Analysis: Why federations were less vulnerable to Madoff than family foundations

Most devastating damage may have been sustained by private foundations.

Bernard Madoff 248 88  (photo credit: AP)
Bernard Madoff 248 88
(photo credit: AP)
We do not yet know the full extent of the damage, as foundations scramble to discover third- and even fourth-degree exposure to their investments in Bernard Madoff history-making scam. So it may be too early to draw decisive conclusions about what it means for American Jewry. Even so, from what is already known about the effect of the collapse of Madoff's Ponzi scheme on Jewish institutional life, it is clear that American Jewry must begin to ask itself important questions about governance. It appears that the most devastating damage in the Jewish community may have been sustained by the rapidly expanding sector of private foundations. The nimble and focused family foundation has been widely acclaimed for two decades as the future of American Jewish communal governance, adding untold funds and energy to communal life. Some have even suggested the private foundations could supplant the system of large communal federations - many of these over 100 years old - that tend to value long-term planning and major charitable infrastructures. Some strong evidence has accumulated to support perspectives of this sort, including the widely-admired success of birthright israel - a product of the passion and stomach for risk-taking of Michael Steinhardt and Charles Bronfman, who pulled the Israeli government and the federations in their wake. Small foundations are fast on their feet, responding quickly to new research and good ideas. They actively look for the next good thing, exemplified in a myriad of initiatives like the ROI network, which bills itself as a "community of young Jewish innovators and leaders," funded by the likes of birthright and Lynn Schusterman. Then came Bernie Madoff, the finest spokesman ever known for the importance of obsessive due diligence. Within two weeks of Madoff's arrest, some of the most pioneering, prestigious and well-run foundations in American Jewish life have evaporated. The Lappin Foundation took with it a sizable portion of Jewish life in the Massachusetts Cape area. The Picower Foundation's half-billion-dollar demise wiped out aid to Sderot children, Jewish camps and groups such as the American Jewish World Service, Limmud and Hillel. The Chais Family Foundation took with it an even larger assemblage of programs throughout the Jewish world, from gifted education in southern Jerusalem to identity programming in the former Soviet Union. Though the final extent of the damage has yet to be properly assessed, these collapses may highlight a strength of the communal federation model of Jewish giving and governing. In a Diaspora community where all Jewish life is private, every institution - from soup kitchens to day schools - is dependent on philanthropy. The growing dependence on family foundations, at least a handful of which we now know were invested almost entirely in one high-earning but unsupervised and unscrupulous asset manager, could put some of the Jewish community's most basic functions at terrible risk. It is noteworthy that over the past two weeks, as reports came in of agencies and foundations suffering terribly or even disappearing because of Madoff investments, relatively little damage has been reported to the endowments of federations. Was this a lucky break, or does it reflect a deeper structural strength, suggesting that some of what is sometimes perceived as a weakness in federations can be an asset? The 157 federations in North America largely fund the infrastructure of Jewish life, including the necessary but unexalted charitable works such as old age homes, back-to-work programs and soup kitchens that care for the overlooked poor of American Jewry. They were founded to centralize and rationalize communal fund-raising, to be an address where all institutions together raise and dispense the communal treasury. The result is a system that generates competition over resources, but then structures it and channels it into compromises that allow the community to pay for itself. True, the board members and executive leadership of federations are not the average Jew on the street, though the system is by its nature more representative of varied interests. But federation leaders still constitute multiple centers of power and competing layers of oversight within the top tier of the communal philanthropic structure. When a federation board comes to manage policy-making and risk, it is more often than not a place of debate, of clashing egos and different visions for Jewish life, incorporating different donors, competing communal leaders and disagreeing religious movements. Because federations have a fiduciary responsibility to multiple donors, their levels of oversight enjoy a degree of support that almost institutionally forces them to think twice about any initiative or investment. This can be a frustrating experience in daily governance, but Mr. Madoff may have taught us that it has a positive side to which we may not have paid sufficient attention in recent years - that it can be an institution's salvation from the sort of woes afflicting the Jewish world in these very days.