Charities’ Loss of Trust and Stability Is the True Damage of the Madoff Scandal

Now that nearly a month has passed since news of the Bernard Madoff scam broke, it is time to put the scandal in perspective. Much has been written about the horrific effects on Jewish philanthropy, and how the fraud reaches deep into Jewish nonprofit life.

But the real tragedy of the Madoff scandal is not a Jewish one, because American Jews are embedded into every fabric of American life, especially in its philanthropic world.

At the heart of the Madoff incident is not so much a concern about the loss of money, but a loss of trust.

The betrayal Jews feel because of the Madoff Ponzi scheme could lead to an overall lack of confidence that might shape discussion about the future of American philanthropy. That is why it is important for everyone in philanthropy to start thinking about how to deal with the fear that the scandal has created so that the entire nonprofit world does not suffer any more than necessary.

Certainly a significant number of Jewish organizations have been hurt badly financially, and all the losses have not yet been revealed.

Some charities and foundations have been entirely wiped out. Those are unimaginable hardships for the institutions involved, but not a disaster for all Jewish nonprofit organizations.

The largest organizations that lost money will survive, and many smaller organizations will probably benefit as donors rally to help make up the shortfall caused by the Madoffinduced losses. It is important to remember that changes in the housing and financial markets account for far more of the financial troubles facing charities today than anything Mr. Madoff did. All nonprofit groups, including Jewish organizations, have been hit hard by the economic turmoil.

Jews are embarrassed and bewildered by Mr. Madoff’s scheming, as well as angry.

But Jewish charities are wounded, not devastated. Over all, the Jewish philanthropic network consists of thousands of nonprofit groups with total budgets in the tens of billions. Jewish foundations have additional tens of billions in assets.

Those thousands of organizations generally have sound fiduciary controls in place, and in the constellation of Jewish communal life, very few of them have been affected in a serious way by Mr. Madoff’s cheating.

The loss of trust and stability that donors and nonprofit groups are experiencing gets to the heart of the real damage Mr. Madoff has done to the American charitable spirit. He has introduced fear and uncertainty about how nonprofit groups use their money. As a result, donors may choose to cut back their donations or at least put them off for a while.

Over time, many organizations will miss the philanthropic dollars lost by Jewish donors. Accumulated wealth almost always ends up in the hands of nonprofit groups, through foundation giving, bequests, and endowments.

Although Jewish donors support a wide network of Jewish organizations, their involvement in the non-Jewish world is arguably the larger role for Jewish philanthropists.

Our studies at the Institute for Jewish & Community Research show that although Jews make up only 2 percent of the population, they provide 25 percent of the largest gifts to higher education. More than 90 percent of the gifts Jewish donors and foundations make of $1-million or more go to a wide variety of non-Jewish charities — colleges, hospitals, museums, and food banks. More than 70 percent of the grants made by the largest Jewish foundations go to general causes, not Jewish ones.

Ensuring that American philanthropy remains a stable and trusted source of communal strength will not be easy. Mr. Madoff’s investment firm, along with Bear Stearns and Lehman Brothers, makes clear a greater need for responsible and appropriate regulation of the financial markets, and, by extension, for philanthropy as well.

But in the same way that regulation must take care not to stifle the markets it hopes to protect, regulation of nonprofit groups and grant makers must seek to maintain the integrity of American philanthropy.

Nonprofit groups must remain independent while allowing measures to be taken that secure confidence.

It would be foolish to pass new regulations to crack down on the investment practices of all charities in response to the Madoff meltdown. We do not need more burdensome audits, reporting rules, or restrictions on donors.

Rather, charities that follow good practices should be highlighted and rewarded. Those who follow the rules, which is nearly everyone, should be commended. More attention should be focused on identifying obvious red flags for those organizations that do not.

The road forward lies in moderating our concerns about the financial impact of the Madoff fraud and recognizing the emotional damage that must be healed.

We need all organizations to do rigorous due diligence. We do not want to overreact and compromise the independence of the nonprofit world.

Gary Tobin is president of the Institute for Jewish & Community Research, in San Francisco.