GU weathers financial storm

September 25, 2008

With the credit market collapsing and the stock market unstable, Georgetown faces several financial uncertainties, including the prospect of diminishing returns on its already-small endowment.

“The current turmoil is so widespread that it pretty much covers all types of financial assets,” Reena Aggarwal, a professor of finance in the McDonough School of Business, wrote in an email. “I do expect these financial troubles to impact the investments of universities, including us.”

Likely to be affected by economic turmoil are donations to the University, which historically have declined slightly during periods of recession, according to James Langley, head of the Office of Advancement, which handles donations to the University

“Much depends on how long it takes for people to feel that the markets have stabilized. We have seen no significant downturn—so far,” Langley wrote in an email.

Georgetown, like many universities, invests part of its endowment in stocks and other financial assets. According to figures from the University Office of Investment, 21 percent of the University’s $1.6 billion endowment is invested in U.S. public equity, which includes investments most heavily affected by the current credit crunch.

But the long-terms effects of the current crisis are still unknown, and according to Aggarwal, most investment strategies focus on long-term performance to avoid being hurt by short-term market fluctuations.

“Any investment philosophy should be long-term, and it should consider a diversified approach, so that exposure to any one sector is limited,” Aggarwal wrote.

While Georgetown might not lose big as the market experiences a downturn, it is likely to experience slower growth. From fiscal year 2006 to fiscal year 2007, Georgetown’s endowment increased from just over $850 million to $1.05 billion. In a similar stretch of time from fiscal year 2007 to fiscal year 2008, the University’s endowment only increased to $1.06 billion.

Perhaps of greatest concern to Georgetown students is the impact the credit crisis will have on the student loan market, which has not yet followed the home mortgage market into meltdown. Some banks have stopped offering federal student loans in some places.

“We’ve gone school by school, and because of the reduction in the amount of subsidies for federal student loans and because there’s only a fixed rate we can charge for federal student loans, we’ve stopped making federal student loans to some schools,” said Tom Kelley, a spokesperson for Chase Bank. “We continue to offer private student loans to all the schools we did before, because we can adjust the rate to match the risk of the borrower.”

Several factors have prevented the student loan market from heading into a collapse.

“There’s added insulation in the student loan market that other types of borrowing don’t have,” Bob Cumby, a professor in the economics department, said. “They don’t have something like the direct loan program by the Department of Education. The federal government lends directly as well as providing guarantees to private lenders.”

Cumby also added that while private student loan lenders may be affected by the crisis, the presence of direct borrowing from the government would prevent serious problems from developing.

In addition to its investments in the domestic market, the University invests in a variety of foreign equity, private investments, and fixed assets. University spokesperson Julie Green Bataille wrote in an email that this strategy will sufficiently insulate Georgetown from risk.

“The focus of Georgetown’s investment strategy is on the long-term—meaning there is not an immediate need to panic given the current instability we’re seeing in the financial markets,” Bataille wrote.

—Additional reporting by Alisha Crovetto

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