Mon 13 Mar 2017
Imagine that it is 2050 and Williams has suffered a dramatic reversal of fortune. We are no longer among the top 10, or even 20, liberal arts colleges. What is the most likely cause of this fall from grace? Financial mismanagement. What is the most common cause of financial disaster? Too much debt. Consider Williams today:
We have borrowed about half a billion dollars. The markets are at all time highs. The endowment earned -1% last year. What could possibly go wrong?
1) Are we really $500 million in debt? I am not sure. These Form 990s are confusing! Some debt may have been paid off already. And, most importantly, the endowment is, by now, probably over $2.5 billion. So Williams is still $2 billion or so in the black.
2) Why is there so much debt? Thirty five years of an equity/bond bull market and federal incentives for borrowing will make even the most risk-averse institution aggressive. In 1998, Williams had $72 million in debt. Increasing that by a factor of 7 can’t possibly lead to trouble, can it? Now, to be fair, as a percentage of the endowment, the increase has only been from 7% to 20%, so only a factor of three increase. And, if Williams had been more levered over the last 17 years, we would be much richer today. And borrowing lots of money to buy houses in Florida was a great strategy from 1998 through 2007. Until it wasn’t. Also, note how federal tax incentives (and loose regulations) encouraged such borrowing, both for speculators in Florida a decade ago and Williams today.
3) Is this too much debt? Tough to say! If we could be certain that the endowment, over the next 10 years, was going to go up by 7% (as it did over the last decade or two), then we ought to borrow billions more, since we only pay a few percent on the debt. (By the way, how much do we pay? Fixed income is confusing.) Most professionals, however, expect returns to be much lower going forward. If the endowment is flat over the next decade, then this debt will prove to have been a major mistake.
Recall these wise words: Leverage is a dangerous thing, for both hedge funds and small liberal arts colleges. It would have been a bad thing for Williams to reduce debt in the depths of the financial crisis a decade ago. Reducing debt now would be prudent.
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