How the Regents Sold the University Down the River

On Sept 17 2008, the Regents Investment Advisory Group met to discuss the UC’s investment strategies in light of the ongoing global financial meltdown. (The notes of the meeting can be found here). The decisions made at this meeting point to a series of questionable judgments, which may have caused serious damage to the university’s fiscal health and a loss of over $23 billion in its investment and pension portfolios. While the regents and the Office of the President would like us to believe that everyone lost money during the great financial meltdown, and so we should not blame management for the loss of billions of dollars, a closer look shows that the regents’ own financial interests could have motivated them to push the UC to raise their stakes in the riskiest investments that were already going bad.

During the early part of the meeting, we find the following entry in the minutes: “President Yudof noted that UC has investments in mortgage-backed instruments. He asked if there has been any investigation into the likelihood of default. He cited the magnitude of the investment and the potential risk of not being able to mark to market.” Yudof here was wisely asking about the UC’s investments in toxic assets and the inability to place a value on these risky investments. The response he got should scare all of us, “As the market turmoil expanded, the non-agency securities became less expensive, and in December, the University bought a fairly significant amount.” In other words, just when things were really going down hill for mortgage-backed securities, the UC increased its investment. While the UC investors thought they saw a bargain, what they were really investing in was a group of assets that they may never be able to sell.

While we do not know how much UC has invested in these toxic assets, we do get some indication, in the following section of the notes: “In response to a question asked by President Yudof, Mr. Wedding stated that the University has about $1.4 billion invested in mortgage-backed securities, of which $0.6 billion is within the UCRP, 40 percent to 45 percent of the total mortgage-backed portfolio.” While $1.4 billion only accounts for a small part of the UCs investment losses, we later read that the investors do not know how much money they have in other types of derivatives and that they cannot value their own assets: “Since May, that market has become very illiquid . . .The University cannot obtain reliable daily or monthly pricing from its pricing providers on many of these securities . . . The majority of them, 95 percent, are still valued AAA, as they were when purchased, but it is difficult to determine a market price . . .The University’s opinion is that it should hold this position rather than liquidate, and that this position will work out over a one-and-a-half to two-year period.” Once again, the UC made a decision to hold onto a large group of investments that it could not value, and even though the bond raters were still giving the mortgage-backed securities high ratings, it was clear that the assets were tied to defaulting loans, and no one could really market these securities.

Instead of putting its money into more stable and safe investments, the UC decided to take advantage of the market instability, and raise its stake in high-risk assets:
“Chief Investment Officer Berggren informed the Committee that this revised policy would result in much higher allocations to both private equity and real estate in the future. . . The recommendation is for an increase in the long-term target for private equity and real estate consistent with the present commitments and with commitments planned for the next few years.” Here we find UC following the failed Yale model of switching university investments from relatively stable bonds and stocks to more volatile investments in securities and real estate.

The question, then, is why did the UC continue to invest in real estate and mortgage-backed securities when it was clear that these areas were seeing the highest level of losses and instability. The answer to this crucial question appears to be that so many of the regents have huge stakes in real estate and financial securities. For example, Richard Blum, who is a major real estate investor, made the following argument at a later investment meeting (2/24/09): “Chairman Blum expressed concern that the University might become too risk-averse. He recalled that, over the last 60 to 70 years, equity and real estate have provided good returns. The current scenario was an event that occurs once in a century. He cautioned that the University’s investment profile might become so conservative that it would prevent the University from achieving its investment goals and taking necessary action when the market begins to recover.” It is clear here that Blum was pushing the regents to investment in his own industry and to continue to take on high-risk investments.

Since the regents are stacked with business people with huge investments in real estate and financial securities, it should be clear that they should not be the one’s managing the UC’s fiscal health. There are simply too many potential conflicts of interest to allow these investors to steer the UC’s investments. As a first step in changing how the regents are chosen, there should be an independent investigation into the UC’s recent investment decisions.