B (2:32)

So, okay, so like we had a whole segment about this because he had Davos in the desert and he was talking about Neom and everyone was like, ha ha, isn't this funny? And then it stopped being funny for.

A (2:44)

A lot of people.

C (2:44)

Yeah. And got being real. Yeah. So it's actually funny because the place where they held Davos in the desert is the Ritz, where they are now holding the people who are being held prisoner.

A (2:54)

Okay, so let's back up. What the hell is going on here?

C (2:58)

So, Ess, this is clearly a consolidation of power where it's so many dozens of princes and very wealthy individuals have been arrested on corruption charges. Now, talking about corruption in Saudi Arabia is a little odd because there is essentially no line between the state and the elites.

B (3:23)

It's, it's an absolute kingdom. The idea that, like the king or a prince can steal from the state is a little bit weir weird when the Saudi royal family is the state.

C (3:35)

Right, exactly. And this is important also because ever since Mohammed bin Salman kind of pushed his, his cousin out of the way so he could become second in line, he has been arresting a number of people, opponents, people supporting the Muslim Brotherhood. But this was really a very massive purge. And one of the individuals that has been involved is Al Walid Ben Talal.

B (4:00)

Who was Prince Al Walid. Now he. If you know any saud billionaire, you probably know Prince Al Walid. He's the one with the jaunty Twitter account who gets into fights with Donald Trump. He's the one who, like, you know, loves getting photographed by, you know, glossy magazines in front of his Bloomberg screens.

A (4:20)

And now he's in prison.

B (4:21)

He's the one who fancies himself the Warren Buffett of Saudi Arabia, basically.

C (4:26)

Yes. And what is interesting is he has actually been very supportive of Mohammed bin Salman's reform measures.

B (4:32)

And their cousins, well, everyone, they're all cousins, but they're actually like first cousins. Yeah.

C (4:37)

So, but to me, that's why this is actually interesting because at this point, we're not just talking about, you know, the religious extremists who might oppose the reform measures of Mohammed bin Salman. We're talking about essentially almost everyone with a tremendous amount of wealth or power.

B (4:54)

So he, he arrested the head of the National Guard, which is the one arm of the military he didn't already control. He arrested basically the people who were in charge of the media and the telecoms so that he had complete control of messaging and communications, which is one of the reasons it's been very hard to get details on exactly what's going on because he's not providing those details and there's no one else providing any details. And he arrested Prince Ella Walid and other various billionaire types because, you know, that is a powerful person. And this really looks like a good old fashioned purge where anyone with any kind of power gets rounded up, herded into the Ritz Carlton in Riyadh and forced to subsist on room service for the foreseeable future.

A (5:48)

So I have a question. Saudi Arabia is not my area of expertise and I've just been kind of watching the news about this this week, baffled about. So is this something that we should be frightened of? Is this like, is this Saudi Arabia heading for like full on banana republic in the without the bananas or is it.

C (6:09)

I mean it's always essentially, I think this is what's interesting because there is the one school of thought which is that, well, but Mohammed bin Salman is really into reforms and he wants to make this the new uae.

A (6:20)

I saw Eli Lake at Bloomberg use like voice that opinion, which made me think it was probably wrong.

B (6:28)

So I mean, okay, my feeling is that it is entirely correct to say that he is a reformer. He want, you know, he wants to allow women to drive. He wants to build Neom, which is going to be a much more kind of secular city, although apparently it still won't allow alcohol and so on and so forth. But at the same time he is clearly a very hard fisted autocrat. And I think the real problem with all of this is that reforms are all well and good and foreign investors and he definitely wants a lot of foreign investment. Foreign investors love reforms, but what they don't like is capricious all powerful leaders who can round people up and put them in jail for any or no reason.

C (7:19)

Yeah, two things about this. One, foreign investors are going to be very frightened when you have someone who's coming in and potentially just expropriating money from people because he's doing that now to people who probably did get the money through embezzlement. But what's going to stop him in 10 years from he gets angry at a US company and saying, well, I'm taking all your assets. So that's part of it where this is going to spook foreign investors. And then on the other hand, when you talk about reforms in Saudi Arabia, I don't think people sometimes fully understand how the Saudi state is currently structured. You, you have a population where two thirds those who have jobs work for the state. You essentially pay no taxes, you don't have to pay almost anything for energy. And part of the reform measures in the 2030 plan that MBS has put out has been about increasing taxes, reducing all of those subsidies. Essential. And the idea that you're going to be able to do that without angering the population at the same time that you're angering the religious establishment which has been the Thing that, since the 18th century, has given has essentially been supporting the House of Saud.

A (8:24)

That's how.

B (8:25)

So that's the Wahhabis, and that's the very. That's the tension, which has always been the deeply problematic underlying tension in Saudi Arabia is that the country has been run by the El Sal family. Yeah. Who, you know, control it. But they're small. You know, they're a tiny proportion.

A (8:49)

So they need support.

B (8:50)

Family. And the way that they have. The way that they came to power and the way that they kept their power was by aligning with these bonkers fundamentalist Wahhabists. And now there is this gap opening up between MBS on the one hand and the Wahhabists on the other, and no one knows how that plays out.

A (9:10)

So it sounds like if, for someone who was interested in reforming Saudi Arabia in a stable way, they would have to either pick religious reforms or economic reforms, because you need one of those power bases. And. Seems like you're saying he's kind of trying to do both at the same time and alienating everybody.

C (9:26)

Exactly. He's essentially trying to, like, overnight reform the country in a way that I see no path where with the Saudi population, this leads to a good result.

A (9:37)

Someone also just said that, or some people are trying to kind of analogize this to a US Situation, and they said it was almost like if Jared Kushner, like, somehow became vice president and then just tried to execute a coup, but, like, in the most obviously inept way you could, like. I don't know.

B (9:55)

I don't know if it's obviously inept. And I think the MBS is much smarter than Jared Kushner, and he's thought this through, and it was done in a much more effective way than I believe. Jared Kushner could pull off anything.

C (10:11)

This is probably true, but so.

A (10:16)

So it's not just, like, a callow young guy doing this?

C (10:18)

No, actually, I think it kind of is. I'm actually gonna push back a little on that. I do think this is a very wealthy young man who essentially was able to, like, live as a playboy and then began to very quickly gain power. He has a dying father. You know, again, he was able to kind of usurp other people. He does not have a tremendous amount of experience. It seems as though he thinks he can just poof overnight change this country. And I think it's, frankly, because of his inexperience. Also. We haven't even brought up Yemen, Qatar.

A (10:49)

Yeah. He's got multiple things. He's got a lot of things he's juggling right now a few. Wait, so, question. Does any of this connect to why he seems to have taken the prime minister of Lebanon hostage?

B (11:01)

Hostage?

C (11:01)

Yes, it does, actually.

A (11:02)

Okay.

C (11:02)

Because this is all about Iran and Saudi Arabia.

A (11:05)

Wait, so just a little background for people who somehow miss this story. And since the news has been dominated in the U.S. mostly bisexual predators. So apparently the prime minister of Lebanon was just. Just decided to resign from Saudi Arabia and, like, showed up on a video saying, I'm doing this my own free will. And here's a newspaper to show you the day I'm afraid of being assassinated. Like a predecessor in Lebanon, you know, Hezbollah. Like, what is. Like. But no one really believes this. And his own party is saying, this isn't. This can't possibly be real. What. How does that connect to all this?

C (11:40)

Because Saudi Arabia and MbS believe that the Hariri and they have not cracked down on Hezbollah because Hezbollah is obviously in the Lebanese government and Hezbollah is connected with Iran. So this all goes back to. It's the same thing. When you're talking about Qatar, it all goes back. And. And when you're talking about Yemen, it all goes back to Iran and Saudi Arabia, these two enormous regional powers who are now, I believe, potentially. A fight that has always kind of been simmering now seems to be escalating, which in this region is extraordinarily dangerous.

A (12:13)

I just love that his one trick is like, whether it is a rival or a rival oligarch in. In Saudi Arabia or a foreign leader is just to hold them up in the wrist.

C (12:25)

That's because if you've ever been to Riyadh, that is the only place you stay.

A (12:27)

Okay.

B (12:30)

I've never stayed in the Ritz. I feel I've missed out. Okay, let's talk about Wilbur Ross.

A (12:35)

Let's talk about Wilbur.

B (12:36)

So when Donald Trump was putting his cabinet together and everyone was talking about all of these billionaires in the Trump administration, Wilbur Ross was always at the top of the list. He was like the really, really rich guy who became commerce Secretary for no obvious reason except for that he was a billionaire.

A (13:01)

Well, no, there were. There were lots of obvious reasons why he made sense for Trump's commerce secretary, but we can get into that.

B (13:08)

Yeah, but one of the, you know, tenets of Trumpism, I suppose, is that if you're unbelievably rich, then you can't be bribed. You don't really worry so much about your own self interest because you've already made it. And so now you can turn around and Just worry about the little guy. Yes. And it turns out that Wilbur Ross has a whole bunch of interests in international shipping which weren't very disclosed when he became Commerce Secretary. That he has interests in Russia which weren't particularly disclosed when he became Commerce Secretary. And that all of the statements that he was making as recently as a couple of weeks ago to Forbes magazine about his billionaire status were to, not to put too fine a point on it, lies.

A (13:57)

Yeah, he was not a billionaire. And the thing about Wilbur Ross is that when people were writing about him in the context of the Trump campaign, he was almost always described as billionaire tycoon or like billionaire industrial baron Wilbur Ross. Like, that was just his reputation. So the fact that that reputation was basically all. It was almost all based on a error by a Forbes reporter years and years ago is kind of amazing. But I think. So we have to. How are we gonna take this?

B (14:26)

Like, so let's. Where do we start here?

A (14:28)

So much. Let's start the shipping.

B (14:30)

Start with the shipping.

A (14:31)

So Wilbur Ross, when he joined the Trump administration, started divesting a lot of his assets, but weirdly, no one really fully seemed to get why he held onto his stakes in these shipping companies.

B (14:48)

And I think one of the things going on here, to take like the 50,000 foot view, is that if you're Wilbur Ross, it's really easy to divest yourself of 2 billion fictional dollars that you never owned in the first place. And it's actually quite hard to divest yourself of shipping companies and stuff, which you really actually want the money from.

C (15:07)

And potentially at a loss.

A (15:09)

Yeah, exactly. So he had these interests and it was at the time his excuses. We've done this research, and as far as we can tell, Commerce doesn't regulate global shipping in any way. And therefore I have no conflict of interest by holding onto these companies.

B (15:26)

I mean, like, when you think of global shipping, you never really think of commerce.

A (15:30)

Yeah. You never think of trade. And why this was obviously weird is that the Commerce Department plays a very important role in regulating trade. And so, yeah, there's potential conflict of interest there. But anyway, it was Trump. There were bigger fish to fry. So this kind of slid by. So the Paradise Papers were released recently. And as, again, these are this trove of documents from a offshore law firm specialized in basically offshore tax havens. So it kind of gave us yet another peak, sort of like the Panama Papers into the doings of the global elite and the global plutocratic class. And what. One of the things that came out of that was that Ross's Shipping, one of Ross's shipping companies had a lot of business with a Russian or its top client client was a Russian energy firm owned by members of Putin's inner circle.

C (16:22)

So, okay, like I would just like, okay any weird. I actually covered Sieber for a while.

B (16:30)

So Siba is this Russian energy firm.

C (16:32)

Yeah, it's a, a gas processing and petrochemical company.

A (16:36)

Yes.

C (16:36)

And so I realize it sounds really bad when you say this company is owned by Putin's son in law and a sanctioned individual.

A (16:45)

Yeah, it does.

C (16:46)

I'm not saying that's not somewhat bad, but like if you're dealing with major Russian companies, they're all going to have.

B (16:52)

Ties to stakeholders, which is exactly why you shouldn't be dealing with major Russian companies.

C (16:57)

And that's totally fair and I don't disagree with it. I just think some of the way that this has been reported as though it's like so close to Putin.

B (17:04)

I'm like, it is everything, everything in Russia when it's a big money thing is, is so close to Putin. I don't think that's wrong at all. You can say that that would be true of just about any big Russian company, which it probably would be. But that in no way mitigates the fact that Wilbur Ross has these incredibly close commercial relationships with essentially the Putin regime.

C (17:27)

Although it is like he. I'm not, I'm not going to try to defend Wilbur Ross because I do think he's a massive conflict of interest. But he did disclose Navigator Holdings. He just didn't disclose Navigator holdings customer, which it seems odd that he would have.

B (17:40)

But also the disclosure of Navigator holdings was just say incomplete. If you disclose I own a company with the word holdings in the name, then the first obvious question is, well, what does it hold and what do those holdings do and are there any conflicts in those holdings? And he seemed very happy to not answer those questions.

A (18:04)

It's just also the kind of thing that in a normal presidential administration would have come up in the internal vetting process. Someone would have said, hey, what is this company? Who are. I mean, all of that would have been looked into. And that just did not happen in the Trump administration. Or if it did, they just turned a blind eye. But most people assumed there just wasn't.

C (18:19)

Yeah, like I don't disagree that this is obviously again a conflict of interest. Obviously this is something that should have been disclosed. All of this, I just think trying to make this a Russia story. I just don't really know.

B (18:30)

This is a Wilbur Ross story.

C (18:31)

Yeah.

B (18:32)

And, and it's and the fact that of all of the foreign regimes that Wilbur Ross's company that he failed to divest himself of could have wound up being involved with like Russia is the worst, for obvious reasons.

C (18:50)

Totally. But again, if he's involved in gas shipping, it's not surprising that it's going.

B (18:55)

To be, which is why he shouldn't be involved.

A (18:57)

I totally agree.

B (18:58)

Yeah.

A (18:58)

And so, and it's not just, it's not just the Russia story. I mean, you said this is a Wilbur roster. I think that's right. He also had this second shipping company, diamond holding, and that has a lot of interests in Chinese trade, which, I mean, again, talk about another hot button top issue that actually as Commerce Secretary he is going to be directly involved in with, you know, deciding whether or not there should be tariffs put on some Chinese goods. Perhaps.

B (19:25)

But so, so like, yeah, how on EARTH does the U.S. come, I mean, does the U.S. commerce Secretary wind up with all of these conflicts? And I guess the question which I have for Jordan is as a local.

A (19:43)

Politics provincial, yes.

B (19:48)

It is obvious to me that under any other administration, a, he would never have got this job in the first place, but with all of these revelations, he would be out of a job right now. It is also obvious to me that the Trump administration is not any other administration. So is it actually conceivable that he survives all this?

A (20:08)

Yeah, I think it is. We're talking about this in a minute. I think if anything, the reason he might get kicked out of Trump administration is because he's not really a billionaire. He might just lose Donald's respect. But I think you have to go back to kind of, you have to think about who Wilbur Ross is and his connection to Trump. Right. They met back in the early 90s when Trump was going through bankruptcy or his companies were going through bankruptcy and Wilbur Ross base was on the other end of the table dealing with that restructuring. And in the end, Trump was pretty happy with the deal he got out of that he survived. And their relationship goes back that far. And then during the campaign, Wilbur Ross stepped up as a economic adviser to Trump. And again, Trump didn't have a lot of respectable people around him. Wilbur Ross was arguably the most respectable Wall street guy who had attached himself, or it seemed like that, who had attached himself to the Trump campaign at that point. And he was working on things like his infrastructure plan or trying to say, I remember that. Yeah, exactly. Or he was like, he was, he was the one who was trying to score how Trump's economic plan was going to him and Peter Navarro were the ones who were writing about how he was going to create all this wonderful growth. I mean, he really went to bat for Trump and he was looked at as sort of, I think, by the press, as an adult in the room. Right. He was someone who filled that role because again, he had this reputation as successful billionaire industrial, who at least was like a savvy guy who. And so he lent that sort of aura to Trump. So he, you know, it's. I think in a way, if it were just the shipping stuff, I think Trump wouldn't care so much. The one thing that I think would get to him is that, oh, this guy, he's actually been lying about his wealth the entire time. And that makes.

B (21:55)

Unlike Donald Trump.

C (21:56)

Exactly.

A (21:57)

It's like your own worst fear about yourself to see it manifested in somebody else. And like, so that may get him kicked out. Yeah.

B (22:02)

So although I will jump in here and say that, like, by the Joe Wiesenthal definition, Wilbur Ross is a billionaire.

A (22:10)

Well, I forget, what is the.

B (22:12)

Basically, if you're worth over $200 million, you're a billionaire.

A (22:16)

We should talk about that another time. I'm curious. Maybe that's the Slate plus segment. But so I think we need to just explain how is it that he came to be. How is it that people even thought he was a billionaire in the first place? And basically what happened was when he did his first really big deal, he sold this steel conglomerate that he had put together in the early Bush era for $4.5 billion. A Forbes reporter came calling and thought that all of the money that got made on that deal was essentially his and just like, screwed up when it turned out most of it was actually his investors money. And Wilbur Ross, which says something about the Forbes reporter. Exactly. And so, you know, Wilbur Ross didn't really correct him. He was like, he was actually kind of like, he kind of tried to play down. He's like, all right, well, if you really want to put me on this list, fin the butt, not looking for the publicity. And then for years on, they just kept including him and kind of adjusting his wealth based on the initial valuation. And so he's always had this outsized reputation as a brilliant deal guy who could make money off these failing industries, which also was part of the reason he became Commerce Secretary.

B (23:24)

And also, I mean, this comes back to the whole thing about Prince Alwaleed as well, and the power of the Forbes list.

A (23:32)

Yes.

B (23:32)

And at some point, we should probably just have a whole segment on the power of the Forbes list. But there are certain people who would include not only Wilbur Ross, but also Prince Alwaleed, who spend an insane amount of time and effort trying to maximize their wealth for the purposes of the Forbes list.

A (23:53)

Just like Donald Trump and Donald Trump.

B (23:55)

And those people just really fascinate me.

A (23:57)

Well, so. And there's a lesson about that, which is when you are on that list, it is a giant advertisement for yourself. And that's what it seems to have been for Wilbur Ross's business. It helped him find clients. His name was on there, and that lent to his reputation as a great fund manager, even if it wasn't totally merited. And I think that actually changes our perspective on who this guy is and why he is in the Trump administration, because for a long time, people did ask, why are you leaving your super successful fund to work for this guy?

B (24:32)

The Scaramucci question.

A (24:33)

Yes, exactly. Well, it turns out that Wilbur Ross was not as rich as everybody thought. He had been sort of living based on. I mean, he'd been living a lie, essentially, it seems like. And some people have now gone look back and realize he was actually having trouble raising money for new funds. It looked like his career was kind of petering out, and so he could go and hitch his wagon to Trump and that would start a new chapter.

B (24:59)

And so you make it look like you've had it made and now you're, like, giving back to public service, when, in fact, you kind of. This is your one opportunity to get out with your dignity intact. And the ironic thing, and I will just end this by saying, I mean, obviously Anthony Scaramucci did not get out with his dignity intact, but he didn't even get out with the. The money that he was promised almost a year ago now by the Chinese and the Venezuelans for his company. That deal still hasn't closed.

A (25:28)

Oh, really?

B (25:28)

Yeah. Okay. So, Anna.

A (25:31)

Yes.

B (25:31)

There's another tiny little footnote to the Paradise Papers. And there are so many stories in the Paradise Papers. We could be talking about the Queen of England.

C (25:40)

Yes, we could.

B (25:41)

We could be talking about Bono. Yeah, we could. And basically, all of these stories are the same. Which is, rich person has some kind of offshore vehicle which allows them to avoid taxes. And buried in this huge pile of paradise paper story is Yale University and various other large university endowments have offshore vehicles which allow them to evade taxes. Which came as a surprise to me because I was under the impression that they didn't pay taxes in the first place.

C (26:16)

This is what most people think.

A (26:18)

Oh, wow. So I'm actually surprised that you were surprised. So this has been well known for a while when you. So like back in, like when Romney was running. Right. And people were asking about, like, what's the purpose of an offshore tax haven? If you called a tax expert, they would say, well, actually one of the main things is so that universities can invest in private equity. Like, that was literally one of the first answers. Like, first things off anyone's tongue when I would talk to them about this. It was just like a well known fact that. Yeah, of course.

C (26:44)

Yeah. Just. Just to explain. So most of the investment earnings that endowments get are tax exempt. However, they do have to pay taxes on unrelated business income.

A (26:56)

Yep.

C (26:57)

And investment income that they gain through debt financed investments, that is private equity and hedge funds, they would have to pay taxes on. So they set up these blocker corporations. The hedge fund pays the blocker corporation. The blocko corporation pays the endowment. The endowment doesn't have to pay taxes on it. Yeah.

B (27:17)

And it's a little bit confusing, but basically, if the endowment buys a large chunk of a company just by buying its shares in the American stock market, that is not. They don't have to pay taxes on that. But if the endowment buys a large chunk of a company through like a private equity vehicle, then they do have to pay tax on it. And let's not go into the reasons why, but the way they avoid that tax is by setting up. They buy a large chunk of a different company, which is actually a offshore vehicle. And then. Yeah. Anyway, so we have a whole bunch of tax avoidance by tax exempt organizations, which I just. Which I just find hilarious.

A (28:02)

It's not a small amount, probably. That's the thing. Someone is like, looked at it like 53% of the assets and big endowments are in what you call an alternative.

C (28:10)

Of course they are, because that's the only place you're getting those returns.

A (28:12)

And a lot of that is private equity and hedge funds.

C (28:15)

Right.

B (28:15)

But I also, I mean, that's. That's not the only place you're getting. No. In fact, over the past five years, the returns in private equity and hedge funds have been much lower than the returns in the stock market. And the reason why you have so much endowment money in private equity and hedge funds is more or less entirely thanks to one guy named David Swensen at Yale who early on put a lot of money into these illiquid vehicles and made a lot of money. And now everyone else in the endowment world was like, ooh, we should follow that, and has generally not had the.

C (28:49)

Same success yeah, although I am going to disagree with you a little bit there because a lot of money was put into hedge funds than the hedge funds haven't been doing as well. So then the money is being put in private equity where they are actually getting a lot of those returns.

A (29:00)

So either way, you've got these tax exempt organizations avoiding taxes. We live in one giant farce.

C (29:06)

Although, can I just say, I'm sorry, there's a part of me that's like either tax all of their investment income or don't tax their investment income. I actually think this is a stupid rule.

B (29:14)

Well, yeah, no, we can all agree that it's a stupid rule. The question which I have is I actually disagree.

A (29:21)

It's a stupid rule. But you have to go back into the history of it. It was designed to deal with. Yes, it was basically designed to deal with real estate scams that you nonprofit and a for profit company could kind of hitch up and do a leaseback or deal where they would both benefit. And nobody wanted this, especially because it could lead to nonprofits just owning a lot of the real estate in the US which has sort of happened anyway if you've ever seen NYU or Columbia's campus. But. So there are.

B (29:46)

But no, but let's, let's actually not. Yeah, talk about this. The New York City property tax in, you know, revenues are being slashed as NYU buys up half of downtown New York. And the minute it gets owned, the minute property is owned by NYU rather than, you know, a corporation or a landlord or an individual, suddenly NYU stops paying taxes on that. And that's really bad for New York City. And it's this ridiculous artificial advantage for nyu, which has just become this enormous landowner and there's no good reason for it. And there are a huge number of distortions which happen when nonprofit institutions have these tax breaks that everyone else don't have. And one of those distortions is the whole existence of these multi billion dollar endowments, which again, like, there's no good reason for any university to have tens of billions of dollars in an endowment.

C (30:51)

That's completely wrong.

B (30:52)

You have.

C (30:53)

I'm sor.

A (30:54)

And now it's time for us to recon. It's time for the debate part we've been waiting for. Okay, so Anna, why are, why are you so defensive of the massive college endowment?

C (31:05)

Because endowments are long term funds set up to fund institutions in perpetuity. That is why they are set up. They have worked very well at doing.

B (31:14)

Okay, so let's, let's stop there. That is definitely what they have become over time and in a kind of corrosive and unhelpful and bad way. Let's just like, rewind a little bit and ask ourselves, like, how does an endowment come to be in the first place? You set up a university and it has income and it has expenses, and sometimes the expenses are higher than the income, and it needs to spend a bit of extra money. So it goes along to donors, and it says, I need a bit of extra money, and the donors give it the extra money. And the problem with that model is that donations can be lumpy. And so in order to smooth things out a bit, you basically get the donors not to just give directly to cover the deficit in any given year, but you get the donors to give into an endowment which can hold that money so that in, you know, bad years, that endowment can spend a bit more. In good years, that endowment can spend a bit less. In that model. There is no particular reason why the absolute size of the endowment should be constant, why it should go up. Whether the.

C (32:27)

No, because the point. When people. Yeah, no, I'm sorry. When. When people give money to an endowment, they give money to an endowment specifically, with restrictions on that money, saying that the principal cannot decline in value and the income has to be used for a specific purpose. That is how endowments are set up. That was how. If you look at, like.

B (32:45)

Not true.

C (32:45)

No. Yes, it is. If you look at Harvard, Harvard does not have one endowment. Harvard has 13,000 individual endowments that all have restrictions on how the money is used. So, first of all, endowments are not piggy banks. Endowments have to be used in specific ways. And the mandate of every single endowment is that it needs to maintain the purchasing power of the principal.

A (33:02)

And I guess the question is.

B (33:04)

I mean, so, like, that. I'm just going to push back on that. What. But eventually happened. And I feel it's just completely wrong to sort of blame the donors for this, which is what you're doing. They're like, well, there are these donors, and they put all of these restrictions on this money. So the poor universities are forced to maintain this, and it's not even up to them. That's not how it happened. What happened is that over time, these endowments started growing. And they started growing initially just because certain large universities foremost amongst them Harvard, but also Yale and Princeton and Stanford started getting a lot of very large donations. And those donations grew to substantial sums. And then they realized they were sitting on large amounts of money as those donations kept on coming in. And then after David Swensen arrives at Yale. The other way that the endowments start growing is because they start investing in sort of risky ways and illiquid ways. And they discover.

C (34:07)

Well, no, but that's, that's, they're actually, I mean, okay, look, if you're looking. Okay, first of all, if you're talking about whether or not they're investing in riskier, less risky assets, an endowment is the type of fund that should be addressed investing in riskier assets because it is a long time horizon, it has fewer liquidity needs, and it has a benign tax situation. So that is actually exactly the type of fund that should be investing in riskier assets, first of all. And again, it's not as though these endowments aren't used for, to fund universities. Universities are incredibly expensive to run. In 2016, Harvard spent close to $2 billion out of their endowment. So these endowments are used, but the idea is that you're, you're using the income that is generated, but you're not supposed to be reducing the principle of the money that people have given. And again, mostly that's actually written into when, how the money is given.

B (34:53)

And that is, and that's mostly not written into the money that's given that often. Essentially what happened is that as the endowments became professionalized and as the highest paid individuals at any university started becoming the endowment managers, the endowment managers realized exactly what was good for them. And this is true of any institution that all institutions, when they become big, start to self perpetuate. And suddenly the endowment managers and all of the consultants and all of, of the seven figure employees started realizing that they were onto a very good thing. And they started encouraging people to think in this way of give us your money and give us instructions to never actually spend it and we'll just spend the income. And that makes sense somehow. And then that idea became institutionalized to the point at which you get people like Anna saying, but this is how it's supposed to be.

C (35:47)

So how are you supposed to fund a university if you're just continuing to allow the purchasing power to just decline and decline and decline.

A (35:54)

You can fund a university's operations through things like tuition if you want to, or donations.

C (36:00)

You don't possibly have enough.

A (36:02)

I want to. Well, now you wouldn't.

B (36:05)

Well, that's not true. Most universities do not have endowments. It's a handful of large universities have big endowments. The rest of them all seem to manage somehow.

A (36:13)

So, Felix, I want to ask a question because a kind of big picture one which is like Fundamentally, what makes you uncomfortable about the existence of these huge endowments? Is it just that it's creates these nonprofits that can then gobble up a city? Is it just concentrated wealth? I have my own discomforts, which I will get into. But I'm curious. I just kind of want the headline version of yours because I'm not totally clear on it.

B (36:35)

So it is for a long time. It has become obvious that Harvard, Stanford and a few others are basically multibillion dollar hedge funds with an educational institution attached. And the main role of the educational institution starts to become like the excuse that the hedge fund needs in order to maintain its nonprofit status. And the tail starts wagging the dog.

A (37:04)

See, I don't know. So that has never been my concern so much. I've always kind of bristled at these big endowments because we heavily subsidize them essentially by giving all these tax breaks to nonprofit universities. And that gives them the ability to just stack up wealth. In the meantime, we don't give nearly as large subsidies to these poor people, private or these poor public institutions. And so it seems like there's this inequity and people have looked at this essentially if you look at all the tax benefits that these, you know, well endowed private universities have versus the tax subsidies the public ones have, it's, it's just, there's no contest. Princeton gets a lot more money than, you know, State U. And so to me that's always been, seemed like a problem. And it could be addressed by maybe taxing universing Princeton and giving it to Oklahoma State or whatever. But I've sort of started to shift my position on this a little bit in the Trump era. And I think there's something to be said for having extremely wealthy, self sustaining institutions that in the end are a net good for society, even if they have a downside, even if they also create their own problems. Harvard is a net good. NYU is probably a net good. And having something that is apart from the state and can just sustain itself no matter what happens essentially in the government isn't necessarily that frightening.

B (38:26)

And that's fine. I have no problem with private universities existing. The question is not whether they should exist or whether they're a net good. The question is why are we giving them these billions of dollars of tax expenditures and these people in particular, and why are we, why have we set up a system whereby it's the richest and least neediest institutions which get the biggest tax expenditures?

C (38:55)

Because they have. I mean, I would argue though that, I mean a Lot of the money, and especially some of endowments like Harvard is often. I mean, that is part of how they used to give, you know, student aid.

B (39:04)

So only if you go to Harvard.

C (39:06)

Only if you go to Harvard. Look, don't get me wrong. I'm. I don't disagree that. I think that we do not have enough money going to state universities and community colleges, and I'm not going to disagree with you about that.

B (39:14)

And we are spending billions of dollars on Harvard in the form of tax.

C (39:17)

Expenses, and that's fine, but he would.

B (39:18)

Be put to better use almost anywhere else.

A (39:22)

Yeah, I think. Well, in a lot of places. So right now, for instance, the House Republicans are considering taxing endowments, a very small portion of endowment income as part of their bill. And that was a moment that made me kind of sit back and go, huh? I've written about this. I have said that I would like to see Harvard's endowment tax, but I don't really want to see it taxed so that you can cut Exxon's taxes. Right. And that's what's happening.

C (39:48)

And again, also, I mean, I know you're going to push back on me, but it is true that, like, also, anything you do, if you tax them, if you require a certain spending limit, you are then just increasing the returns that they have to make.

A (39:58)

Yeah.

C (39:59)

Because they. You can. And it's not to grow the fund, it's to maintain the purchasing power.

B (40:04)

Right. And that is the point which I just deeply, fundamentally disagree with, is this idea that endowments can only ever move in one direction. I remember not that long ago when the Harvard endowment was $10 billion, and everyone said, oh, my God, why does Harvard Need a $10 billion endowment? That's crazy. Now the Harvard endowment is $40 billion, and you still have someone like Anna saying, well, it can only go up. It can never go down. It's like, why can't it go back down to $10 billion.

C (40:38)

Again? Because the mandate of an endowment is to maintain the purchasing power. I sound like. I know, I'm a robot here.

B (40:45)

Yeah, you sound like a robot because you're not actually answering the question.

C (40:48)

No, I am answering the question because you cannot maintain an institution forever if the amount of money you're using to, in theory maintain that forever is declining.

B (40:56)

Yeah, of course you can.

A (40:58)

You just change the way you're maintaining it. But I.

C (41:00)

Okay, you could just be spending less and less.

B (41:01)

Yes, you spend less and less. Sometimes institutions get smaller, sometimes they get bigger.

C (41:05)

But do we really want.

A (41:07)

And that was. And that Comes back to my point is that actually the idea, idea of Harvard getting smaller over time is not that appealing at a moment when government itself.

B (41:13)

But no one is saying that Harvard's going to get smaller. All I'm saying is that Harvard was the best university in the world and was in great financial shape when it had $10 billion of endowment. It is not obviously a better university now that it has $40 billion of endowment. And the endowment has gone up so much without any obvious benefit that I really don't have any problem with the idea that sometimes it might go down. After all, this endowment is constantly getting inflows from John Paulson, writing $400 million checks or whatever. It's not like the only place it can make money is by investment returns. It can also do it the old fashioned way by going to alumni.

C (42:03)

And they do that and they factor that in when they create their spending amounts and they create their return requirements. It's entirely true. But again, you have to also remember that you know, when you're trying to figure out what your return requirements are for this type of fund, you're using, you know, you're using your, your, your expenses, you're using your spending. And then you're also using the relevant rate of inflation, which is not just the rate of inflation, it's the rate of inflation in education which happens to be kind of high. So there is a reason why they then have had to target higher rates or higher rates of return. And again, yes, the endowments have gone up quite a bit, but that's also been because look at where assets have gone up in the last 10 years pretty much everywhere.

A (42:45)

So another question for you. Do you want Harvard just to spend money down or do you want to take their money? Because I personally don't really see the difference in letting Harvard keep its money or spend it on its own students, because it's sort of, that's kind of all the same to me. I see the argument for taking Harvard's money if you want to use it elsewhere on stage. What is it?

B (43:09)

My belief is that I hate perpetuities and I hate foundations which are designed to exist in perpetuity. I hate endowments which are designed to, in Anna's words, maintain purchasing power in perpetuity. I especially hate perpetuities which exist only because of their tax exempt status. And if you are a tax paying perpetuity, let's say that you're rich family who owns a bunch of vineyards or timberland or something like that, and you've been paying Taxes every year on that. And it basically exists in perpetuity. And you hand it down to your, you know, generation after generation. That's fine if you are a perpetuity, which can only really make sense as a perpetuity because you have this special sweetheart deal from the government and you don't need to pay the same taxes that everyone else has to pay. That is wrong. And when the result of that is that you wind up getting skewed results like NYU taking over downtown Manhattan and with all of the follow on effects that has for the New York City fisk, I say that no, you shouldn't get special favor for being a perpetuity because perpetuities are actually bad things to begin with.

A (44:34)

My only add on to that and we don't have to put this on, would be that I think I would have been a lot more sympathetic to your position before we realized that a lot of other fundamental institutions in this country are essentially crumbling. And having perpetual ones, perpetual nonprofits that are basically designed to educate and advance knowledge is not the worst thing.

C (44:53)

Yeah, I think having education to have a means to support themselves, it just is important.

A (44:58)

Felix, at the risk of sounding glib, I think your concerns are a little bit. 2013.

B (45:07)

Okay, let's have a numbers round. Anna.

C (45:13)

Mine is 969 micrograms per cubic meter.

B (45:18)

Ooh, ooh. Okay, hang on a sec. Like. Okay. All right, I've got my. So it's about 1 gram per cubic meter, which is tiny compared to the size of a cubic meter.

C (45:34)

Yes.

B (45:34)

Okay.

C (45:35)

So this is the amount of a very dangerous form of particulate matter in the air in Delhi. So I don't know if people have been following the story right now in Delhi. I mean, in many Indian cities, the air quality is very bad. Recently it has gotten so bad. So the. Who says that you're not supposed to have anything over 25 in terms of micrograms per cubic meter of this particular particulate matter. And there was one apparent measurement, like this past week of969.

B (46:06)

And is this a weather phenomenon or is this like, suddenly people are driving more cars phenomenon combination.

C (46:12)

So it's obviously you have, you know, cars, buses, tuk tuks, all the things you have on a deli street. But you also have crop burning in a lot of the neighboring areas, the neighboring provinces. And so that's been kind of all of that smoke has been coming over. And then you also just had Diwali. So that also added to it. And then just because of what the weather is like, Right now in Delhi, you're getting this like just mass of some of the worst air quality ever seen.

A (46:34)

Does that mean that like walking down the street in Delhi is just like smoking a pack?

B (46:38)

It really is. And we've seen this obviously in Shanghai, we've seen it in Beijing, we've seen it in Mexico City for decades. It's a real problem with many cities. And it's a problem which my home city of London like went through in the 19th century. And we fixed that problem. It is fixable. But somehow globally, it's still getting worse.

C (47:02)

Yeah, exactly.

A (47:05)

Felix. My turn or your turn? Which one of us is.

B (47:07)

I'm going to come out with my Anna Shymansky number because it's 30.

A (47:14)

30.

B (47:15)

30 is the number of years in prison that you could be sentenced to if you accept the invitation of Venezuelan Vice President Tarek El Assaime to enter into debt renegotiations. So this, this guy basically has been alleged to run a cocaine smuggling network. And as a cocaine smuggler or as an alleged cocaine smuggler, if you are a Wall street banker, you're not meant to be doing business with him. And yes, renegotiating your Venezuelan bonds counts as doing business with him. So it's going to be kind of interesting to see who turns up to these renegotiations.

A (48:01)

Oh, man, that's so good. My number is 64%. And that's how much less roughly in taxes Donald Trump would pay under the House plan compared to the current tax system. At least if you go by his 2005 tax return that mysteriously was leaked to Rachel Maddow way back when.

B (48:22)

So this is an AMT thing.

A (48:24)

Yeah, it's the AMT thing. Justin Fox at Bloomberg basically noticed when Trump said I would get killed, my accountant, my accountant told me that this tax plan was going to kill me, yada yada. It's just like there's no way this tax plan is going to kill you. So he went and looked at Trump's old tax return and which he basically only pays taxes because of the alternative minimum tax and which would be repealed. And plus there's a, as we have discussed, a large break for pass through companies like the Trump Organization. So he does pretty good in this.

B (48:58)

Okay, I think that's it it for us this week. Thank you for listening to Slate Money. The live show is coming up very, very soon. Wednesday, November 15th. Come to the Bell House in Brooklyn. We have James Truman and Francis Lamb. We're going to be talking about food and it's going to be great. So the tickets for the live show are available@slate.com live or I think they will be if there are any left. Go along to slate.com live and find out. And also please leave us a voicemail for our December call in show. The number for that is 347-960-6314. We will leave that phone number in the show notes or if you must, you can just email us as ever on slatemoneylate.com and go listen to Dear Prudence because she's awesome. She comes out on Tuesdays. That's Mallory Ortberg, normally with a remote guest co host answering questions about toilet paper or nicknames or whatever weird crazy agony aunt questions that Dear Prudence gets on Slate. I love that column. So check out the podcast on Tuesdays. Jordan.

A (50:18)

Yes?

B (50:18)

You were looking at me quizzically.

A (50:20)

I was just. If I were gonna talk about subjects that Mallory Ortberg answers questions on, toilet paper was not the first top of my mind.

B (50:29)

What's the top of your mind?

A (50:30)

It's more like, oh, my sister in law stole my baby's name. Can I still be friends with her? Or I'm in love with both of my roommates. Can I try to make this relationship work or should I move? That's what I think of when I think of Dear Prudence.

B (50:45)

But toilet paper, my favorite one is my boyfriend like treats his cat too well. Men shouldn't treat cats too well. Should I break up with my boyfriend because he's too nice to his cat?

C (50:56)

I will say though, I once dated a guy who was obsessed with his cat. It was a problem.

B (51:00)

It's an interesting question. I'm just saying maybe we, maybe we should call in to Dear Prudence and ask about, you know, the men and their cats. Many thanks to Dan Trader for producing this and we will talk to you next week on Slate Money.