TMQ Excerpts

The Tuesday Morning Quarterback, Gregg Easterbrook, has been one of my favorite football and culture miscellanea writers for the past six years (in spite of his conservative leanings - this is how you know he must be good in my eyes). Some excerpts from this week's post I thought were worth sharing.

Harvard to Purchase Ireland: Last week, Bowdoin College became the latest elite school to announce dramatic tuition reductions for middle-class students. Davidson College started this welcome trend two years ago; since then, Amherst, Bowdoin, Harvard, Pomona, Princeton, Swarthmore, Williams, Yale and a few other top-ranked schools have rolled out cost reductions, either via a big extension of financial-aid eligibility for middle-class families or by converting all student loans into tuition discounts, as Bowdoin did last week. Everyone is impressed by the cost-reduction actions taken by these schools. TMQ pointed out early this past fall that some elite colleges have amassed such fantastic endowments -- Harvard's endowment now exceeds the GDP of Ireland -- that it was shameful the schools continued to soak middle-class parents. The developing dynamic was that poor kids with good grades could attend an elite school free and the parents of rich kids did not care about the price but that kids from middle-class families were being squeezed out. Now, many elite colleges will become more accessible to the middle class, allowing students to graduate with less or little debt -- so idealistic young graduates are in a position to enter public-service careers, rather than racing to Wall Street to cash in and pay off their loans.

Bowdoin is the latest super-elite college to aid the middle class. Wonderful -- but now who will aid the middle class at state schools?

Top schools are not cutting middle-class costs exclusively for reasons of improving education. Elite colleges have been coming under increasing congressional pressure to stop hoarding in their endowments, with Sen. Chuck Grassley (R-Iowa) and Rep. John Tierney (D-Mass.) leading the charge on that score. Federal law requires most types of charities and foundations to give away a minimum 5 percent of their funds annually; many elite-school endowments were giving away only 3 to 4 percent, and the overall average in 2007 for college endowment giving-away was 4.6 percent, according to the National Association of College and University Business Officers. TMQ has been among many commentators to point out that if big-endowment colleges simply upped their annual endowment outflow to 5 percent, tuition prices could be slashed. The middle-class tuition price reductions unveiled by many top colleges will bring them some well-deserved positive press and should get Congress off their backs. Colleges would far rather improve their aid plans voluntarily than be hit with some 900-page congressional mandate.

But admirable as the recent elite-college decisions are, it's not enough. Harvard, with a $35 billion endowment, could charge undergraduates nothing at all, as could Yale, with a $23 billion endowment. Williams has the largest small-college endowment, at $2 billion, and could charge students nothing at all. Most well-endowed colleges are not in a position to charge nothing; neither Bowdoin nor Davidson could, for example. But Harvard, Yale, Stanford, Williams, Amherst and Pomona -- the best-endowed colleges relative to student body size -- should simply stop charging anything to students from other-than-rich families.

The larger problem is that as welcome as the decisions of the well-endowed elite colleges are, most kids don't attend elite colleges. About three-quarters of American undergraduates attend public colleges and universities, where the listed tuition price might be lower than at an elite private school but the effective price for a middle-class family actually might be higher. Under the new setups, a state university might list a $15,000 tuition price but not grant much financial aid, while one of the well-endowed elites lists a $35,000 tuition price but waives most of the cost for middle-class families. Now that the middle-class-crunch problem has been addressed, at least at the well-endowed elite schools, more attention must be paid to the middle-class crunch at typical colleges and universities. Consider that the University of Connecticut, which has twice as many students as Yale, has an endowment of $300 million -- meaning Yale's endowment is 75 times larger, and meaning the University of Connecticut has far less endowment income to give away as aid. Traditionally, the wealthy have given to elite schools for prestige reasons but giving to public universities tends to focus on athletic facilities, not on the endowment. It's time to convince the wealthy that Harvard, Yale and Stanford don't need any more money: They should give instead to public universities and lesser-known liberal-arts colleges, where their donations will have more impact. Here's an encouraging story about a rich man who is doing exactly that.

Suppose the General Manager of the Miami Dolphins Awarded Himself the Same Bonus as the General Manager of the New England Patriots: Last week, this story appeared buried inside the business pages of The Washington Post. Why wasn't the story on Page 1? The Post reports that the blue-blooded five, Wall Street's five top investment banking houses, awarded their management $39 billion in bonuses for 2007 -- a period when those firms combined to earn investors about $11 billion in profits. Merrill Lynch lost $8 billion in 2007, Morgan Stanley $3 billion and Bear Stearns $230 million, yet the executives of these companies were showered with billions of dollars in bonuses. Otherwise, they would refuse to do any work! Which, apparently, would be in shareholders' interest. Merrill Lynch and Morgan Stanley could have done better by their shareholders in 2007 by simply purchasing Treasury bills; a software program designed to make simple conservative investment decisions about market-following mutual funds would have performed better in 2007 than the top management of most investment banking houses. And the software program would not have paid itself billions of dollars in bonuses for screwing up! (TMQ owns no stock in any of the mentioned firms.)

It's one thing when profitable firms shower money on their CEOs and other top brass; often the amounts are indecent, but as long as shareholders come out ahead, the executives have at least some justification for their windfalls. But in the modern milieu of corporate kleptocracy, even when the company does terribly and the CEO makes decisions that blow up in the firm's face, the CEO awards himself hundreds of millions of dollars, anyway. Why is this not seen as white-collar crime?

Last week's buried Post story included this priceless quote: "'To many people, [the bonuses] will be shocking and questionable,' said Jeanne Branthover, managing director of Boyden Global Executive Search. 'People in New York in the world of investment banking will understand it. It's critical that pay is still there or you're going to lose really good people.'" Beyond that executive headhunter firms such as Boyden have a self-interest in running up CEO pay -- this can increase the search firms' headhunting commissions -- consider the reasoning: OMG, we can't lose the really good people who cost our shareholders billions of dollars with dim-witted decisions! The notion that top corporate managers must be paid fantastic amounts because they possess incredible, astonishing expertise often is used to justify CEO pay, even when the managers who claim the incredible, astonishing expertise make foolish decisions. "We'll put billions of dollars of money entrusted to our care into subprime gimmick mortgages backed by no documentation of income; my incredible, astonishing expertise tells me this is totally safe!"

If corporate managers who screwed up received $5.85 an hour, the federal minimum wage, for the year in which they screwed up -- that is, if their wallets were at risk when they perform poorly -- then they might fairly argue for huge bonuses when they perform well. But there is no evidence that the people who made the big investment calls on Wall Street last year (except at Goldman Sachs, which avoided the subprime mess) are any better at what they do than people chosen at random off a Brooklyn street. You bet "people in New York in the world of investment banking" will understand huge executive bonuses paid in the same year as huge losses. What's happening is basically a hustle, intended to enrich the executives while separating the investors from their cash. "People in New York in the world of investment banking" understand that, all right!"

This entry was posted by VJ, on Wednesday, January 23, 2008. You can leave your response.