The blighting touch of busted investments has extended beyond the airy reaches of high finance to the more erstwhile and down-to-earth domain of nonprofits, a story in the September 24, 2009 edition of The New York Times reports. Unaware (or perhaps simply heedless) of the danger, nonprofits dipped their toes in dark pools of speculative capital, only to find the turbulent eddies of economic contraction too powerful to resist.

“Homeowners and businesses were not alone in taking on piles of debt over the last decade,” the Times story reports: “Nonprofits of all sizes did the same, and now they, too, are paying the price.”

This price has come in the form of bills come due on reams of DOA derivative paper, which many nonprofits — universities, museums, symphony orchestras and the like — staked their endowments on. This downturn has lead to a draining of nonprofits’ coffers as they rush to cover not only their bad bets, but also the cost of day-to-day operations.

The Times story hastens to point out that the these bad investments, while themselves not solely responsible for the financial pickle they find themselves in, have certainly aggravated their institutional headaches. “While debt is the not primary reason for these institutions’ woes,” the story reports, “the need to service it eats into their dwindling financial resources, forcing near Faustian choices.”

Nonprofits are typically leaky, listing vessels in calmest conditions. Add a bit of economic churn such as the United states is experiencing now, and shipwreck threatens.

Adding to nonprofits woes is that gains won during the boom have already been plowed into capital improvements. “In many cases, charities used the money from bonds to buy real estate and build facilities,” the Times story continues:

Prep schools added golf courses, pools and observatories. Colleges bought entire neighborhoods and put up labs and sports facilities. Museums erected new wings, and symphonies added thousands of seats to their concert halls.

So, unless these nonprofits want to liquidate these investments — want to put their glitzy new arenas, laboratories or golf courses on the auction block — they will have to look elsewhere to recover their losses.

Hopeless crush: nonprofits seduced by exotic investments.

One can’t help but feel galled upon reading news of nonprofits’ hard times. Their investments were of the most dubious sort. The Times story quotes Clara Miller, head exec at the Nonprofit Finance fund, who reveals that these now wobbly nonprofits dabbled in “‘auction-rate securities, interest-rate arbitrage, complex swaps — which backfired on them the same way it would backfire on any hedge fund or asset manager.’”

The esoteric nomenclature of such investment vehicles belies the fact that their entire existences are devoted to a single principle: quick and big profit. Every such vehicle inevitably has behind it massive amounts of leverage (borrowed money added to a capital investment to exponentially increase the return), something hedge-fund managers love, because it also increases the amount of fees they charge investors.

Leveraging investments are great at making everyone involved piles of cash as long as investments continue to generate returns sufficient to service the leveraging debt. Should investments tank, however, all of a sudden this leverage goes from force multiplier to crushing burden. Once a speculative bubble goes pop, and investments cease performing, it’s lights out, folks. Party’s over.

This is just a long way of saying that the fact that nonprofits wished to join the party makes one question the very meaning of the designation “nonprofit.” One would suppose these institutions held nothing but reliable, blue-chip stock on their portfolios, stock that, while certainly not generating spectacular returns, at least produced reliable ones. No, these nonprofits were after sexier stuff — all gamine gyrations of puts, calls, strikes and options.

And I begin to speculate myself. I wonder if these nonprofits weren’t up to something altogether venal, exploiting their tax exempt status as a way of increasing their profit margin. No, it’s best not to muse upon such things; it shakes my faith. Though I fear that despite my best effort and intentions, I am beginning to lose my religion. . .

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