to be bad. The damage that caused in terms of losses was astronomical—and largely invisible to the general public. The piece is a cautionary tale about the predatory things that can happen to the naïve who get taken in by salespeople offering “complex” financial instruments.
Yale Model
The two-part piece “Yale Model” explores the model’s source as a “philosophy of investment” or a worldview. The Model was popularized among institutional investment managers by David Swensen’s book Pioneering Portfolio Management. Originally published in 2000, Swensen’s book is still widely seen as presenting an important and innovative “philosophy” of investment management. In 2022, most college and university endowments with holdings valued at $1 billion or more still follow Swensen’s approach. Its main features redefine how endowments are managed away from the traditional emphasis on prudence and conservation of capital to an approach rooted in maximizing returns on investment (“yield chasing” arguably increased as endowment performance and size got factored into various rankings). To effect this, managers leave behind the “prudent” mix of portfolio holdings (60/40 stocks/bonds) and move into an expanded range of asset classes, notably “alternatives,” hedge funds and private equity principal among them. Private equity is the other thread that runs through this collection: what is private equity; what do these funds do, and what problems attend them.
The first part of Yale Model traces the rise of institutional investors and of strategies particular to them by following the work of Charlie Ellis, an investment advisor active during the 1970s, who was also chair of the committee of trustees that oversaw Yale’s endowment during Swensen’s tenure. It points to a problem for traditional “stock picking” that surfaced in the 70s that seems to have resulted from a surfeit of investors all looking at the same data (price movements) and inadvertently making stock markets “efficient” (efficient markets do not allow for immense profits, because profits come from exploiting inefficiencies). The argument at the time was: this requires a change of asset types which, in turn, required a new, professional, and quantitative approach to risk management.
The second part looks at the Yale Model itself. It is divided into parts the titles of which are also definitions of an endowment: as an institutional space, as a portfolio, as social networks. It looks at Swensen and Takahashi’s application of modern portfolio theory, making it into a heavily quantitative risk management tool that enabled managers to assimilate a “long-term perspective” that did not respond to price movements or market turbulence. It also looks at the qualitative center of this quantitative machinery - the process of asset class definition, which makes of this part a primer on alternative investment types as well. The main theme concerns the Yale Model as a kind of cognitive geography, the kinds of information it includes and what it excludes.
Balance Sheet
The last piece widens out the angle. The first part takes as its point of departure a 2010 report that detailed the consequences of the financial crisis for six New England colleges and universities, the endowments of which were all invested on the Yale Model. We present some of the report’s main observations, with a particular emphasis on the striking continuities that link 2010 with 2022: the upward reallocations of resources entailed by the model; the tendency among activist trustees (frequently with professional or educational backgrounds in finance) and upper administrators to centralize power with themselves; the emergence of an autocratic management style; the tendency to inflict “cost cutting” downward, on faculty, students, employees, and communities.
The second part returns to the present in order to marvel at the extent to which the distortions in institutional and resource allocations noted in 2010 persist in order to begin posing the questions: What are we up against and what can we do about it?
The Matter of Timing
We hope our efforts may benefit from timing. Fissures that can be connected directly back to what Elizabeth Popp Berman recently called “the economic style of reasoning” have become increasingly visible, even when accompanied by demonstrations of its proponents’ shared inability to acknowledge problems or self-correct. For many years, when things no longer worked (if they ever did) the technocratic managerial response had been: pretend it still does. The justification can be restated as: "Armed with science and numbers, we understand the essence of things. Your pain is merely anecdotal—and, remember, the plural of anecdote is not data. Data is what I say it is." From this viewpoint, democratic legitimacy is not at issue. It cannot be undermined because "politics" is not seen as a potentially useful feedback loop but, rather, merely as a space of emotions, irrational and populist. But the democratic legitimacy of the kinds of management symmetrical with neoliberalism have been undermined, from the monetary policy of central banks to Brexit to higher ed on finance, and will continue to be. The ways of thinking particular to contemporary financialized capitalism are losing their hold on the social imaginary.
Together may we leave behind the period of isolated individuals and critics who detailed observable and conceptual problems but whose work, no matter how informed or powerful, never engendered the kinds of change about which they may have dreamed.
© Pattern Recognition: A Research Collective, 2023