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Credit crunch crimps schools
Wachovia's decision to end fund restricts college withdrawals
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Published: October 3, 2008
NEW HAVEN, Conn. - An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.
Wachovia Bank, the trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday that it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could withdraw only 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by yesterday.
Commonfund is a nonprofit organization based in Wilton, Conn., that advises colleges and schools on money management. It said yesterday that it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, the managing director of Commonfund.
About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment-plant purchases, he said. In North Carolina, 22 educational institutions are invested in the fund, but Luke said that the fund could not disclose their names.
Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.
"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."
Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, according to Matthew Hamill, the senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.
Hamill said he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with more cash allowed to be withdrawn.
"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."
The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue-chip companies, and the rest is in securities backed by mortgages and other assets, Luke said.
Amid the housing-industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors look for safer options, such as Treasury bills.
Commonfund said recently that volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund's portfolio held in mortgage- and asset-backed securities.
There have been no defaults in the fund's portfolio so far, Luke said.
"Credit markets have frozen, which has made trading of even the highest-quality short-term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."
Commonfund said it pledged $50 million of its corporate reserves in April to back the fund.
Fay said that Wachovia's decision was not affected by last week's announced $2.2 billion deal for Citigroup to buy Wachovia's banking operations.
Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets -- typically at a loss when it must be done quickly, and especially amid the recent market turmoil.
A slow liquidation helps protect investor returns and ensures that each investor would be treated equally.
College fund
• The freeze: Wachovia Bank, the trustee for the $9.3 billion Short Term Fund offered by Commonfund, says it will terminate the investment fund used by hundreds of U.S. colleges and universities.
• The fund: The Short Term Fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue chip companies, and the rest is in securities backed by mortgages and other assets that have been hurt by the mortgage and Wall Street slump.
• What's next: Investors can remove as much as 37 percent of their funds from the Short Term Fund, and will be able to withdraw at least 57 percent of their money by the end of the year. Commonfund is working with schools to find alternative financing sources and says it hopes to eventually give investors all their money.
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