The Harvard Scam- How Elite Schools Steal From You

Here's a question we've been digging into for the last few months. How did Harvard University get so rich? Take a look at these two data points. In 1978, Harvard University had a $1.4 billion pool of money, and they admitted 2,200 students to the incoming freshman class. This year, they have $50.7 billion, and they only admitted 1,942 students. That's a 3,500% increase to their endowment size and a 12% decrease to that admissions number. The same is true of the rest of the Ivy League as well. But it's not true for public universities, which have seen decreased state funding over the same time period while increasing their enrollment numbers. Public universities enroll way more low-income students, too. The University of California, Berkeley, for example, enrolls more low-income students than the entire Ivy League combined. In the wake of affirmative action being struck down, there seem to be two tracks of organizing for equity in higher education. One is making admissions to elite institutions fair by removing legacy admissions, something that Biden's Department of Education is also investigating. But it's not enough to just end legacy admissions at elite institutions that only benefit a very small percentage of Americans. We need to structurally reform the higher education system. We're supposed to be the party of the working class. We ignore what these schools are doing at our own peril. Schools like Harvard, they should be expanding. They should be building the second and third campus. If we taxed the top elite private institutions, we could get a trillion dollars within a decade. It's not impossible. We'll show you by the end of this video some very real ways we can actually do all of these things right now. And as a bonus, if you watch till the end, I'll make you a bet that I can show you one thing that Donald Trump did that you watching this video will actually agree with, and it has to do with Harvard. So let's get into it. This is The Classroom from More Perfect Union, and today we're talking about how Harvard and the rest of the Ivy League got rich. A financial endowment is basically just an investment portfolio designed to grow a pool of money reserved for an organization. The Bill and Melinda Gates Foundation has the largest endowment in America at $67 billion. Endowments for universities date as far back as ancient Rome. Money and education have always been tied together. Harvard isn't just the oldest institute of higher learning in America, it's also the oldest corporation in the entire western hemisphere. Harvard defines its endowment as thousands of philanthropic gifts donated since Harvard's early history, many of which were given to support specific aspects of Harvard's teaching and research work. Legal scholar Henry Hansman writes that the shift to relying on these gifts came in the 1700s as a way to free Harvard from religious policy pressures that came with state funding from Massachusetts at the time. Endowments, quote, served to protect these institutions from the vicissitudes of the political process. It did not, however, free them from outside influence entirely, but rather served to shift the source of that influence. But it was only recently that these endowments exploded in size. If you go back to the 60s in particular, endowments, they were mainly managed to maintain the size of the endowment. Charlie Eaton is the author of Bankers in the Ivory Tower. In the book, you have a very important moment in the history of endowments. There's this report that the Ford Foundation puts out in 1969. Yeah, in that they say, you know what, really endowments should be invested to maximize return on investment. And that lays the groundwork for these major changes in endowment management that take root in the 1980s. The 1980s, the decade that transforms the university endowment as we know it. One thing that astonishes me about this time period is that this is when American intellectual society seems to shift away from inventing transformative new technologies or uncovering medical breakthroughs and instead starts inventing financial schemes. Two of these schemes are hedge funds and private equity funds. They're both just very high risk, high reward investment methods that appeal to very wealthy individuals. Yale University's endowment manager, David Swenson, saw an opportunity in these new investment methods. David Swenson develops this Yale model of endowment investing that involves putting large shares of the endowment into private equity investments and hedge fund investments The catch was those investments are riskier. They often also are at the expense of workers. What are you looking at? You're laborers. You're supposed to be laboring. That's what you get for not having an education. By 2019, about 60% of Yale's endowment fund consisted of investments in hedge funds, private equity and venture capital firms. Hedge fund billionaire and 2020 presidential candidate Tom Steyer was a huge fan of Swenson saying What David did was he pioneered new ways of thinking about investment. He did it with absolute integrity and honor, and he did it for a bigger cause than himself. It just so happens that Swenson's pioneering new ways furthered Steyer's own interests as well. Both Tom Steyer and David Swenson were alumni of Yale University. And at a Yale homecoming football game around 1986, Tom Steyer says he heard that David Swenson was now managing the Yale endowment, and he started a two year courtship of meeting with David Swenson to say, hey, if you invest in my fund, I think I can earn really big returns for the Yale endowment fund. David Swenson said, well, you know, this is high risk. How do we know you won't just close your firm if your hedge fund doesn't make big returns in its early years? And Steyer said, no, you can trust me, I won't shut down. And as a result, David Swenson on that trust gave Tom Steyer around $300 million in investment, which was about a third of his initial capital. And that was a secret to Swenson's success. Embracing people like Steyer, he would grow Yale's endowment fund from $1 billion when he took over in 1985 to $31 billion when he passed away in 2021. The same sort of transaction between college and hedge fund was happening at Harvard. Another of the first major hedge funds is the Baupost Group, founded by Seth Klarman and a few other folks who were hanging around the Harvard Business School in the early 1980s. They developed their own hedge fund model that has since earned tens of billions of dollars. And oddly enough, folks from the Baupost Group have gone on to sit on the Harvard Board of Managers that manages the investment fund. OK, this is a really important point that Charlie just said. Seth Klarman went to Harvard Business School, then he graduated and founded a hedge fund. And then Klarman and other folks from his hedge fund went back to hold influential positions at Harvard and their endowment invested in the hedge fund he had founded. Fun fact, David Swenson went on a similar journey. He was a Yale graduate who went to work on Wall Street at Lehman Brothers and Salomon Brothers, then went back to Yale to run their endowment fund. This country club like revolving door between the Ivy League and Wall Street was mutually beneficial. It helped secure hedge funds and private equity firms with massive early capital that they desperately needed. And it also led to an endowment boom. Those schools that have added the most private equity and hedge fund managers to their boards So let's just recap. At one point, university endowments were managed just to maintain their size, only being grown to beat inflation. Then David Swenson and the Yale model changes everything, pushing towards investing in riskier assets to maximize growth. At the same time, people like Seth Klarman graduate from Ivy League schools, go work on Wall Street and start populating the board seats of their old colleges. They apply the lessons they learned on Wall Street to make as much money as possible. That's how Harvard and Yale and a whole bunch of other elite universities got rich. But what's so bad about colleges having a lot of money? Isn't that good for the students that go there? Well, for one thing, recent studies have shown that the colleges creating the biggest upward class mobility for their graduates aren't the ones with the most money. In fact, they're largely public universities, which have far less resources. The Ivy League was founded by the rich and the elite and is operated for the benefit of the rich and elite. This is Jane Chung, a Harvard alumni who talked to me about what it's like coming from a working class background and getting admitted into an elite university. I found myself in a place where I was encountering incredible amounts of wealth and I did not know how to navigate a system that was designed for the elite. Universities like Harvard, where I attended, have massive amounts of wealth. And yet, students coming out of school are mired in hundreds of thousands of dollars of debt. So where's the disconnect here? The story at public colleges has been starkly different. If you take an example like UC Berkeley, fantastic public school. They have 45,000 students in their student body. They only have $3 billion to operate. Elite private universities keep their enrollments very, very small to remain elite. By definition, an elite is a group of folks that excludes others. If you admit too many students, you're not going to be elite because you're not being as exclusive. That pursuit of elite status was exacerbated by another innovation of the 1980s, the U.S. News & World Report's college ranking system. Author Sahad Sharda writes about how the magazine and its billionaire owner, Mort Zuckerman, got so powerful and influential in his new book, The College Cartel. U.S. News & World Report has this massive market share. It is seen as the de facto college rankings by the vast majority of high school students. Okay, so I just want to understand this U.S. News formula. How does it actually work? There was this clear idea that you needed to make sure the schools everyone intuitively thought were the best schools come out on top, or else your ranking wouldn't have credibility. The aspect of this, which I think is really not understood well enough, is the sort of implicit bargain that Mr. Zuckerman made with the elite colleges was, you have to make it look like we're the most credible and established ranking, and in exchange, we're going to continue to rank you really well, and we're going to develop our methodology to make sure that you come out on top. And so the essential logic of the U.S. News & World Report college rankings is spend as much money as possible on as few people as possible. The natural logic of this system ends up being rejecting more and more students every year just in order to climb rank. You end up with this massive scarcity and all sorts of distortive behavior. That scarcity of seats is totally artificial, and it's just another way that the Ivy League country club retains its power and prestige. The billionaire who owns the magazine has donated millions to Ivy League universities and sits on several of their boards of trustees. These close ties between U.S. News and the elite college presidents came in handy in the mid-2000s, when there's a possibility for a government competitor to the U.S. News rankings model. You know, in the Obama administration, there was an effort to try and do this, to set up a public option in the rankings market and to tie it to government funding for schools and things like this, to make it a real player. But the elite college presidents were able to convince the Obama administration to not make the college scorecard effort a real ranking, but instead just sort of an aggregation of information. Part of the reason it's so hard to rein in Harvard is that, despite the fact that they basically operate like a hedge fund and boast about being the oldest corporation in the Western Hemisphere, they're actually legally considered a non-profit. Basically, what this means is if I'm a non-profit and I raise $100 in a year, I don't have to pay taxes on that. And tax exemption isn't the only benefit that their non-profit status gets them. They also get access to additional resources they use to compound their wealth. Here's one example that Charlie Eaton writes about. You've probably heard news stories of massive donations from wealthy alumni that is meant for a building to be named after them or something. Well, the colleges don't actually use that money on the building. They take it and they put it into the endowment fund, where it can grow investment returns, and then they borrow the money for the building from the government through markets that are only accessible to non-profits. The reason they enjoy 501c3 status is because they are in name operating for educational benefit and for the public good. Are they doing that? That's arguable. With legacy admissions and with these donations and close ties with investors, really what elite universities end up being is these gated communities for the education of elite kids. And that's not a public good. Remember how I said if you watched to the end of the video, I'd show you something you'd agree with Donald Trump on? Well here it is. In 2017, Trump signed into law a 1.4% tax on net investment income at the richest schools in America. Yes, Donald Trump has set the blueprint for how progressives might be able to tackle Harvard and it's not just Trump. So AOC talks about taxing the wealthy, but the Harvard University endowment pays zero tax. Harvard has 40 plus billion dollars, billion, in their endowment. Excessively large private university endowments. Senator Tom Cotton posting a 6% tax on endowments of America's top 10 universities would raise $15.4 billion. Why are we subsidizing this insanity? These are the richest institutions in America. They don't pay any taxes. Like, why does anyone say that? The right wing has co-opted, in the name of culture war or whatever it is, ideas about making public education more accessible and more affordable. And that's a real problem because the one thing most people in this country have as a common experience is education. And as Democrats, we should be talking about how to make education more affordable, better, and more equitable for everyone. I talked to two Massachusetts Democrats who want to do just that. Representative Peter Cataldo and Senator Pavel Pajano are two state legislators who introduced a bill that would punish Harvard. The bill addresses three different admissions policies that we find to be pernicious. Those are early binding decision, legacy preference, and donor preference. Rather than banning these practices, if an elite school that's highly selective and that has a large endowment decides to use them, then we are going to place a public service fee that's equivalent to a very, very small percentage of the endowment. In most cases, it would probably be less than the capital gains that are earned on the endowment itself. And so the school can make a choice that we view as a win-win. Either they stop using practices that hurt working class people, or they pay a public service fee that goes into a trust fund for community colleges in the Commonwealth. I live in Lawrence, which is one of the poorest cities in Massachusetts, where attainment of a four-year degree is less than 10% of the population. And one of the biggest obstacles is finances. When we talk about making community college free for everybody in the Commonwealth, we're talking about 50 to 100 million dollars. That's less than 1% of Harvard's endowment. Now imagine what we could do if we taxed all elite universities in America. States across the country have proposed legislation that would do that. The total sum of the Ivy League's endowments is more than twice the cost of making community college free for all Americans. We started off this video asking how Harvard got rich, but the real mystery left to me is why so many people have been cut out of the benefits those riches have gotten them. Harvard and other Ivies could be building a second or third campus. They could quadruple their enrollment if they wanted to, but they won't, because their prestige is founded on excluding millions of working class Americans from their country club system. That won't change unless we get serious about tackling their endowments. Before you go, please don't forget to like and subscribe to the channel for more content like this. In every episode of The Classroom, we're unpacking systems of inequality that affect all of us. What other topics do you want to see us cover? Sound off in the comments below, and once again, please don't forget to like and subscribe.