✔✔✔✔✔ FC here. Everyone who loves Duke is indebted to the mole in Allen Building who enabled this report.
At the height of the financial meltdown in January, 2009, Duke borrowed $500 million by issuing bonds. That is, it made a long-term promise to pay only the interest on $250 million until April, 2014 when the principal was due in lump sum, and a similar promise to pay only the interest on another $250 million due in lump sum in April, 2019.
Fact Checker has learned that Duke has just paid off the entire amount -- years early -- at a very, very steep cost. The holders of the 2014 bonds received -- in addition to all their interest due to date -- a windfall bonus of 15 percent over their current value, while the holders of the 2019 bonds got their interest plus a windfall bonus of 7.9 percent.
Fact Checker estimates the total windfall at $57 million!
As staggering as that number is, it is of even more concern to Fact Checker that we do not know who got the loot.
✔ For several years, we have been watching conflicts of interest involving some members of the Board of Trustees who run big financial institutions that do a substantial -- and suspicious -- amount of business with Duke. We first picked up the scent -- or stench -- on this when we noticed Duke was using a travel agency north of Chicago. Yes, it turned out to be owned by a Trustee.
We have been delaying a Special Report on conflicts of interest until we examined Form 990 from Duke's 2009-2010 tax returns -- but the Brodhead Administration has been stalling and stalling on releasing these documents as required by federal law. All the numbers that will be embraced in these tax returns were finalized early last October when the outside auditor signed off on them. All the conflict of interest declarations in these documents would have been in place even earlier, by June 30, 2010. We see no charitable explanation for the delay.
We feel stakeholders in the University are entitled to a clear, specific accounting of who got the $57 million (our calculation) windfall. More specifically, if any institution run by a trustee was involved.
✔ Breckinridge Capital Advisors, a relatively small Boston investment house with no apparent Trustee tie, is only institution we know of that bought some of the bonds. We do not know if Breckinridge kept the investment and will now reap some of the windfall -- or if its bonds were traded earlier.
But there is another equally important angle. Breckinridge does business through intermediaries, and much of the abuse that has been uncovered in institutional investments involves the people who helped organizations such as Breckinridge and Duke do business. Was any Trustee involved? We need disclosure so we have assurance.
✔✔✔ We also feel we are owed a clear explanation of why we borrowed the money to start with; we have posed questions, not one of which was ever answered satisfactorily.
✔ To be sure, other universities borrowed massive amounts in in 2008 and 2009. Six of the schools in the Ivy League, including Harvard, borrowed a combined $7.2 billion. Stanford borrowed a cool $1 billion. The other schools explained -- and Duke did not -- that the money was needed because in investing in fancy private equity deals and hedge funds, the universities had promised not only their initial investments but had become obligated to invest even more on a schedule that now looked impossible to keep. In ordinary times, money for the new investments would come from donations which were drying up, and from the sale of older investments for capital gains, which were rapidly turning into massive loses.
In other words, the loans were to keep the money flowing to private equity deals and hedge funds -- favoring the big investment houses -- rather than defaulting on a contractual obligation despite radically changed unforeseen circumstances. Others -- like employees ushered into retirement, people laid off, and faculty and staff with frozen salaries -- would feel the downturn, but not the big boys who would be favored.
As times got better, and it became feasible to sell older investments without a blood bath, universities have been paying off their debt. Harvard has announced plans to pay off a sliver -- $300 million -- of what it borrowed but the terms have not yet been set. In the case of Stanford, it has been doing a juggling act, now deciding to use part of its bond money to finance construction and other parts to pay down debt earning higher interest rates.
Duke never offered such an explanation. In fact when FC inquired about the status of the money we borrowed, we were assured it was intact. As it turned out, we had spent $90 million on current expenses.
Executive Vice President Tallman Trask has stated that the loan provided an insurance policy to make sure Duke could meet all its obligations. What he is really saying is that the Brodhead Admnistraton took steps to make sure the big boys were taken care of, while its faculty and staff were hurting. Trask smiles now saying by reinvesting the loans along side other endowment funds, Duke actually made money on the loans, plus it got the insurance, in effect, for free. However....
This begs the question. If Duke could make money on the loans, why didn't it continue to rake it in, instead of paying a staggering $57 million to end the deal?
Thank you for reading FC.