The Harvard Scam: How Elite Schools Steal From You

Summary

The video explores how Harvard and other Ivy League institutions amassed wealth, highlighting a 3500% increase in Harvard's endowment from 1978 to the present. It discusses the role of philanthropic gifts, the shift to aggressive investment strategies in the 1980s, and the influence of alumni in finance. The video criticizes the exclusivity and legacy admissions, suggesting that taxing these institutions could fund public education. It also touches on the potential for elite universities to expand access but chooses not to, maintaining their prestige through exclusivity.

Takeaways

• 🏛️ Harvard University's endowment has grown from $1.4 billion in 1978 to $50.7 billion, a 3500% increase, while the number of admitted students has decreased by 12%.
• 📉 Public universities, in contrast, have experienced decreased state funding and increased enrollment, with institutions like UC Berkeley enrolling more low-income students than the entire Ivy League combined.
• 🔄 The Ivy League's wealth accumulation is not mirrored in upward class mobility for their graduates, with public universities often performing better in this regard.
• 💼 The 1980s marked a significant shift in university endowment management, with a move towards riskier investments like hedge funds and private equity, led by Yale's David Swensen.
• 🤝 A close relationship between Ivy League universities and Wall Street has been mutually beneficial, with alumni returning to influence investment strategies and endowment growth.
• 💼 The U.S. News and World Report College Rankings system incentivizes exclusivity and high spending, reinforcing the elite status of Ivy League schools.
• 💵 Nonprofit status allows elite universities to avoid taxes and access resources that compound their wealth, despite operating like hedge funds.
• 🏦 Harvard and other elite institutions use donations for investment rather than direct spending, leveraging their endowment while borrowing for capital expenditures from government markets accessible to nonprofits.
• 💭 There is a growing call for structural reforms in higher education, including taxing elite private institutions to fund more equitable opportunities.
• 🗣️ Politicians like AOC and Senator Tom Cotton have proposed taxes on large university endowments to fund public education and make community college free.

Q & A

How did Harvard University's endowment grow from 1978 to the present?

Harvard University's endowment grew from $1.4 billion in 1978 to $50.7 billion in the present, marking a 3500% increase. This growth was largely due to a shift in investment strategies, particularly in the 1980s, where the university began to invest in high-risk, high-reward financial schemes like hedge funds and private equity funds.

What role did David Swensen play in the growth of Yale University's endowment?

David Swensen, Yale's endowment manager, was instrumental in developing the 'Yale model' of endowment investing. This model involved allocating a significant portion of the endowment to private equity and hedge funds, which were riskier but had the potential for higher returns. His strategies helped grow Yale's endowment from $1 billion in 1985 to $31 billion by 2021.

How did the U.S. News and World Report College Rankings system influence university admissions and endowments?

The U.S. News and World Report College Rankings system incentivized universities to maintain exclusivity and spend more money on fewer students to climb the rankings. This led to a scarcity of seats, increased rejection rates, and a focus on prestige over accessibility, which in turn helped elite universities maintain and grow their endowments.

What is the connection between elite universities and Wall Street, as discussed in the script?

The script highlights a 'revolving door' between Ivy League universities and Wall Street. Graduates from these universities often go on to work in finance, and later return to their alma maters to hold influential positions, such as board seats. This connection has led to mutual benefits, such as securing early capital for hedge funds and private equity firms, and driving the growth of university endowments.

Why do public universities have a different financial trajectory compared to Ivy League schools?

Public universities have seen decreased state funding while increasing their enrollment numbers. Unlike Ivy League schools, which have grown their wealth through endowment investments and exclusivity, public universities have had to manage with fewer resources and serve a larger, more diverse student body, including a higher number of low-income students.

What is the role of legacy admissions in the context of elite university admissions policies?

Legacy admissions refer to the practice of favoring applicants with a family history of attending the university. The script suggests that this practice, along with other exclusive admissions policies, contributes to the elitism and wealth of institutions like Harvard, often at the expense of working-class students.

How does the script suggest that taxing elite university endowments could benefit public education?

The script proposes that taxing the endowments of elite private institutions could generate significant revenue, potentially in the trillions of dollars over a decade. This revenue could be used to fund public education initiatives, such as making community college free for all Americans.

What is the significance of Harvard's status as a nonprofit in terms of its financial operations?

Harvard's nonprofit status allows it to enjoy tax exemptions and access to resources that compound its wealth. This status is beneficial for the university's financial operations, as it can invest in growth-oriented assets without paying taxes on the income generated, thus contributing to its wealth accumulation.

How does the script challenge the notion that wealth accumulation in elite universities benefits all students?

The script challenges this notion by pointing out that the wealth accumulation in elite universities like Harvard often leads to increased exclusivity and debt for students, rather than benefiting a broader student body. It suggests that these institutions could be doing more to expand access and reduce costs for students.

What are some proposed solutions to address the wealth disparity in higher education as presented in the script?

The script presents several proposed solutions, including ending legacy admissions, taxing elite university endowments, expanding enrollment in elite institutions, and redirecting funds to public education and community colleges. It also discusses legislative efforts to penalize elite schools for using exclusive admissions practices.

Outlines

00:00

🏛️ Wealth Inequality in Higher Education

This paragraph delves into the financial growth of Harvard University and the Ivy League over the past decades, contrasting it with the decline in state funding for public universities. It highlights the stark differences in endowment sizes and admission rates between elite private institutions and public universities, emphasizing the latter's commitment to enrolling more low-income students. The script also touches on the potential for structural reforms in higher education, suggesting that taxing wealthy private institutions could fund significant improvements. The narrative proposes expanding elite institutions and using their resources to benefit a broader student body, hinting at a critique of the current system that favors the privileged.

05:00

💼 The Ivy League's Financial Boom

The second paragraph explores the historical and financial mechanisms behind the Ivy League's wealth accumulation. It discusses the evolution of university endowments from ancient Rome to the modern era, focusing on the pivotal shift in investment strategies in the 1980s. The paragraph introduces David Swensen's innovative investment model at Yale, which involved high-risk, high-reward strategies like hedge funds and private equity. It also reveals the close ties between Ivy League institutions and Wall Street, suggesting a mutually beneficial relationship that has contributed to the endowment boom. The narrative critiques this model, pointing out the potential exploitation of workers and the ethical implications of such financial schemes.

10:02

📊 The Influence of U.S. News Rankings

Paragraph three critiques the U.S. News and World Report college rankings system, arguing that it perpetuates elitism and artificial scarcity in higher education. It discusses how the rankings incentivize universities to reject more applicants to improve their standing, which in turn increases exclusivity and prestige. The paragraph also touches on the magazine's billionaire owner's ties to Ivy League institutions, suggesting a conflict of interest that favors these schools. Furthermore, it highlights the Obama administration's failed attempt to introduce a government alternative to the U.S. News rankings, illustrating the entrenched power of the current system.

15:04

💼 Taxing Elite University Endowments

The final paragraph proposes practical solutions to address the wealth disparities in higher education. It suggests taxing the endowments of elite universities to fund community colleges and make education more accessible. The paragraph discusses legislative efforts to penalize elite institutions for using admissions practices that favor the wealthy, such as early binding decisions and legacy preferences. It also points out the irony of elite universities, which operate like hedge funds, being legally classified as nonprofits. The narrative concludes with a call to action, urging policymakers to seriously consider the impact of endowments on educational equity and to implement reforms that benefit a wider range of students.

Keywords

💡Endowment

An endowment is a pool of money donated to an institution, often a university, to be invested and used for specific purposes such as funding scholarships, research, or faculty positions. In the context of the video, Harvard's endowment has grown significantly over the years, from $1.4 billion in 1978 to $50.7 billion, which is a 3500% increase. This growth is tied to the university's financial strategies and the broader theme of wealth accumulation in elite educational institutions.

💡Legacy Admissions

Legacy admissions refer to the practice of giving preference to applicants who have a family history of attending a particular university. The video discusses the potential for making admissions to elite institutions fairer by removing legacy admissions, which are seen as benefiting a select few rather than promoting broader access to education.

💡Ivy League

The Ivy League is a group of eight prestigious universities in the United States, including Harvard. The term is often used to represent elite higher education institutions. The video highlights the wealth accumulation of these institutions and contrasts their practices with those of public universities.

💡Public Universities

Public universities are institutions funded by state governments and typically offer lower tuition rates than private universities. The video points out that public universities have seen decreased state funding while increasing their enrollment numbers, unlike the Ivy League schools, which have seen their endowments grow significantly.

💡Affirmative Action

Affirmative action refers to policies designed to increase opportunities for underrepresented groups in education and employment. The video mentions the striking down of affirmative action in the context of discussions around equity in higher education, suggesting that there are ongoing debates about how to ensure fair admissions practices.

💡Taxation of Endowments

The video discusses the idea of taxing the endowments of elite private institutions as a means to generate revenue for public education. It mentions that taxing the wealthiest schools could yield a significant amount of money, which could be used to fund initiatives like making community college free.

💡Hedge Funds

Hedge funds are investment funds that pool capital from accredited investors and invest in a variety of assets, often using complex strategies. The video explains how the investment in hedge funds and private equity by university endowments, like Harvard's, has contributed to the growth of these institutions' wealth.

💡Private Equity

Private equity refers to investment funds that acquire private companies or buy out public companies to take them private. The video mentions private equity in the context of high-risk, high-reward investments that have been used by university endowments to grow their wealth.

💡Yale Model

The Yale Model of endowment investing, developed by David Swensen, involves allocating a significant portion of an endowment to alternative investments like hedge funds and private equity to maximize returns. The video highlights how this model has been influential in the growth of university endowments.

💡Nonprofit Status

Nonprofit status is a legal designation for organizations that operate for purposes other than making a profit. The video discusses how elite universities, despite their wealth, maintain nonprofit status, which provides them with tax exemptions and other benefits, contributing to their financial growth.

💡U.S. News and World Report College Rankings

The U.S. News and World Report College Rankings is a system that ranks universities in the United States. The video critiques this system for promoting exclusivity and high spending by universities to achieve high rankings, which can contribute to the wealth gap in higher education.

Highlights

Harvard University's endowment grew from $1.4 billion in 1978 to $50.7 billion, a 3500% increase.

Harvard's admissions decreased by 12% from 2200 students in 1978 to 1942 students in the present year.

Ivy League universities have seen a similar increase in endowments and decrease in admissions.

Public universities face decreased state funding and increased enrollment, in contrast to Ivy League trends.

Public universities, like UC Berkeley, enroll more low-income students than the entire Ivy League combined.

Efforts to organize equity in higher education include making admissions fairer by removing legacy admissions.

Structural reforms are needed beyond just ending legacy admissions at elite institutions.

Taxing top elite private institutions could generate a trillion dollars within a decade.

A financial endowment is an investment portfolio designed to grow a pool of money for an organization.

Harvard's endowment is composed of thousands of philanthropic gifts since its early history.

The shift to relying on philanthropic gifts came in the 1700s to protect Harvard from religious policy pressures.

Endowments exploded in size recently, with a significant shift in the 1960s towards maximizing investment returns.

David Swensen developed the Yale model of endowment investing, focusing on high-risk, high-reward investments.

Yale's endowment fund consisted of about 60% investments in hedge funds, private equity, and venture capital by 2019.

The close relationship between Ivy League schools and Wall Street has been mutually beneficial for both parties.

Elite universities' endowments have grown through investments in riskier assets, maximizing returns.

Studies show that colleges creating the most upward class mobility for graduates are largely public universities with fewer resources.

The U.S. News and World Report College Rankings system incentivizes colleges to spend more on fewer people to climb ranks.

Ivy League schools' pursuit of elite status is exacerbated by the U.S. News rankings, leading to artificial scarcity of seats.

Elite universities are legally considered nonprofits, providing tax exemption and access to additional resources.

Proposals to tax the endowments of elite universities could fund initiatives to make education more accessible and affordable.

Harvard and other Ivies could expand their campuses and enrollment but choose not to, as their prestige is based on exclusivity.

Transcripts

Here's a question we've been digging into you 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.

They admitted 2200 students to the incoming freshman class.

This year, they have $50.7 billion

and they only admitted 1,942 students.

That's a 3500% 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 fairer

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 Class Room, 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 Hansmann 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 Swensen

saw an opportunity in these new investment methods.

David Swensen develops this Yale model of endowment investing that involves

putting large shares of the endowment into private equity investments and hedge

fund investments that could yield higher returns on investment than other folks.

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 Swensen, 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 ways furthered Steyer's own interests as well.

Both Tom Steyer and David Swensen were

alumni of Yale University.

And at a Yale homecoming football game around 1986,

Tom Steyer says he heard that David Swensen was now managing

the Yale Endowment, and he started a two year courtship,

meeting with David Swensen to say, Hey, if you invest in my fund,

I think I can earn really big returns for the Yale Endowment Fund.

David Swensen 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 basically as former Yalies they shook hands.

And as a result, David Swensen, 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 Swensen’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 are 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.

Okay.

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 Swensen 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,

they tend to have higher rates of return on investment.

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 Swensen 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 who 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 original 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 of 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.

The 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 and World Reports College Rankings system.

Authors Sahaj

Sharda writes about how the magazine and its billionaire owner, Mort Zuckerman,

got so powerful and influential, and his new book, The College Cartel.

U.S. News and 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 where 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 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 and 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 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 was a possibility for a government competitor to the U.S.

News rankings model.

You know, in the Obama administration, there was

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 nonprofit.

Basically what this means is if I'm a nonprofit

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 nonprofit 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 nonprofits.

The reason they enjoy 501 (c)(3) 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 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 ten 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 doesn’t 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 Payano are two state

legislators who introduced a bill that would punish Harvard.

The bill addresses three different admissions

policies that we found 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 city in Massachusetts,

where attainment of a

four year degree is less than 10% of the population.

And one of the biggest obstacle goals is finances.

When we talk about making community college free for everybody

in the Commonwealth, we're talking about $50 to $100 million.

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.