Tanking Endowments Cripple Many Foundations, Universities, Nonprofits
Last year’s death of the auction rate securities market creating a ticking time bomb for individual and institutional investors. Finally, in August 2008, after months of holding illiquid investments that had been touted “as good as cash,” some retail investors found relief when major Wall Street firms made a pact with state and federal regulators to buy back more than $50 billion of the securities.
But for many auction rate securities investors, the deals failed to make them whole again. In particular, institutional investors, including charitable foundations and educational endowments, are still waiting on Wall Street to come up with a resolution for the carnage created by auction rate securities and other exotic investments.
For many foundations and endowments, the erosion of their investment portfolios has done far more than hinder their ability to grow and compete. It has forced some to close their doors, while others must reduce faculty and services or raise tuition during a time when students and families are hard pressed to come up with additional financial resources for college.
A study released March 2009 from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst six months of performance ever recorded at the end of 2008, losing an average of 24.1%.
The problem lies with portfolios of hard-to-value and difficult-to-sell assets. Among these investments are mortgage-related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.
As a result, a growing number of universities, nonprofit organizations and other entities are facing a grim reality: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. And state laws in 24 states prohibit nonprofits from tapping into their principal.
As reported March 20 in the News and Observer, neither the National Council of Nonprofits nor the Council on Foundations keeps track of how many of its members are struggling with endowments that currently are under water. According to Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, however, “it is a serious problem,” one that will only get worse if the current financial downturn continues.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
