After discussing the dire ramifications of attorney Ira Millstein's involvement in the Yeshiva University investment scandal, the Charity Governance blog raises several serious questions about how poorly Richard M. Joel and J. Michael Gower are handling the revelations in the aftermath of the Bernie Madoff-Ezra Merkin Ponzi disaster:
Shortly after the Madoff scandal broke, Yeshiva became one of the first charitable organizations to announce a loss. University President Richard M. Joel sent an e-mail to students reporting a $110 million loss. President Joel could have described the loss as significant or material, but he chose in his e-mail to attach a fixed number to it.
Roughly two weeks later, J. Michael Gower, the university’s vice president for business affairs and CFO sent an e-mail to Bloomberg announcing the out-of-pocket loss was only $14.5 million. Janet Frankston Lorin, Yeshiva’s Madoff Losses Based on ‘Fictitious’ Profits’ (Dec. 30, 2008). The remaining $95.5 million represented fictitious profits.
This announcement is troublesome to the say the least. Charitably speaking, it suggests that Yeshiva’s accounting system might be in disarray.
It is hard for us to understand how the university could not have easily accessible records that show its cost basis in each of its investments. How could it possibly determine whether the investment was performing as expected if it didn’t know its cost? Maybe a hundred years ago it took some time to calculate cost, but in this day of computers and financial management software, the university’s revised loss is a mysterious and troubling revelation.
We can only wonder whether the purpose underlying this revelation is to reduce the pressure on the university to sue Merkin and some of its trustees. One could interpret the revelation as a statement by the university that “It isn’t nearly as bad as we thought so we should be thankful.” In other words is this a case of hitting yourself in the head with a hammer because it feels good when you finally stop?
In any event, even the $14.5 million loss is the out-of-pocket loss, it still doesn’t reflect the true loss. First there is opportunity cost which can be measured by the alternative investments that could have been made with the $14.5 million. At a 5% rate of return, a $14.5 million investment in 2000 would have grown to $21.42 million by 2008. At the purported Madoff 10% rate of return, it would have grown to $31.08 over the same period. We chose 2000 because that is the date of Millstein’s opinion letter, although the Bloomberg story suggests that the investment may have been made earlier. In any event, neither of those numbers is anywhere close to $110 million. Yeshiva would be wise to keep its mouth shut, gather all the facts, and release a report.
Joel and Gower may think dribbling out information is transparency, but all we’ve seen them do is add to the confusion.
There is a second cost: uninformed decisions by the board. The trustees were calculating spending rates and making decisions based on endowment numbers that were overstated. The university may now find itself squeezed for funds because it spent more than it should have.
Will scholarships be cut, will tuition rise, will students be forced to leave school, will research programs we put on hold, will capital projects be deferred or halted? Having $95 million less in endowment certainly has to some negative consequences.
Most importantly, $14 million isn’t anything to sneeze at. To the extent there was a conflict and inappropriate behavior, the fact that less was involved doesn’t eliminate the our concerns about Madoff's, Merkin's, and the board's behavior. If a lawsuit was warranted at $110 million, it is still warranted at $14.5 million, $21.6 million, or $40 million.