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  • How Yeshiva University Really Lost Its Money
    A shift to risky investment and spending strategies, while failing to plan for a rainy day, caused far greater losses than Bernie Madoff

    It was a time for emergency prayer. Rabbis at Yeshiva University were horrified at the idea that a non-rabbi was set to take over the presidency of a school that had been led by ordained clergy for more than a century. Joining many students at the college, they gathered on a brisk December day in 2002 to engage in a chant-and-response of Psalms, hoping to stave off disaster for their beloved school’s future.

    What they couldn’t have known when that prayer session took place more than a decade ago was that the real danger in Yeshiva’s new leadership was not to the school’s spiritual welfare but to its very existence. Over the years to come, the new leadership at Yeshiva would ramp up risk in the school’s investment portfolio, vastly increase spending, and do little to insure against a rainy day.

    When rainy days did arrive, with the global financial meltdown of 2008, Yeshiva was heavily exposed. Today, its finances are overwhelmed by a sea of red ink. According to a recent announcement by credit ratings agency Moody’s, the school will run out of cash next year.

    While Yeshiva has been making headlines for a sex-abuse scandal that had the school facing a $380 million lawsuit, a dramatic reversal of fortune undermining the organization from within has gone largely unnoticed. And when Yeshiva’s financial state has garnered attention from news outlets, the explanation has often been losses it sustained from its investments with convicted Ponzi scheme operator Bernard Madoff, estimated at $105 million.

    But a two-year investigation by TakePart in association with The Jewish Channel reveals that the Madoff losses represent only a small fraction of far greater losses that were due to Yeshiva’s new investment and spending strategies. (DISCLOSURE: The author of this article attended Yeshiva University from 1998 to 2002, earning mediocre grades and a reputation for student activism, and was not invited to return for his senior year.) The school lost more than $500 million on its high-risk investment portfolio—after selling off nearly $500 million of ultra safe U.S. Treasury bonds when the new regime took over a decade ago, plowing the proceeds mostly into hedge funds and corporate stocks. Assuming the strategy of increasing risk in its investment portfolio would pay off with higher returns, the new president and the board that hired him took on a bevy of new expenses, spending down their cash reserves and resting much of Yeshiva’s fate on their hedge fund gambles. Now that those investments have proved to be losses, Yeshiva faces more than $550 million of debt, and it appears to have been tapping into the principal of its investment portfolio to cover annual deficits. On their own, any one of these changes—the half-billion-dollar hit to its portfolio, the diminution of liquidity, and the mass of debt—would be a significant, though bearable, difficulty for a university; together, their effect has been devastating.

    Overall, it’s a swing in the financial fortune of one of the country’s top private universities and one of the world’s most esteemed Jewish institutions of more than $1.3 billion, well more than 10 times the losses from the portion of Yeshiva’s portfolio invested with Madoff. Students who applied to and enrolled at a school that had spent aggressively for 10 years now find themselves at one where drastic budget cuts need to be taken, assets need to be sold off, and key operations relevant to the school’s status as a top-tier institution, such as the graduate schools, are being cut. To get back on track, Yeshiva would have to find a way to generate growth in the school’s student and donor base (e.g., tuition hikes, increases in enrollment, and funding solicitations) sufficient to balance its budget and pay down its debt, while slashing its budget and selling off assets in a way that doesn’t hamper that growth. Yeshiva is now selling off at least ten of its buildings in an effort to generate cash, and has entered into an agreement with Montefiore Medical Center to operate the university’s medical school in a deal that rids Yeshiva of a major annual expense, while risking its status as a leading research university.

    The investigation, which involved the review of more than 10,000 pages of legal and financial documents, dozens of interviews, and many New York State Freedom of Information Law requests, shows how the leading lights of Wall Street helped achieve those losses for Yeshiva.

    Some of the most prominent names in investing—Berkshire Hathaway’s David S. Gottesman, Redwood’s Jonathan Kolatch, Oppenheimer’s Ludwig Bravmann, and Salomon’s Gedale Horowitz—guided the school’s finances in a way that was quite exceptional among universities. The portion of Yeshiva’s assets allocated to specific risky investments ranked near or at the top of all schools by the time the 2008-09 crash came, and Yeshiva’s losses rank among the largest in the country.

    As hedge fund culture came to dominate the leadership and financial stewardship of Yeshiva, its books looking less and less like those of a typical nonprofit, another aspect of troubling Wall Street behavior that led to the crisis of 2008 created additional problems: At the same time that Yeshiva’s leadership presented great risk to the school and its debtors, one of the world’s leading credit rating agencies seemed to ignore the problems the school faced, even touting aspects of Yeshiva’s investment allocations that would lead to the university’s downfall.

    Read the rest of this story at TakePart.





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