Wall Street has lost its moral foundation, according to Yale Chief Investment Officer David Swensen.
Before approximately 80 students, faculty and administrators at a Thursday master’s tea, Swensen discussed the causes and consequences of the 2008-’09 recession during which Yale lost nearly a quarter of its endowment. Swensen, who advised President Obama as a member of the President’s Economic Advisory Board and spent six years with Lehman Brothers, also discussed the transformation of the University’s endowment during his 28-year tenure as Chief Investment Officer. Though he touched on issues such as fossil fuel divestment, Swensen focused on the most recent financial crisis and the culture on Wall Street.
“Wall Street has lost its moorings,” Swensen said. “Nobody involved in that process remembered their moral underpinnings. It was all about money.”
In the period leading up to the recession, financial services firms were aware that their packages of subprime mortgages were “garbage” but sold them anyway, Swensen said. Rating agencies continued to rate the securities as AAA, the highest possible rating, and tax-supported firms like Goldman Sachs continued to reward their executives with tens of millions of dollars in bonuses in the wake of the crisis, he said.
Swensen said integrity is central to investment management. But the current culture surrounding finance is defined by money, Swensen said, adding that reputation is no longer emphasized.
When choosing managers to work with, Swensen said he looks for unorthodox professionals who are willing to do what is right for Yale.
Swensen also spoke about his role in pioneering a new style of investing that emphasizes diversification and nontraditional asset classes. Known as “the Yale model,” this investment strategy has since been widely emulated by institutions across the country.
When he first came to Yale in the 1980s, Swensen said the conventional investing wisdom was to own U.S. stocks and bonds. The average university endowment had around 95 percent of its funds invested in those asset classes, he said. Only 5 percent of the average endowment was allocated elsewhere.
“I took a look at that and it didn’t make a lot of sense to me,” Swensen said. “I knew enough about finance [to realize] that diversification was a good idea.”
Today, domestic stocks make up only a small portion of the Yale endowment — 6 percent. The majority of the endowment is now invested in alternative assets such as private equity, real estate and absolute return.
Swensen also defended his decision not to change Yale’s investment strategy despite Yale’s poor performance during the recent financial crisis, during which the endowment lost $6.5 billion.
His disciplined policy has allowed the endowment to rebound to about $21 billion, he said.
Though Yale’s target allocations for private equity have long been on the rise, Swensen said the Investments Office is now reducing the endowment’s dependence on private equity investments. Private equity investments are illiquid, meaning not easily sold for cash.
Prior to the financial crisis when the University’s endowment peaked at $23 billion, the Investments Office made commitments to private equity based on the assumption that the level of the endowment would remain high, Swensen said. But when the financial crisis caused the endowment to drop to $16 billion, the University was “over-allocated” to those illiquid asset classes. If the next five to 10 years promised to be stable, the lack of liquidity would have been fine, Swensen said.
Responding to a question about the ethical implications of Yale’s investments, Swensen recalled returning to his office one day in the 1980s to find students there protesting investments in companies involved in South African apartheid. Along with many other institutions, Yale ultimately divested from these companies.
Swensen said he respected the amount of thought students give to ethical investing.
He also acknowledged current discourse surrounding whether universities should phase out investments in the fossil fuel industry.
“It will be interesting to see how this whole thing plays out,” Swensen said.
Audience members interviewed said they found his remarks fascinating.
“I liked his analysis of the financial meltdown of 2008,” Fred Polner, Associate Master of Trumbull College, said. “He did not hold any punches.”
Associate Master of Branford College John Bradley ’81 said he found Swensen’s personal experiences on Wall Street and descriptions of the roots of the financial crisis particularly interesting.
Rose Wang ’14 said Swensen’s remarks were genuine and consistent with the ideas in his books.
Swensen joined the Yale Investments Office in 1985 when the endowment was valued at $1.3 billion. As of June 30, the University’s endowment was worth $20.8 billion.