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, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday 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 only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by Thursday.
Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday 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, 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.
"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."
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, 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and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.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."
Assumption College in Worcester, Mass. had about $20 million in the fund, but was able to get back nearly a third of that, said Christian McCarthy, the school's executive vice president and treasurer. The redemption and other funds enabled the college to pay all its bills, he said.
"It's been a tremendous inconvenience," McCarthy said. "It really did come as quite a shock. It is disconcerting."
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, while 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 seek safer options like Treasury bills.
Commonfund said recently 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. Commonfund also said it was looking for a new trustee for the Short Term Fund in order to re-establish the program in largely the same form.
Fay said Wachovia's decision was not affected by last week's announced $2.1 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 ensure each investor would be treated equally.
A rescue package approved by the Senate late Wednesday would let the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.
By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."
Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.
"We feel terrible for them," Luke said. "We want to help them. We're working very hard to do so."
Bethany College — a Lutheran school in Lindsborg, Kan., with 600 students and a $12 million budget — has $700,000 invested in the fund.
"Obviously we weren't planning on withdrawing all at once," said Aubrey Streit, a spokeswoman. "We're just re-evaluating our plan for how we will work with the cash flow over the course of the next academic year."
Bethany College is not in a state of panic, Streit said, but she noted that the investment was a significant part of its budget.
"It wasn't something we expected," Streit said. "It really makes it real to see the financial impact coming here."
Grinnell College in Iowa had about $4.8 million in the fund, but was able to withdraw 34 percent, said Russell Osgood, the college's president. With a $1.5 billion endowment, he was not worried.
"It has had no effect," Osgood said.
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