People stand in line for food and water last October in San Isidro, Puerto Rico in the aftermath of Hurricane Maria.

Erika P. Rodriguez / The New York Times

People stand in line for food and water last October in San Isidro, Puerto Rico in the aftermath of Hurricane Maria.

April 11, 2018

Pollack Rejects Resolution Calling on Cornell to Divest from Puerto Rican Debt

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President Martha E. Pollack on March 30 rejected the Student Assembly’s unanimously supported Resolution 28, which called on the University to divest from Puerto Rican debt bonds and maintain greater transparency in investment filings.

“While Resolution 28 is rooted in compassion for an important social and political cause, I do not believe it meets the Board of Trustees’ adopted threshold for divestment,” President Pollack wrote.

The resolution, passed at an S.A. meeting on Feb. 15, follows a string of Ivy League protests against university investment in The Baupost Group, a hedge fund run by Seth Klarman ’79, after whom Klarman Hall is named. The group reportedly manages a hedge fund that owns nearly $1 billion in Puerto Rican debt.

“Allowing an investment partner to engage in a speculative activity with donated money is irresponsible,” said Zachary Schmetterer ’18, the S.A. parliamentarian, in an interview with The Sun. “On the Puerto Rican side, this also indirectly harms the island’s rebuilding efforts.”

Schmetterer, who has reviewed the Baupost hedge fund model, argued that “distressed government debt investment does not produce reliable returns and incurs significant unknown market and political risk.”

According to Schmetterer, Provost Michael Kotlikoff, Chief Financial Officer Joanne DeStefano and Vice President Joel Malina canceled a meeting with the Resolution authors in the weeks before President Pollack’s decision. After a long email exchange, the conversation has now been rescheduled for April 27.

President Pollack defended the debt bonds by writing in a March 30 letter to the S.A., “divesting from any Baupost holdings would not change how Puerto Rico’s debt is restructured nor would it help the people of Puerto Rico.”

Pollack’s response echoes Klarman’s own acknowledgment of divestment pressure back in October that these anti-debt bond initiative “well intentioned” but “impractical.”

Prior to the S.A.’s approval of the resolution, DeStefano also warned S.A. members that the Puerto Rican debt crisis did not warrant divestment.

The University upholds strict standards for withdrawing monetary investments, and reserves the decision for only the most severe instances. Cornell also requires evidence that its divestment would have a substantial influence, according to DeStefano.

The resolution additionally called on Cornell to “list investment partnerships in their yearly tax filings in terms of both the initial investment amount, the fund’s name, and affiliation.” Other Ivy League institutions list partnerships and investments with greater clarity, according to Rahul Mukherjee ’20, president of Cornell Impact Investing, an undergraduate private equity club, and co-author of Resolution 28.

In response to this directive, Pollack explained that the University strictly adheres to IRS rules and reporting requirements.

“IRS Form 990 requires disclosure and reporting of related organizations when a university has control through majority ownership or investment,” President Pollack explained. “Harvard and Princeton disclose such investments because of their majority ownership of those investments.”

The Resolution authors, Christopher Arce ’19, Schmetterer and Mukherjee, formally responded to Pollack’s rejection in a letter Tuesday.

“While we realize that the resolution may not meet the Trustees’ threshold for divestment, there is a conversation that should be had about where our university’s endowment funds are going and how our returns on those investments are maximized,” the group wrote. “We as students are not only concerned about the economic conditions in Puerto Rico, but are also equally concerned about Cornell’s financial future.”

Despite the stark disagreement between the S.A. and Board of Trustees, Schmetterer feels strongly that an open dialogue will yield a profitable and ethical solution. He anticipates a compromise through portfolio modification and communication.

“When there is a dialogue between the office of the University investments and an investment vehicle it’s not like we have zero choice over what’s in our portfolio,” Schmetterer explained. “The administration is making this seem like we have to completely divest from Baupost Group if we’re trying to address the Puerto Rican issue. We can have a portfolio with no Puerto Rican debt.”

While Schmetterer acknowledges that Cornell’s portfolio management may only force Baupost to redistribute its holdings, Schmetterer anticipates a cascade of divestment and, ideally, the cancellation of Puerto Rican debt. Harvard and MIT’s endowments make up a large portion of Baupost’s total funds, according to S­­­­chmetterer, and student groups at these Universities actively protested Puerto Rican debt holdings.

Schmetterer said “no one wants” to discuss the University’s investment in “distressed debt,” which are investments that make money if the debtor declares bankruptcy.

“How do we do it well?” he said. “And is this even benefiting our University and how can we examine it? That conversation needs to be had.”