The ASA: Wizards of High Finance?

The Disgruntled Sociologist has been examining the finances of the American Sociological Association. As a result, The Disgruntled Sociologist is not only disgruntled, but also deeply disturbed. So, fair warning, this is a long post.

Let’s start with a mystery, from the ASA’s 2008 tax return (Form 990). (You can get your own copy here.)

2008 was a bad year. Total assets dropped by almost three million dollars. At the same time, total liabilities increased by almost two million dollars. By the end of the year, the ASA’s net worth had been cut in half. Gulp.

(Oh, and: Who knew? We do not remember reading about this in Footnotes.)

How did this happen? To be fair, 2008 was a bad year all around: epic collapse in financial markets, etc. The ASA was apparently not shorting the sub-prime mortgage market, and so took a big hit like everyone else.

Still, closer inspection suggests some strange things.

Take the drop in assets:

What do we see here?

• The ASA took a bath in the markets. The value of investments in publicly traded securities – stocks, bonds, mutual funds – fell from $7.1M to $5.1M.  That is a loss of 28%.  That actually compares somewhat favorably with the drop in the stock market; the S&P500 dropped approximately 33%. (Thanks, W!) But such a large drop suggests that the ASA was heavily invested in the stock market, and paid the price.
• The ASA spent down its cash reserves to the tune of $1.8M – from approximately $3M at the beginning of the year to $1.2M at the end.  It is unclear from the tax return where this money went.
• The only substantial increase in assets comes in the form of accumulated depreciation.

Now consider the increase in liabilities.  This is if anything more disturbing.

Two things are of note here:

• The ASA has $8M in bond liabilities. Who knew? Closer inspection of the tax returns indicate that these bonds were issued on Nov. 28, 2007, for the purchase of the ASA’s “headquarters condominium.”  Them must be some pretty sweet digs.

• The big change in liabilities comes in the ominous category, “Other liabilities.” This increases twentyfold, from $101,000 to $2,000,000. Twentyfold! What, oh what, can these “other liabilities” be?  Dig a little deeper into Part X of Schedule D, and you find:

“Interest rate swap obligation”?  What does that mean?  Dig a little further:

That isn’t much of an explanation. As a working hypothesis, The Disgruntled Sociologist thinks the ASA got caught in the same way Harvard’s endowment got caught: in Harvard’s case, Larry Summers made a bet that interest rates would rise (interest rates were historically low in 2007, everyone thought they would go up); in the crisis they fell dramatically. Similarly, we think the ASA made a bet that interest rates would rise, and got burned. Why make that bet? Presumably because they had issued a bunch of bonds to buy their HQ space, and were worried that the interest payments on those bonds would go up.

This could be the wrong interpretation.  But it is hard to tell, because the ASA has not, as far as we know, described — let alone explained — these events.  In this context it is very disturbing that the ASA releases very little financial information to its members, and does not communicate regularly about the state of the association.  Audited financial statements are available on the ASA website, but they are a) hard to find (you have to search, you cannot find them by browsing) and b) the most recent audited statement is from … 2007! Coincidence?

(By contrast, look at the data rich reports from the Executive Director of the APSA; or the audited financial statements that are published in the American Economic Review each June and easily available on the AEA website.)

Nonetheless, a $2M change in the value of interest rate swap obligations suggests an organization engaged in relatively sophisticated hedging strategies. And more importantly, an organization that is out its depth. Perhaps the swaps were dictated by the bond issuance, which was dictated by the purchase of the “headquarters condominium.” But if a $2M loss on interest rate swaps was the cost of purchasing a “headquarters condominium,” perhaps it was not such a good idea?

The real scandal is the fact that nobody knows. Go to the ASA website and search for “interest rate swap” or “bond issuance.”  Nada.  Search in the full-text index for Footnotes.  Nothing.

Think about this the next time you pay your dues.

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