The Columbia Protests and the Economics of Divestment

Thousands of university students in the United States have been arrested in recent weeks while protesting their schools’ financial ties to Israel amid the ongoing war in Gaza. A number of those arrested were students at Columbia University in New York City, which was at the forefront of the protests—and the arrests.

How sizable are Columbia’s investments in Israel? Why has Columbia fallen short in managing its endowment? And have the protests further empowered the university’s alumni donors?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: The protests at Columbia were most directly about divesting the university from investments in Israel. But alumni donors were quite vocal in opposing some of these protests, as were federal government officials, and that seemed to motivate some of the university administration’s actions. In terms of the financial issues at stake, how does the scale of the university’s Israel-relevant investments compare with the revenue from donations and government funding?

Adam Tooze: So the students themselves have done a lot of work on this. It’s really interesting to see, contrary to the sort of simple-minded way in which the protests have been presented in the media. It’s actually kind of typically nerdy. So they’ve gone away and they’ve looked at the tax forms and they figured out which assets might be involved with Israel. And it’s, broadly speaking, big contractors that have, say, for instance, cloud data-type deals with the IDF [Israel Defense Forces] in Israel or something like that. Right? So that’s the basis for the claim. Their demand is not to flush this money down the drain, but simply to reallocate it to a different investment. It would require the reallocation of 6.12 percent of Columbia’s publicly traded investments of $784 million. So it’s about $40 million, something like that, right? So that’s what they’re asking for. And again, to repeat, they’re not asking anyone to burn or throw this money away. They’re just simply asking to swap it into another investment.

So the cost to Columbia of doing this in economic terms would simply be the difference between the rate of return on the assets the students have identified and the rate of return on some other assets which are not currently held. And it’s difficult, I think, to assess, in marginal terms, whether this brings any greater or lesser return. But that’s the economic scale of this. And by comparison with gifts from donors, which run to hundreds of millions a year, this reallocation is tiny. By comparison with revenue streams like government grants, it’s super tiny. Like, government grants are $1.2 billion. This reallocation is tens of millions. And what we’re actually talking about, a potential cost of, is the opportunity cost of not investing in the Israel-connected assets. Which might actually be negative. In other words, there might be no cost. They might actually generate a higher rate of return investing in something else. It’d be very difficult to prove one way or the other. So in economic terms, it’s really hard to imagine that this matters.

But that’s not the argument, right? The argument on the part of an individual university mobilization like this is not like anti-apartheid disinvestment in South Africa in the ’80s, where the aim of the game was actually to strangle South African capitalism. And it worked as a power political play. It helped to convince South African big business that they had to begin discussing the end of apartheid. The aim with Israel, which is a much stronger economy than South Africa was in the 1980s—much less dependent on external funding, it has huge foreign exchange reserves, it runs a trade surplus—the game is symbolic. The aim of the game is to say, “On our side, we don’t want to have anything to do with supporting the Israeli state that’s involved in this violence and this illegal occupation.” And the aim of the game, furthermore, is to try and create a phalanx, a coalition of the most prestigious universities in the United States, which collectively signal—if you want to understand the aim of the protesters, this is their logic—collectively signal that the younger generation of Americans is not willing to stand foursquare behind [Israeli Prime Minister Benjamin] Netanyahu’s regime and government in Israel in its relentless and violent campaign against Gaza. And even that is not necessarily going to sway the economics of Israel, but it will send a political message, and a political message, of course, not just to Israel, but to politicians in the United States who will realize, perhaps, that there is a price to pay for their knee-jerk reflex willingness to vote tens of billions of dollars in support of Israel in the middle of this campaign.

And the resistance on the part of the administration, I think, is similarly political. In other words, they think this will be shockingly bad for their relations with large numbers of alumni. And at a deeper level, the Columbia administration, on principle, I think, says—well, it’s difficult to read the statements. [Columbia President Nemat] Shafik seems to just take an anti-divestment position altogether, which she’s not really entitled to do. It’s actually a matter of decision by a board. That board has a procedure, which they have used to stop the divestment demands, claiming that a wider group should have been consulted. In general, I think, there’s just a reluctance on the part of the administration to allow voice to be exercised in matters like this, strategic matters of investment.

And frankly, if I were them, it would not be the Israel bit that I was worried about. It’s just their general management of the endowment which is terrible. And so if they were actually open to wider criticism, I think there would be a damning series of questions more generally about their stewardship of Columbia’s resources that would need to be posed beyond these symbolic issues of how we stand in relation to Israel and the current war in Gaza.

CA: You point out that Columbia has not been terribly good at managing its endowment. But if that is the case, should that be a surprise, given that managing an endowment of this size is not really the core mission of a university? Is there a contradiction or tension here that needs to be resolved?

AT: Of course it’s true in some senses that we should focus on what core competencies of organizations are. But once you reach a certain scale, obviously, a well-organized organization has enough in-house expertise to manage outside expertise that you buy in. And then you actually spin this on its head. You say, look, okay, what does long-term success in investment management entail? It involves knowing about the world, being able to research the world and ideally having a really long time horizon. Right? That’s the, we think, key to success, the kind of Warren Buffett model of investment. You know about what you’re investing in and you’re patient.

And you could argue that university endowments are perfectly situated to do this. Ideally, you have something else which also matters in financial markets, which is contacts, network. So you don’t need to engage in illegal insider trading. But when the time comes, you’re on the inside of the best slices of any deal. Not illegal insider trading. Important to emphasize. Just being there in the room at the moment when the nice deal is done. And what better position to do that from than, say, the senior members of the business school or the law school of an Ivy League university in the United States, which is massively networked with the rest of society?

And if you look historically to legendary important investment and endowment managements that have shaped the entire business and profession of endowment and investment management on a large scale, they are, in fact, coming out of the university system. And the first, believe it or not, is John Maynard Keynes, who was elected as bursar of King’s College before World War I, remained in that position through the ’30s and was a legendary investor, because he created the model of investment portfolio diversification, something that we take for granted now in large-scale endowment management.

And in the modern era, the model for endowment, long-term endowment model is the Yale model, which was sponsored by the legendary endowment manager David Swensen, who pioneered the realization that if you had a really long time horizon, then the way to go was not in publicly traded equities, where the prospects of you being able to outthink and outsmart the market were quite slim, but instead that you should go into so-called alternatives. So private equity, exotic land deals of different types, buying Brazilian agricultural land in the course of globalization, strategies which a short-term investor that needs liquidity, that needs to be able to rapidly sell assets, can’t risk because these markets aren’t liquid. But if you are Yale and you’re going to live forever, then you can take risks on illiquid investments. And it was under his stewardship that the Yale endowment surged, began to rival that of Harvard. He achieved in excess of 10 percent returns over a period of 10 years, which is remarkable as a track record.

And the tragedy of the Columbia situation is that we seem to be an endowment chasing that Swensen model of boutique insider private deals into which the vast majority of the financial endowment is invested but yielding dramatically substandard returns. And I’m not just measuring this against, and the accountants are not just measuring this against, Yale or Harvard, which have done far better, but against the S&P 500. It’s literally true that if Columbia had put all of its money in a standard, vanilla exchange-traded fund, the most basic product that you would buy if you were investing in equities for a private, you know, modestly small-sized private pension scheme, if they’d done that, they would be $2.5 billion to the good.

CA: So, in relative terms, the poor management of the endowment has actually empowered alumni and donors?

AT: Yeah, it makes Columbia more sensitive to donors. And I don’t know, I actually don’t think that finance is what—you know, the most noisy donor is Robert Kraft, and he, with two other people together, is thought to have donated $100 million over a period of time. Why that sways anyone, I’m not sure. It’s just not enough money. So I’m quite skeptical of this idea that the sheer weight of donor power really is what’s mattering here. I think it’s actually politics. It’s not so much that Kraft really has all that much money or is willing to give that much money. It’s that the idea that he might not give is sort of shocking, right? It breaks one’s conception of what Columbia is. And that’s really the problem. You know, and there may be an argument that there’s a broader donor base that will be put off. And that’s, I think, where it’ll be interesting to see where there is long-term damage. But yes, the message is, with the scale of the endowment that Columbia has, if it was basically competently managed, we really wouldn’t have any, you know, gift issues to worry about.

What donors should know is that their money is not well-stewarded by Columbia University. And that’s not a matter of student protest. That’s the fact that it’s incompetently run. And that should really be the message. Because when you give the money, of course the money isn’t spent on immediate projects, unless it goes to a capital project, which relieves the endowment in various ways. But what they should know—and this was always the argument at Yale, is you give the money to Yale, you know, it will be expertly managed toward the cause and the better interests of the cause that you care so much about. Whereas if you give it to Columbia, you’re basically saying you’re giving it to a bunch of incompetents who aren’t going to steward this money as well as holding an ETF would. So rather than giving it to Columbia, you’d be better off holding it in an ETF for the period and then handing it to Columbia at the end than giving it to Columbia to manage.