Felix Salmon

The costs and benefits of grad school

Felix Salmon
Jan 7, 2010 20:43 UTC

I’m a great believer in the benefits of an undergraduate education when it’s done right (which is rarely). But grad school is a different matter entirely: the opportunity costs are much higher, the amount of debt involved rises substantially, and the range of jobs you can do at the end of it in many ways goes down rather than up.

Thomas Benton has a great column about grad school in the humanities: no one should do it, he says, unless they’re independently wealthy or otherwise being paid for somehow.

But what about more vocational graduate degrees, like law school? Anybody thinking about it should read not only Elie Mystal’s post at Above the Law but also the long comment stream attached, filled with people like Elie who graduated from law school with six-figure debts and found themselves either stuck in Biglaw jobs they hated, or else just simply overwhelmed by impossible finances.

It’s also worth noting the bimodal distribution of law-graduate salaries:


In order to make law school work (assuming you’re not paying cash for your tuition and living expenses), you basically need to end up in that second hump, over to the right: Biglaw, as it’s known. But a glance at the chart shows that most law students won’t make it there.

Here’s Benton, talking about humanities students, but with a lot of applicability to other fields too:

The letters I receive from prospective Ph.D.’s are often quite angry and incoherent; they’ve been praised their whole lives, and no one has ever told them that they may not become what they want to be, that higher education is a business that does not necessarily have their best interests at heart. Sometimes they accuse me of being threatened by their obvious talent. I assume they go on to find someone who will tell them what they want to hear.

Right now, a lot of people are thinking of going back to school, just because unemployment is high and well-paying jobs are hard to find. But anybody doing that should be very careful indeed about the debts they’re racking up. They could end up hurting much more than any degree will help.

(HT: O’Dell)

Update: Just found this astonishing chart, from Mike Mandel. It speaks for itself, I think:



I am currently considering attending grad school. I have a bachelors degree, I was working for a large company but left in order to open my own business. Unfortunately due to issues with our investors 2 years after I opened the business I had to close it down. Now I am back trying to look for work but I have been unable to find any management, assistant manager or even admin positions. The feedback I keep getting back is that I don’t have enough experience. I am about to be 29 and having my own business thought me a lot, but I am very worried that my current employment options are entry level call center type of job. I am looking for advice on if I should get an MBA, enroll in law school or just go into the call center and see if I can grow from there.
Any advice would be appreciated Thanks

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The PhD in financial journalism

Felix Salmon
Dec 22, 2009 15:04 UTC

Did you know that it’s possible to get a PhD in financial journalism? Lennie Fuller does — he’s a former Lehman executive who’s now thinking of doing exactly that at Stirling University. He asked me if I had any ideas about possible thesis topics, and I thought in my bloggy way that throwing the question open might be interesting. So what do you think the big open questions in or about financial journalism are?

Fuller is a qualified Scottish Chartered Accountant, and wonders whether something similar to the CFA might not be implemented in financial journalism: should journalists be regulated or qualified before going to work? If you don’t really understand something like structured finance, is it possible to write sensibly about it?

My feeling on this one is that the arguments against such a scheme are so overwhelming as to render any thesis on the subject pretty moot. Freedom-of-speech principles alone would more than suffice, as would the simple fact that the public would not be well served by any scheme which served to further perpetuate the degree to which journalists have been captured by the financial institutions they cover.

That said, one interesting thesis topic might be an empirical look at the expertise of the people who produced the best journalism of the crisis. Certainly the trade press, where one finds a great deal of narrow expertise, failed utterly to grasp the bigger picture. What kind of qualifications or knowledge, if any, did the best journalists of the crisis have in common? My feeling is that the main qualification that journalists needed was a strong and healthy skepticism of authority figures, including senior bankers, central bankers, and regulators. And that’s not a trait one learns by studying overcollateralization waterfalls in detail.

Fuller also wonders whether financial journalism “should only be investigatory as all other information is freely available in the market” — which seems to me to ignore the mechanism (journalism) by which an enormous amount of information enters the market. (There’s a reason why all those trading floors are surrounded by screens tuned to CNBC, while the trading screens themselves invariably have full feeds from Reuters and Bloomberg.) More generally, I think that people like Fuller, who are looking at financial journalism largely from the perspective of a financial-market professional, have to be careful to remember the crucial public role played by journalism. Just because information is “in the market” doesn’t mean that it’s known by the general public. And it’s the job of journalists to intermediate between the two.

More generally, it’s the job of journalists to interpret what financial-market professionals are doing and to explain it to a generalist audience. Yes, market activity can be complex, and as a result some of the subtleties will be missed. The professionals might not like that, but if they already know everything that the article is talking about, then it’s not aimed at them anyway. One of the biggest lessons that financial journalists have learned over this crisis is that we collectively spent much too much time writing about deals for bankers and lawyers, and much too little time writing big-picture articles for the general public which would require broad, rather than narrow, understanding of what was going on.

Finally, Fuller asks when sources become insider trading: the simple answer is never, if you don’t trade, and there’s really no reason for journalists to engage in such activities. More generally, the only insider information that journalists ever really have is the inside information of what is going to appear in tomorrow’s paper. If you trade in advance of a market-moving story appearing, that’s very bad. In other cases, you’re not an insider, so you can’t be guilty of insider trading.

But that’s just Fuller’s ideas. What other ones are there? I’d be interested in looking at the difference between the trade press and the consumer press, for starters, and how they can learn from each other. I’d also be interested in asking whether there’s a fundamental conflict of interest in the financial-press business model: how can we financial journalists be expected to hold the industry to account if we’re ultimately being paid by that very industry?

And does anybody know of any other PhD programs in financial journalism? What have the results been to date?


“Certainly the trade press, where one finds a great deal of narrow expertise, failed utterly to grasp the bigger picture.”

Hear, hear!!

There are extraordinary topics at hand. We are presently witnessing the rise and fall of civilizations, with stunning handoffs from nations of the past to nations of the future, with policy choices that help determine which group we are a part of.

If you are a good financial journalist, you can help deliver play-by-play coverage of national and civilizational trends. These are buffetting us like crazy and if someone helps us figure out what is going on, we eat that stuff up!

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Those Harvard swaps: Even more of a fiasco than we thought

Felix Salmon
Dec 18, 2009 16:09 UTC

Bloomberg takes a dive into the Harvard swaps fiasco today, and uncovers some pretty juicy information. For instance, check out Larry Summers’s state of mind when he was entering into the swaps:

Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.

“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”

Money? Don’t worry about money. Larry can take care of all that. He’s Larry! And Larry was certain of two things: firstly that his beloved Allston project was a go — despite the fact that he hadn’t raised the funds for it, and secondly that interest rates would rise by the time construction started. Therefore, he decided to lock in funding costs by using forward swaps.

At the same time, Larry decided to be cheap (in a move which turned out in the end to be incredibly expensive). He could lock in funding costs simply by buying an option, but that would, you know, cost money. The swaps, by contrast, required no money up front. So, that makes them better!

We all know what happened next: Summers was ousted as president of Harvard, interest rates plunged, and the university decided to issue new bonds in order to be able to pay a billion-dollar ransom to get out of the swaps contracts.

You can’t blame Summers for the timing of the exit, which couldn’t have been worse: Bloomberg quotes swaps adviser Peter Shapiro as saying that “December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money. Not only was the 30-year swap rate a mere 2.69%, down sharply from 4.25% in November, but the credit spread for non-sovereign AAA-rated issuers like Harvard also hit an all-time high, maximizing Harvard’s borrowing expense.

In hindsight, the decision to exit the swaps was just as disastrous as the decision to enter them: swap rates are now back up to their December 2004 levels, which means that had Harvard simply waited, it could have exited at no cost whatsoever.

The big winner here is JP Morgan, which both wrote most of the original swaps and which underwrote the bond deal which allowed Harvard to exit them. After the bond deal closed, JP Morgan bankers went out to dinner at Mistral in Boston to celebrate with Harvard officials.

Not that they picked up the bill. To the contrary, JPMorgan invoiced the Massachusetts state finance agency $388.78 for three employees who attended. Classy, that.


How Larry Summers lost Harvard $1.8 billion

Felix Salmon
Nov 29, 2009 22:54 UTC

Most people, if they’ve hired a legendary fund manager on a multi-million-dollar salary to look after investments and liquidity, would listen to the advice of that person. But most people aren’t Larry Summers:

It happened at least once a year, every year. In a roomful of a dozen Harvard University financial officials, Jack Meyer, the hugely successful head of Harvard’s endowment, and Lawrence Summers, then the school’s president, would face off in a heated debate. The topic: cash and how the university was managing – or mismanaging – its basic operating funds.

Through the first half of this decade, Meyer repeatedly warned Summers and other Harvard officials that the school was being too aggressive with billions of dollars in cash, according to people present for the discussions, investing almost all of it with the endowment’s risky mix of stocks, bonds, hedge funds, and private equity. Meyer’s successor, Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears.

Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%. No wonder Meyer and El-Erian tried to talk him out of it: the Harvard endowment was never designed as a place to invest sums of cash which might be needed immediately. Instead, it’s designed to invest for the very long term, taking advantage of the higher returns on illiquid investments.

Summers was playing a high-risk carry-trade game with Harvard’s cash:

The aggressive investment of cash accounts is part of how the university has long run its “central bank,’’ an account that holds funds from its various schools and pays them a modest US Treasury rate of return. The “bank,’’ in turn, has invested the lion’s share of that money with the endowment, generating returns that are used to pay for shared needs, like graduate housing and financial aid.

No one had the stones to stand up to Summers when it came to this high-risk strategy of essentially borrowing at Treasury rates and investing the proceeds in an illiquid long-term endowment — certainly not James Rothenberg, Harvard’s part-time, unpaid, California-based treasurer.

After Summers left, sheer inertia took over, and nothing happened — maybe because El-Erian was soon on his way out as well. The result was that the university ended up losing 27% of its $6 billion in “cash”: a whopping $1.8 billion. There’s no indication, of course, of any kind of apology from Summers.

Update: Brad DeLong, in the comments, does some back-of-the-envelope math and reckons that Harvard came out ahead of the game, on net, even after accounting for that $1.8 billion loss. But that’s exactly the difference between a long-term endowment, on the one hand, and a “cash account”, on the other. If you have money in a cash account, you spend it. And money you’re spending should be liquid, not tied up in an endowment which can drop 27% in one year.

And Viyada York says that Harvard’s investment committee, rather than Summers, should be held responsible for the loss. It’s true that the managers of the endowment are responsible for its performance. But they’re investing for the long term. Summers should absolutely be held responsible for the decision — which was entirely his — to invest the Harvard cash account alongside the endowment, despite the fact that the cash account required much more liquidity than the endowment as a whole.


10 Days later the NY Times reports:
“BOSTON — Harvard announced Thursday that it would indefinitely suspend construction on a high-tech science complex in the Allston neighborhood of Boston because of money problems.”

Regardless of the optimal policy and slight differences between the optimal and good policies, I don’t think anyone can claim that it was a “good” policy covering all economic conditions?

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The weird resignation of Brandeis’s president

Felix Salmon
Sep 25, 2009 13:37 UTC

The latest chapter in the Brandeis fiasco is that president Jehuda Reinharz is resigning, just one year after signing a new five-year employment contract. The official letters don’t once mention the name “Rose”, which is insane: how can Reinharz say with a straight face that he “will leave the University in good condition with a strong foundation on which to build in the future”, even as there’s still enormous uncertainty over the question of whether the university will have to sell millions of dollars from the Rose’s art museum just to make up its funding shortfall?

Reinharz explicitly denied, in an interview with the Brandeis Hoot, that his decision had anything to do with the Rose — while admitting that PR surrounding his resignation would be handled by the same crisis-management firm that was hired after the Rose news broke and the university’s own communications officers utterly botched the way they dealt with the announcement. There’s certainly nothing in Reinharz’s stated reasons for his resignation (“It is now time for me to enter the next chapter of my professional life”) which explains what has changed since a year ago, when Reinharz signed his five-year contract.

With any luck a new president will be found soon, who has no personal association with the decision to close the Rose — and who might be able to better cope with the attention now being paid to that beleaguered museum.

Harvard donations: Down, not up

Felix Salmon
Sep 16, 2009 19:40 UTC

On Friday, I posted a chart which I thought showed donations to Harvard University rising substantially over the past couple of years, to over $1.6 billion a year. Boy was I wrong. As the Crimson reports, Harvard received $602 million in gifts this past fiscal year—an 8 percent year-on-year decline.

My commenters picked up on the mistake very quickly, but unfortunately I missed those comments: I rushed to meet Bob Millman for wine that afternoon, and then disappeared off to a wedding for most of the weekend, and by the time I got back the comments on the Harvard post were quite far down the list. Which is no excuse: I really should have been on top of this.

So many apologies for not updating the post in a timely manner, and for not paying enough attention to my astute and perspicacious commenters. You guys are the best, and I definitely screwed this one up.


Thanks for making the correction and apologizing, however belatedly. Nobody’s perfect and I think we all appreciate you doing your best.

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How endowments spend tuition payments

Felix Salmon
Sep 15, 2009 20:12 UTC

If you want a defense of the endowment style of investing, Michael Hennessy provides a really good one. Even he, however, admits that many endowments went way too far during the boom years:

Some (not all) endowments were far too aggressive with their private assets programs, sometimes to the point of planning on incoming charitable contributions (and even seasonal tuition payments) to help fund private asset capital commitments and private capital calls in a “just-in-time” fashion.

Using tuition payments to make capital calls from private-equity funds? I know that people have described Harvard as a large hedge fund with a small educational institution attached, but this is just insane. As a public service, Hennessy should start naming names.


I’ll not name any names, but suffice it to say that these referenced universities still all have outstanding long time real and risk-adjusted returns, even including 2008. The real egregious flaw was banking on donations into their institutions to help provide liquidity. Tuition payments are fairly predictable and, after all, contractual obligations, albeit ones experiencing more deliquencies and defaults than normal.

Indeed most endowment investment operations should be communicated in a fully transparent way, and most are. And indeed they should be used, and are used, as a selling point to prospective donors and students alike. And that has historically been a very good thing because they have by and large done a superb job, leading to much more money for programs, tuition aid, etc. How that money is divvied and spent is an entirely different matter, and decided by the governing bodies of those institutions, and informed by faculty and administration primarily and the educational marketplace (which has become a misguided arms race, as most arms races are). But again, being down 25% in the worst financial crisis in our lives = what the 70/30 did. What model of investing will produce the best returns over the next 10 years?

Chart of the day: Harvard donations

Felix Salmon
Sep 11, 2009 14:53 UTC

Well done to Jane Mendillo for increasing the transparency of the Harvard endowment, moving from a relatively terse “John Harvard letter” to a more discursive “Endowment Report”. Whence comes this chart:


At the height of the worst recession in living memory, it seems, donations to Harvard went up.

I actually called this, back in May, saying that Harvard’s alumni might be more likely to donate to a university when their donations weren’t dwarfed by endowment returns. But then the Times said that donations were correlated with endowment returns, and I thought that donations might fall. I guess there was nothing to worry about.

(Incidentally, the annual donations to Harvard, at over $1.6 billion, are now pretty much the same as the size of the entire endowment at Wellesley College, whence Mendillo came.)

Update: Wow, I really got this one wrong. As my commenters rightly point out, the chart shows donations from the endowment to the university, not donations to the university. Those did indeed fall.


Shame on you for not fixing this.

Chart of the day, College tuition edition

Felix Salmon
Sep 9, 2009 16:03 UTC


This chart comes from John Caddell, and it shows the cost of attending Rensselaer Polytechnic Institute as a percentage of US median income. Scary stuff. But not as scary as David Leonhardt’s column today, which demonstrates a nasty ghettoization effect at state colleges, many of which are turning into failure factories:

Only 33 percent of the freshmen who enter the University of Massachusetts, Boston, graduate within six years. Less than 41 percent graduate from the University of Montana, and 44 percent from the University of New Mexico.

There are serious problems with incentives, here: colleges get paid according to their enrollment, not according to the number of students they graduate. And with freshmen cheaper to teach than seniors, it actually benefits a college to have more of the former than the latter.

The first order of business here is to level the playing field: at the moment, poor kids have an alarming tendency to attend colleges with low graduation rates, even when they’re more than capable of getting into colleges with higher graduation rates. They thereby essentially give their rightful place at the better schools to richer kids, who are much more likely to graduate in the first place. That’s why Joe Weisenthal is wrong here:

The authors cite students who go to Eastern Michigan University (39% graduation rate), but who could have gone to University of Michigan (88% graduation rate). But UMich is already at maximum capacity — as are other elite schools — so for one thing, an influx of new applicants, would just displace students, and we’d be back to ground zero. But beyond that, how do we know that the the UMich graduation rate would stay constant given an influx of students who used to go to Eastern Michigan? That’s a gigantic variable.

The point is that the displaced students would be richer students who would be much more likely to graduate in any case, even if they went to Eastern Michigan University. And even if the UMich graduation rate fell from 88%, it would still be much higher than 39%.

This, from Weisenthal, is also silly:

While the educators complain that high schools aren’t doing enough to prepare students for college, the goal of “improved matriculation” sounds just as silly. Just as graduating from high school doesn’t automatically make you prepared for college, graduating from college doesn’t automatically make you ready for the real world.

No, but it makes you much more employable, and it does wonders for your lifetime earnings. Lots of companies simply won’t employ a college drop-out, no matter how qualified they are, and will employ a less-able college graduate instead. It’s often the first filter applied: companies won’t even look at people without a degree.

Improving the matriculation rate therefore improves the range of choice presented to employers, and improves the overall quality of the white-collar workforce. It benefits everyone, except for maybe dubiously-competent graduates who right now don’t really need to compete, in the job market, against smarter applicants who unfortunately dropped out of college. If those smarter applicants get themselves degrees, the less-competent will find it harder to get jobs.

Update: Ryan Avent seems to think that dropouts are dropouts, wherever they attend university. I don’t think that’s true. For one thing, the presence or absence of a campus makes a big difference: students are much more likely to drop out if there isn’t one. And for another thing, there are all manner of peer effects: if most of your peers are dropping out, you’re more likely to follow suit than if nearly all of them are graduating.

Update 2: Oops, Charles Kenny just pointed out that Caddell was using the wrong numerators in his chart, he was using the top line when he should have been using the second line. So I’ve deleted the chart, as it stood it was very misleading.

Update 3: Caddell has fixed the chart, so it’s back.


I have to agree with Michael. More selective colleges admit students who in general are more likely to be ready for the academic standards of that college. These colleges have the ability and luxury to filter out students they don’t think will make it through in 4-5 years. Less selective institutions have to deal with a much wider range of preparation. If these institutions conduct remedial classes (as many community colleges do), they know that they will have a low success rate at high cost to the institution. Less selective colleges have a more difficult educational task ahead of them vs. the more selective colleges, which can let its students run on autopilot, so to speak. Why do you think professors at research universities (like UM) have such terrible reputations as teachers?

Tuition is an important factor for a student choosing where to go, and would involve socioeconomic factors very directly. Here’s a comparison of EMU and UM tuition:

EMU, resident tuition, undergraduate: $238.50/credit hour; EMU estimates tuition and fees cost for freshmen as $4188.50.

UM, resident tuition, undergraduate: $805/first credit hour, $449/add’l credit hours; full time enrollment for lower division undergrad (12-18 credit hours) $5735 + 95 in various fees. The total increases by about $700 per term for upper level undergraduates.

Either is expensive, but EMU would be an easier choice for someone without a large pool of financial and social support.

Another factor to consider for students who must work to support their education is to what degree institutions accommodate people who work during the day and/or have to get childcare. Institutions like EMU and community colleges have much more available in those regards than more selective places like UM or the University of Iowa, where I teach. Getting an undergraduate degree at either one of these places would be extremely difficult to do for someone with a full-time job. The undergraduates I have who are returning students leave full-time work when they get to upper division courses, which are scheduled at the convenience of the college and faculty, not the student.

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