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The Wall Street Skinny
March 20, 2025
This Week on The Floor
Wishing you all a happy spring break from Utah and The Bahamas!
Why are America’s elite universities raising massive amounts of debt?
New policies looking to limit junior investment bankers’ hours at last…
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Why are American universities borrowing money at a record pace this quarter?
According to a Bloomberg article, “America’s most prestigious colleges are rushing to the debt market at the fastest pace on record, locking in financing while they can to pay for campus projects or refinance debt against a backdrop of tax and funding threats”.
This isn’t just about the threats to withdraw federal funding from schools like Columbia.
There’s the broader possibility that the entire tax status of these Universities and their gigantic endowments may change.
Historically, universities were exempt from federal taxes under section 501(c)(3). However, the Tax Cuts and Jobs act of 2017 during the first Trump administration introduced a new 1.4% excise tax (the “Endowment Tax”) on universities with >500 students and assets worth >$500k per student.
For context, Harvard’s endowment is close to $50bn.
Princeton’s endowment is around $34.1bn
Now multiple proposals are on the table to raise the Endowment Tax from 1.4% to anywhere from 10-21%. One proposal aims to lower the asset value threshold to $200k per student, expanding the scope of universities to which the tax would be applicable.
Universities seem concerned they may also lose their ability to issue tax-exempt debt — what we call “municipal bonds” — hence the rush to the bond market by names like Harvard, Stanford, UPenn, Colgate, and others.
Municipal bonds offer lower yields relative to their taxable counterparts, making them attractive to borrowers.
According to Bloomberg, both Harvard and Stanford recently issued two mandatory puttable structures: bonds that are structured in a way that forces the issuer to pay back their debt prior to maturity, but which allows them to subsequently remarket the bonds as tax-exempt should they lose their status in the meantime.
Universities are also tapping the corporate bond market, locking in other sources of funding beyond just muni bonds.
For better or worse, these schools are no dummies, and are strategically locking in long term, relatively low interest rate funding while they can.
Banks Try New Strategy to Limit Junior Hours
After the deaths of junior investment bankers, will policy changes finally improve culture?
Following the recent deaths of junior bankers, Wall Street firms have come under scrutiny for the culture that glorifies working extremely long hours.
Many have called for caps on weekly hours worked by analysts and associates.
Well, believe it or not, many firms already have caps in place.
Policies were put in place at many firms to limit hours worked over a decade ago after the death of an analyst in 2014 sparked global outrage.
But the implementation of these policies has been questionable — with many junior bankers reporting that they were explicitly directed to ignore or circumvent the rules put in place to protect them.
Now, Bank of America specifically has announced they are changing who oversees the implementation of these policies in order to enforce an 80-hour work week cap.
The current model in place has used a system of Chief Resource Officers, comprised of mid-level bankers on a one year rotation program.
Having been at that level personally, it’s easy to imagine how VP-level managers might feel pressure to curry favor with senior bankers, or be unwilling to enforce rules that contradict the culture passed down by their MDs.
Plus, the lack of continuity in the role may have led to diminished accountability.
Bank of America is now appointing senior bankers to permanent roles of as CROs, hoping that enforcement from the top down will encourage compliance.
We’ve said many times before that the culture has to come from the top down, so I do think this is an encouraging development.
But there’s no small irony in the fact that these announcements come on the heels of annual layoffs of junior bankers across the street.
Some 2,000 employees at Morgan Stanley and Goldman Sachs globally and 150 analysts and associates at Bank of America specifically are all going to be looking for new jobs.