[Infowarrior] - ICANN blows $4.6m in stock market

[Richard Forno]

(via IP)

http://weblog.johnlevine.com/ICANN/icannspec.html?seemore=y

If you visit the new dashboard on ICANN's web site, you see some nice  
bar charts, including one rather large negative number of $4,462,000.  
If you click the little arrow at the top of the Financial Performance  
chart, a footnote window pops open where the last sentence is:

     The large variance to budget is due to investment losses of $4.6  
mil.

Investment losses? Yup, ICANN's been speculating in the stock market,  
and has lost $4.6 million, or to put it in concrete terms, the 20 cent  
fee from 23 million domain registrations.

Way back in 1998, ICANN's bylaws said they should establish  
"reasonable reserves for future expenses and contingencies reasonably  
related to the legitimate activities of the Corporation". This is  
perfectly reasonable, any company needs a cash cushion to deal with  
unforseen bumps in revenue and expense. Fast forward to 2002, when  
ICANN's finances were still somewhat precarious, due to its  
bureaucracy expanding faster than its revenues. In his ICANN reform  
proposal, Stuart Lynn proposed $10 million as an adequate level of  
reserves to be built up over three years, which still sounds  
reasonable. As time passed, the money started to flood in a lot  
faster, so by the 2007-2008 budget year ICANN had $25 million in spare  
cash, and the reserve goal had now become a full year's revenue, which  
is ridiculous. (How likely is it that ICANN's income will drop to zero  
for a full year, and even if it did, there's only a few key functions  
like IANA and Compliance that couldn't be deferred over a crisis.)

At its November 2007 meeting the ICANN board approved an investment  
policy, which is where they went off the rails.

     RAJASEKHAR RAMARAJ: ...

     One is that the money that -- a portion of that annual reserve  
fund has actually been accumulated so far. And there is an opportunity  
cost attached to it which seems considerable, because of want of this  
investment policy.

     The investment policy will focus actually on safety and  
performance. That's based on community feedback on that issue, focused  
on safety, principal safety and performance.

     STEVE GOLDSTEIN: Thanks. And to add to what my two colleagues  
have already said, the opportunity cost of just leaving that money in  
a money market fund as opposed to investing it wisely, depending on  
what assumptions you make, but it is of the order of a million dollars  
a year. So it's very important that we have a good investment policy.

It appears that ICANN doesn't understand the difference between a  
reserve and an endowment. A reserve is accumulated surplus cash, held  
to deal with emergencies. An endowment is a permanent fund where the  
income (and in unusual circumstances, the principal) supports the  
operation of the organization. Reserves have to be there when you need  
them, so they belong in cash: money market, bank deposits, and the  
like which don't fluctuate. Endowments are typically invested for the  
long term, with the organization getting some fraction of the income.  
Unfortunately, ICANN seems to think that its Reserve Fund is an  
endowment, so according to the 2008 annual financial report, they  
bought about $16.5M in bonds, and $8.5M in stocks. We don't know in  
detail what happened between then and now, but it's reasonable to  
assume that their portfolio tanked with everyone else's, producing the  
$4.6M investment loss. Well, uh, oops, let's hope they can get by on  
$20.4M, and the way the market's going, perhaps somewhat less than that.

Lest it be unclear, I am not saying that ICANN should have forseen the  
market crash (well, any more than everyone else in the world should  
have.) I'm saying that their investment policy is irresponsible. If  
they could afford to lose $4.6M from their reserves, why did they  
collect it from us in the first place?