01:00 AM EST on Sunday, January 23, 2005

BY MICHAEL LEWIS

The men who manage Harvard University's $23-billion portfolio are leaving to start their own investment fund. The university will ultimately pay for indulging the moral outrage that drove them away.

For almost 15 years, Jack Meyer ran an operation that generated consistently high returns; last year alone, Harvard grew $1 billion richer, thanks to Meyer's team, than it would have gotten by simply investing in market indexes.

But for the past few years Harvard alumni -- led by members of the class of 1969 -- have expressed outrage at the bonuses Meyer and his top managers took home. Meyer made $7.2 million last year. His two most important investment managers, David Mittelman and Maurice Samuels, pocketed about $25 million each.

In response, a group of 11 members of the Harvard class of 1969 composed a letter that called the bonuses "unnecessary, inappropriate and contrary to the values of a great university."

Without putting too fine a point on it, Meyer this month made it clear that he was leaving, at least in part, because he was tired of having his pay, and the pay of his employees, a matter of public controversy. Mittelman, Samuels and two other managers are going with him.

By market standards, Meyer was fantastically underpaid -- though of course he didn't say that. Instead, he said "it's time for a new chapter," which sounds refreshing until you realize that the only difference between his new chapter and his old one is that he will be keeping a vastly greater chunk of his investment profits.

News stories hinted that Harvard will probably invest directly in Meyer's new hedge fund -- and, implicitly, pay him a great deal more than it has ever paid him, to run a great deal less of Harvard's money.

As the Wall Street Journal reported, Harvard already has invested $500 million in Eton Park Capital, a hedge fund that no one from the class of 1969 has complained about.

For the privilege of giving its money to Eton's Eric Mindich, Harvard pays a 2-percent annual management fee, plus 20 percent of the investment profits, and, in the bargain, agrees not to remove its money for a minimum of four and a half years. Had Meyer had that deal, he'd be a billionaire.

In a stroke, the class of 1969 has helped Harvard create a bizarre incentive system for its money managers: Stay at Harvard and they are paid a fraction of what they can make with their own firm, and are subjected to scorn and ridicule; leave and they can make a quiet fortune, while still running Harvard's money.

Now that the class of 1969 has had its way, and driven Harvard's gifted money managers into the private sector, one of two painful things is likely to happen to Harvard's portfolio, and maybe both.

Either the money will be run by less capable managers who are willing to accept wages that don't scandalize Harvard's alumni, or it will be run by managers who aren't Harvard employees, and who charge the university a lot more.

Either way, the cost to Harvard of indulging its class of 1969's outrage is likely to run quickly into the hundreds of millions of dollars. Over the long term, it could easily cost the university billions.

Why did the university let this happen? One answer is there isn't much the school can do about it -- the class of 1969 enjoys First Amendment rights just as completely as every other class.

But that's not really true. Harvard's leaders could have made the complainers seem ridiculous. President Larry Summers could have made a speech decrying the cost, especially to students who cannot afford Harvard's tuition, of the moral outrage of Harvard's class of 1969. Former Treasury Secretary Robert Rubin, an adviser to Harvard, might have stood up and explained how many hundreds of millions of dollars Jack Meyer had, in effect, donated to Harvard.

Why Harvard's leaders remained relatively silent only they can say, but I'll bet the main reason is that they were afraid to say what they thought.

We have arrived at a point in the money-management game where the going rate for the people who play it well is indefensible even to the people who understand it. No one wants to be seen thinking it is normal for someone to make $25 million a year.

But there's another reason for Harvard's reticence, touched on by the class of 1969. The modern university still likes to pretend that it is not a business.

Or, rather, that it is a business when it is a seller, and a university when it is buyer. It charges people huge sums of money for its services, but then, when it employs them, invokes its special nature as an excuse to pay them as little as possible.

Harvard can decline to pay its money managers market rates in the same spirit that the University of Oklahoma can decline to pay its football players anything at all -- because to do so would violate the sanctity of the university.

Most of the time this above-it-allness is a convenient pose for a university. But this time it is a very expensive pose, as even freshman money managers can turn pro.

To indulge the moral outrage of the few, Harvard will pay a big price. It will be able to offer fewer scholarships and less generous salaries. It will fund less research, and spend more time worrying where its money is going to come from. There will be more pressure on alumni -- even on the class of 1969 -- to pony up money to pay for all the things Harvard wants to buy.

If it doesn't watch out, Harvard may need to get itself a real football team.

Michael Lewis, author of Liar's Poker and MoneyBall, is a business columnist for Bloomberg News. The opinions expressed are his own.