What does the financial meltdown have to do with raising money?

What have I found most surprising about raising money for a nonprofit?  It’s that, when seen on the spectrum of “objective decisions” v. “relationships and trust,” most philanthropic decisions are made based on relationships and trust.

This shouldn’t be too surprising, but it belies the (appropriate) emphasis on measurement and impact assessment that is so preoccupies the nonprofit sector.  Put another way, many nonprofits care a lot about proving that what they do works, but they should remember that this kind of information does not drive many decisions about where to allocate philanthropic capital (for more on this, see the SSIR piece called “Why Measure” by Katie Cunningham and Mark Ricks, which essentially says that most individual donors do not look at nonprofit data, even when it is available.).

And here’s the tie-in to the financial meltdown.  Today I read an incredibly sobering article in the New York Times titled “From Midwest to M.T.A., Pain From Global Gamble” about school districts across the country that lost millions investing in complex financial structures.  In one example, the Whitefish Bay School district in Wisconsin, on the counsel of a financial advisor named David Noack, took $35M of its own money and borrowed an additional $165M from a bank called Depfa to invest in a synthetic collateralized debt obligation.  The district’s $200M was used as a type of insurance guaranteeing $20 billion of corporate bonds.  That’s right – $35M in equity to insure $20 billion in corporate bonds.  They leveraged up and were acting like a hedge fund, playing with the district’s financial future.  If 6% of the insured bonds went bad, the district could lose all its money.

What was the payout for taking on this much risk? $1.8M a year, versus $1.5M the district would have received investing in risk-free treasury bills.

Why did they do it?  Mark Hujak, a local financial advisor and member of the school board, said, “I never read the prospectus…We had all our questions answered satisfactorily by Dave Noack, so I wasn’t worried.”  The catch is, Mr. Noack was no expert.  He had, according to the article, “attended only a two-hour training session on C.D.O.’s”

The Whitefish Bay School district is one of scores of organization that are getting caught in this financial meltdown, which is why it will take a long time to unravel.  And the the truth is that the world has gotten so complex and interconnected that in many cases our only option is to follow the guidance of experts whom we trust.  Building anything big – whether a great nonprofit or, unfortunately, selling large swaths of risky CDOs – happens because one person trusts another, listens to their story, and puts their money behind that story. Without trust, you have nothing.

So whether you’re raising money or selling books or cars or (gulp) financing, recognize that the real currency you’re trading in is trust, and that earning, nurturing, and maintaining trust is really the only thing that matters.

And, by the way, if this is right, who do you want on the front lines talking to potential supporters – a “fundraiser” whose only job is to raise money, separate and insulated from “the work,” or someone who embodies the spirit, capability, execution, drive, motivation, and passion of your organization?