Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis

Peter Conti-Brown

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In late 2007 and early 2008, Senators Max Baucus (D-Montana) and Chuck Grassley (R-Iowa)—Chairman and Ranking Member, respectively, of the Senate Finance Committee (“SFC”)—called higher education to attention by opening an inquiry into how elite universities manage their multibillion dollar endowments. Commentators during the previous decade had extolled the genius of elite universities’ investment management departments, and now the Senators and others began asking the important question: to what end the accumulation of so much wealth? Actually, the Senators’ questions carried added bite. They asked universities to provide detailed information regarding endowment restrictions, financial aid policies, student demographics, and the average amount that families must pay for students to attend the universities. Additionally, the Senators and others explicitly challenged one of higher education’s sacred cows: its favorable tax treatment under § 501(c)(3) of the Internal Revenue Code.

Soon, however, the inquiry skidded to a stop. Along with most other participants in the global financial market, university endowments were severely battered by the financial crisis of 2008. The early estimates predicted an average loss of 23% of endowment value in only five months. The political momentum that had grown around Senators Baucus and Grassley seemed to dissipate while many elite universities scrambled to make sense of budgets that had not anticipated such losses. Roughly a year after the SFC’s questionnaire dominated news in higher education, the news shifted to focus on university endowments’ increasingly dire financial straits and the university budget cutting that soon followed. Even the most elite universities, with the largest endowments, were not immune. Consider the various responses to the financial crisis from the five private American universities with the largest endowments, measured by absolute dollar value—Harvard, Yale, Stanford, Princeton, and MIT. The schools variously have cut budgets up to 15%, laid off hundreds of employees, frozen salaries, halted or delayed construction projects, issued billions of dollars in debt, canceled or downgraded varsity sports teams, and closed libraries, among many other responses. By every account, universities—including the wealthiest in the country—have made significant cuts to almost every area of their budgets.

At first blush, this sudden change has a seductive logic. Yale’s President Richard Levin describes that logic—from concerns about the ever-growing endowment to concerns that universities cannot finance themselves—in these terms: “We had a run that was historically unprecedented, and at the tail end of that it looked like we were getting too rich . . . . Well, [that view has] quickly been amended.”1 Excessive wealth, lost quickly, suddenly does not look so excessive.

This logic, seductive as it is, is unsatisfying, and leaves one question unanswered. Even post-crisis, elite universities sat atop multibillion dollar endowments: why, then, did they not spend down more of these cash reserves rather than inflict significant disruption to their operating budgets? After all, the canonical research on university endowments, by Henry Hansmann,2 assesses the theoretical justifications for university endowments. Prominent among them is the idea that endowments are the universities’ “rainy day fund.” In light of the theory and the torrential downpour of the financial crisis, why then so much reluctance to spend more from the endowment?

Universities and other commentators, to the extent they have engaged the question at all, have produced roughly three answers: (1) during times of plenty, universities spent at levels that the post-crisis endowment could not sustain; (2) the law prevented universities from spending their endowments however they saw fit, which stood in the way of using endowment funds during times of crisis; and (3) elite endowments were invested in funds and assets that were difficult to access, particularly during times of crisis, making their use for budgetary stability impossible.

This Note argues that these explanations, with respect to elite universities, are wrong: universities did not spend beyond their means during times of plenty, the law does not meaningfully restrict elite universities in endowment spending, and universities could and did access even the most illiquid of investments during the crisis months with relative ease.

Rather than history, law, or finance providing the explanation for university budget cutting, this Note argues that elite universities have come to view their endowments as having value independent of the financial wealth such funds represent. That is, rather than simply an accumulation of excess capital, an elite university’s endowment represents a symbol of status and prestige, similar to the university’s libraries, art museums, architecture, faculty, and the prominence of its alumni. And just as an elite university would never sell its libraries, art museums, or architecture, so too will universities reach for any number of alternative funding sources—including their operating budgets—to avoid increased deterioration of their endowments. In that sense, universities’ endowments are like cowboys’ belt buckles: the bigger the buckle, the more impressive the cowboy, even though a much smaller buckle is sufficient to fulfill its function. Even though a university’s endowment may be adequate for its investment and budgetary funding purposes at one level, the larger the endowment, the more powerful the signal of excellence that the endowment represents.


Copyright © 2011 Stanford Law Review.

About the Author: Peter Conti-Brown is an Academic Fellow at the Rock Center for Corporate Governance, Stanford University.

Citation: Peter Conti-Brown, Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis, LEGAL WORKSHOP, Aug. 28, 2011,

Based on: Peter Conti-Brown, Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis, 63 STAN. L. REV. 699 (2011).

  1. Matthew Kaminski, The Weekend Interview with Richard Levin: The Age of Diminishing Endowments, WALL ST. J., June 6, 2009, at A11.
  2. Henry Hansmann, Why Do Universities Have Endowments?, 19 J. LEGAL STUD. 3 (1990).

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