Because It’s Wreckable, Alright?

Felix Salmon has an essential story about Eric Schneiderman’s investigation into the bustout of Cooper Union. George Campbell took over a well-regarded liberal arts college, permanently associated with one of Lincoln’s greatest speeches as well as orations from other progressive leaders, fulfilling its mission of providing a free high-quality education to a small, dedicated group of students. The institution was financially stable when he took over.

Campbell, however, wanted a proactive, strategically dynamic Master Plan involving building new buildings nobody else particularly wanted. Campbell argued that this $120 million could be raised through fundraising. As we learned when CUNY sought to give David Petraeus a six-figure gift for doing something with some vague resemblance to teaching, though, beware of administrators who project their ego trips onto potential donors. Presicely because the demand for new buildings among the Cooper Union community was so weak, Campbell couldn’t raise anything remotely like the necessary money. But this is America — if you can’t raise the cash, borrow it. Campbell found one bank willing to lend him the money for his idiotic scheme, with remarkably onerous conditions:

And yet still Campbell didn’t give up. One lender – and only one lender – was willing to front Cooper Union the money that Campbell was requesting, but that loan came with four unacceptable conditions.

The lender was MetLife, and the first unacceptable condition was that its $175 million loan was to be secured by a mortgage on the Chrysler Building land. That land was granted to Cooper Union, in perpetuity, by Peter Cooper’s heirs – it was never designed to be collateral for short-term liquidity of dubious necessity.

The second unacceptable condition was that the liquidity was not going to be short-term at all: the loan would take the form of a 30-year mortgage, with a prepayment penalty so enormous (it was $81 million in 2012) that the loan could never be restructured or otherwise paid off early. Even if Campbell managed to magically find the rest of his $120 million, he couldn’t use it to pay down the loan, thanks to that prepayment penalty. The loan would last the full 30 years, even though Cooper Union had no real plan for where it would find 30 years’ worth of interest payments. By the time that the $175 million loan was paid off in full, Cooper would have paid back $10.3 million a year for 12 years, followed by $15.8 million a year for another 18 years, for a total of $387.4 million. That’s well over $200 million in total interest payments alone. Cooper Union had no realistic way of even paying back $175 million, let alone $387 million, so MetLife’s terms were clearly a non-starter.

The third unacceptable condition was that Cooper Union would be forced to give up an enormous amount of upside on its Chrysler Building land. In 1998, Cooper Union negotiated a rather clever 99-year lease for the land, under which it had a lot of leeway to raise rents substantially after 2018. Indeed, there was even a possibility that Cooper Union might be able to end up owning the Chrysler Building itself.

But MetLife was not interested in maximizing Cooper Union’s upside; rather, it was interested only in minimizing its own downside. So MetLife, in return for the $175 million loan, required Cooper Union to sign a series of leases on the Chrysler land, dating all the way out to 2048. Those leases were very favorable to the tenant, Tishman/Speyer, and they essentially prevented Cooper Union from ever being able to take advantage of rising midtown property values.

Finally, there was one last unacceptable thing that Cooper Union would need to do in order to get its $175 million: It would have to get the New York attorney general to agree to the deal with something known as a cy près petition. A cy près petition happens when a charity needs to restructure the terms of its trust, or endowment. In this particular case, in order to get the required cy près relief, Cooper Union would find itself being forced to lie to the attorney general about the necessity of taking out the loan in the first place. Since no university president or board of trustees ever wants to lie to an attorney general, the whole idea of borrowing the $175 million was obviously never going to happen.

Why would Campbell do such an extraordinarily stupid thing? Part of it is self-aggrandizement — new buildings are better for your “legacy” than something as mundane as maintaining a good institution and running it well. And there are more material benefits to be had as well:

Faced with a loan whose terms were unacceptable on multiple levels, the Cooper Union board did exactly what you would expect them to do. They agreed to everything, and paid Campbell a hefty bonus for his troubles.

Needless to say, the plan was a complete fiasco. The financial situation of the school deteriorated massively, and the hatchet man brought it by the board to replace Campbell fired fifty shots into Cooper Union’s mission by beginning to charge tuition.

There’s something uniquely indefensible about this particular act of looting. As Paul has observed, the orgy of debt-fueled (most of it of the taxpayer-funded student variety) building has been a disaster for American higher education. But some individual non-elite tuition-dependent schools might be able to say with a little plausibility that they’re trapped in a collective action problem: if they don’t offer the lazy rivers and opulent dorms today’s students demand, their enrollments will decrease. I suspect most of the time this isn’t true, but it’s at least an argument. Cooper Union — with a rich tradition, at the time free tuition, and an attractive Greenwich Village location — didn’t have any trouble attracting high quality students. Campbell wanted to borrow an unsustainable amount of money to build new toys for the same reason Gordon Gekko wanted to liquidate Blue Star airlines — there was more in it for him that way.

For a different version of the same story, head a few blocks southewest. On the decline of shared governance, see the situation in Iowa.