Madoff Haunts Yeshiva as University Slides to Junk: Muni Credit

Photographer: Jin Lee/Bloomberg

Bernard Madoff, who supported Jewish causes, joined Yeshiva University’s board of trustees in 1996 and was treasurer when he resigned in 2008 as well as chairman of the business school. Close

Bernard Madoff, who supported Jewish causes, joined Yeshiva University’s board of... Read More

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Photographer: Jin Lee/Bloomberg

Bernard Madoff, who supported Jewish causes, joined Yeshiva University’s board of trustees in 1996 and was treasurer when he resigned in 2008 as well as chairman of the business school.

Yeshiva University lost about $100 million when Bernard Madoff, a trustee, was revealed to be a fraud in December 2008.

While Madoff left the board and is in prison, Yeshiva is still struggling. The school warned that its chronic budget deficits may worsen after failing to produce an annual financial report on time. The move led Moody’s Investors Service to cut its rating this month to an unprecedented four levels below investment grade, spurring investors to sell Yeshiva debt.

“It’s about their management,” said Emily Schwarz, an analyst at Moody’s in New York who focuses on higher education. “I don’t see the market being the main concern. They really have a real niche. They are the Jewish university of New York.”

Much is at stake for Yeshiva, which was founded more than 100 years ago and is central to the Modern Orthodox community in the U.S., with top-rated medical and law schools as well as a rabbinical school. The university was in the midst of ambitious growth when Madoff’s Ponzi scheme unraveled, adding faculty and expanding campuses around New York. It is still seeking to meet fundraising campaign goals.

The university has been unable to control operating costs, particularly at the Albert Einstein College of Medicine, and it encountered delays deploying a system-wide accounting network common at other nonprofits, Moody’s said. Management has sought to cut spending, stirring some faculty discontent by freezing salaries. Yeshiva generated annual deficits of $107.5 million in 2010, $46.7 million in 2011 and $105.9 million in 2012.

Photographer: Jason DeCrow/AP Photo

Richard Joel, who spearheaded Yeshiva’s expansion after becoming president in 2003, froze senior administrative salaries and hiring last year. Close

Richard Joel, who spearheaded Yeshiva’s expansion after becoming president in 2003,... Read More

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Photographer: Jason DeCrow/AP Photo

Richard Joel, who spearheaded Yeshiva’s expansion after becoming president in 2003, froze senior administrative salaries and hiring last year.

Wary Donors

“You might be able to get enough donors to write some checks to fix this problem, but people don’t like to back institutions that have problems -- they like to back winners,” said Howard Cure, municipal research director at Evercore Wealth Management in New York. The company, which oversees about $4.9 billion, liquidated its investments in the school’s debt last year. “Yeshiva has a lot of problems.”

The university failed to produce an on-time financial report for the year ended June 30, 2013, releasing a draft estimating a deficit of $146 million that it later said would probably be larger. On Jan. 9, Moody’s lowered the rating by five steps to B1, making Yeshiva the only university with an endowment of more than $1 billion that it ranks as junk. Yeshiva’s mark in 2008 was Aa2, the third-highest grade.

New CFO

J. Michael Gower, Yeshiva’s chief financial officer who was hired before the Madoff scandal, left last year and was replaced by Toby Winer, the CFO from Pace University in New York. Gower is currently CFO of Rutgers University in New Jersey.

Yeshiva is also burning through cash. It drew down a $75 million line of credit and borrowed an additional $60 million through a six-month note. The moves increased its debt by 85 percent since 2008 to $567 million, according to Moody’s. Standard & Poor’s lowered Yeshiva one step to A last month, still investment grade.

“What’s very heartbreaking about Yeshiva is that it attracts these very sincere, spiritual people yet it is revealing itself to be such a catastrophe,” said Margaret Soltan, an associate professor of literature at George Washington University in Washington who blogs about higher education. “It’s a catastrophe for the community that the leadership there has managed to screw it up.”

Yields Climb

Yeshiva tax-exempt bonds maturing in September 2038 traded Jan. 13 at an average yield of 6.53 percent, the highest since they were issued in 2009, data compiled by Bloomberg show. That’s equivalent to 81.4 cents on the dollar, down from about 100 cents earlier this month.

Evercore’s Cure said his company sold the school’s bonds because of a sex-abuse scandal at Yeshiva University High School for Boys, which intensified after former students filed a $380 million lawsuit against the institution in July. It claimed Yeshiva covered up abuse that took place starting in the 1970s.

The university stands out because, in contrast to so many other schools that have struggled amid the economic recovery, it has enjoyed stable enrollment and rising revenue from tuition. Yeshiva collected one of the largest gifts in higher education last year when Muriel Block gave more than $150 million to the Albert Einstein medical school.

“Our leadership team and outside advisers are working diligently to build a sustainable Yeshiva University for the future,” the school said in an e-mailed statement. “In that respect we are highly focused on overcoming our specific challenges, as well as those faced by most private universities in a difficult higher-education landscape.”

Property Sales

Richard Joel, who spearheaded Yeshiva’s expansion after becoming president in 2003, froze senior administrative salaries and hiring last year. The university said it will cut non-essential programs and sell real estate, including properties on the main campus in Washington Heights, in the far northern reaches of Manhattan’s west side.

Joel said last month in a letter to faculty and alumni that he would take a symbolic $100,000 pay cut. A former president of Hillel, which supports Jewish groups on college campuses, his compensation was $1.24 million in 2011, making him the 24th highest-paid private-university president in the U.S., according to the Chronicle of Higher Education.

The school’s commitment to traditional religious values may be helping inflate operating costs. It maintains separate undergraduate campuses for men and women in New York with different faculty. The undergraduate college also boasts small class sizes, with a student-faculty ratio of as few as 6-to-1, according to Yeshiva.

Faculty Angered

Yeshiva charges about $37,600 for undergraduate tuition and fees. It has four campuses in New York City and one in Israel. The total student body is almost 7,300, including a seminary and affiliated high schools.

The austerity measures are stirring discontent after four years of faculty salary freezes and cuts to retirement benefits. More than 20 professors sent a letter to the Board of Trustees in May 2012 protesting the cuts, the Commentator student newspaper reported. Last year, a reception at Joel’s residence was canceled amid a faculty boycott, according to the newspaper.

Yeshiva ordered $30 million of budget cuts in the wake of the Madoff scandal, reducing 60 positions and trimming non-personnel expenses in 2009, according to the Commentator. Almost all of Yeshiva’s Madoff losses were determined to be fictitious gains it earned on a net $14.5 million investment.

Madoff History

The university’s endowment fell 27 percent in the year ended June 30, 2009, to $979 million. Much of the drop was the result of the credit crisis that compounded stock-market declines. The endowment was valued at $1.2 billion as of June 2013, the university said.

Madoff, who supported Jewish causes, joined Yeshiva’s board of trustees in 1996 and was treasurer when he resigned in 2008 as well as chairman of the business school. Yeshiva invested in Madoff through Ascot Partners LP, a firm controlled by another university board member, Ezra Merkin. The university in 2009 approved a conflict-of-interest measure to stop doing business with board members.

Alumni include New York State Assembly Speaker Sheldon Silver and the late writer Chaim Potok. Business leaders and philanthropists populate the board, including David Gottesman, founder of investment advisory firm First Manhattan Co. and an early investor in Warren Buffett’s Berkshire Hathaway Inc.

“They’re doing major budget cuts, and it’s calling into question whether academic standards will remain,” said Roy Eappen, a municipal-bond analyst at Wells Fargo Securities in New York.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editors responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net; Stephen Merelman at smerelman@bloomberg.net

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