Back in March, I wrote a story documenting the financial meltdown’s calamitous impact on the nonprofit sector. I neglected to mention one important reason for this: the reckless behavior of nonprofits themselves.
As Stephanie Strom documents in The Times today, many nonprofits spent the past two decades doing their best imitation of hedge funds. Interest-rate arbitrage, auction-rate securities, complex swaps: these were among the practices in which nonprofits engaged, taking advantage of a change in the tax code that allowed charities easy access to credit markets. Strom offers the example of New York Law School, which in 2006 floated $135 million in auction-rate securities and sold its library for roughly the same amount ($136.5 million), using the money not to build a library but to pad its endowment and borrow for construction.
Now, many of the same nonprofits are drowning in debt that will result in museums being shut down, services being slashed, staff being cut. Some will presumably end up bankrupt or foreclosed, an unfortunate fate for which they have only themselves to blame.