Wednesday, December 17, 2008

Institutional Responsibility

YU Endowment Shaken By Madoff Storm, Losing $110 Million

Yeshiva University's endowment, already battered by the tough economic environment, took another major blow this past weekend, losing approximately $110 million, or 8% of their endowment's assets.

In a mass email to YU students, staff and many alumni, President Richard M. Joel acknowledged they invested approximately $110 million in Ascot Partners, a $1.8 billion hedge fund managed by J. Ezra Merkin, although they asserted that the exact figure was difficult to ascertain. Mr. Merkin, who recently resigned from his positions as a trustee on YU's board and chairman of YU's Investment Committee, sent a letter to investors Thursday, December 11th, stating he had invested "substantially all" of the fund's capital with Bernard Madoff; the fund is now virtually worthless. Before President Joel's letter clarifying that the loss was $110 million, sources had located the losses between $100 and $140 million, while some unsubstantiated rumors around campus had ranged far higher.
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Mr. Madoff, who resigned this past weekend from his positions of treasurer of the Yeshiva University Board of Trustees and chairman of the board of Sy Syms School of Business, was indicted on Thursday on charges that he had swindled $50 billion in a Ponzi scheme which shocked Wall Street (see related article, "Former YU Treasurer Bernie Madoff Runs $50 Billion Ponzi Scheme").

Mr. Merkin served with Mr. Madoff on Yeshiva's board, and was a member of several other prominent instiutions. For the last few years he has served as the chairman of the investment committee at the UJA-Federation of New York, as vice chairman for the Ramaz School of Manhattan, and as a member of the Columbia College's Board of Visitors.
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However, Yeshiva's problems with Mr. Merkin allegedly began well before Ascot collapsed. One board member at Yeshiva related that several trustees and President Joel been looking into Merkin's management of the endowment prior to the events of this past Thursday. While some were discomfited by returns they found disappointing, others seemed to be rubbed the wrong way by a leadership style described by several as secretive and overbearing. A friend and supporter of Merkin acknowledged that "he has a hard edge to him."

Some sources were particularly troubled by Merkin's tactic of directing substantial amounts of YU's endowment to a fund that he himself managed. Figures ranged for how much money was invested with Merkin, but it appears the best estimate is that roughly $200 million was invested in Merkin-managed funds.

Kenneth Reed, director of research and policy analysis at the National Association of College and University Business Officers, called this tactic "a definite conflict of interest." Mr. Reed explained that endowment investment committees customarily provide guidelines to ensure a healthy degree of diversification, but do not set more specific details for where and how to invest.

The UJA-Federation of New York, where Mr. Merkin had formerly served on the board's investment committee, did not lose money with Ascot Capital because a conflict-of-interest policy prevented Mr. Merkin from directing their endowment towards his own funds, according to their recent statement.


Several financial professionals further expressed surprised over Merkin's self-compensation for his work with Yeshiva's endowment funds. One source close to trustees alleged that Merkin took a full management fee and did not give YU any discount for the size of their investment, which is out of character for most investors in the hundreds of millions of dollars according to financial professionals.


It borders on criminally negligent for institutions -- and YU appears to be not the only one -- to allocate donor money without basic conflict of interest policies. Especially given that this is not a new issue.

It would take some chutzpa for such institutions to ask for further donor money before heads, especially those who are now claiming to have been troubled or discomfited or already looking into it, roll.

In terms of effective actions we can take now to prevent a tragedy like this in the future, I would think that holding people criminally liable for allocating donor money on the basis of social connections instead of rigorous due dilligence should be high on the list.

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