Last week, 900 colleges and 100 private schools were closed off from the nearly nn9.3 billion that Wachovia Bank was holding for them in the Commonfund Short Term Fund, a short-term investment fund. Wesleyan University, one of the 900 colleges affected by Wachovia’s move, had nn20 million in the fund at the time of this decision. Within the past two weeks, the University has been able to take nn8 million out of the fund; however, nn12 million remains frozen.
According to the Fund’s Sept. 30 statement, Wachovia Bank acted as a trustee of the Fund until last week, when it resigned from this position and announced that it would limit each college’s access to the Fund to 10 percent of the value of their account. Since then, however, some investors, such as the University, have been able to access a greater percentage of their accounts, as additional funds have recently matured.
While most of the nn9.3 billion is held in securities, colleges cannot access this money until these securities mature. Close to 60 percent of these securities are set to mature by Dec. 31, though it remains unclear when the other 40 percent will become available to the colleges.
The University utilized this short-term investment fund primarily as a checking account for its payroll.
“Wesleyan, like many other universities, used the Commonfund as its cash fund,” said John Meerts, vice president for Finance and Administration. “Cash comes in and leaves the University in relatively large chunks, which means that we must have a relatively large balance to cover our cash flow.”
The University’s monthly payroll alone is about nn6 million, which explains the University’s surprise when Wachovia made the announcement that it would limit access to funds.
“When we found out, yes, we were worried,” said President Michael Roth at last Sunday’s Wesleyan Student Assembly (WSA) meeting. “It happened two days before payroll. But we worked our way around it and figured it out. You shouldn’t notice any changes.”
The Fund began experiencing significant price volatility last spring as a result of the unfolding national credit crisis. Instead of stabilizing, however, these fluctuations continued for the past six months. According to the Fund’s Sept. 30 statement, this price volatility was concentrated in 15 to 20 percent of the securities—particularly asset-backed securities. The recent freezing of the credit markets from the failure of Washington Mutual Bank, Lehman Brothers and American International Group, however, exacerbated the situation.
This financial shake-up was wholly unexpected. The Fund has been in existence since 1974 and was regarded by most colleges as a safe and viable investment. According to the Sept. 30 statement, the Fund’s investment guidelines—set by Wachovia in consultation with the Commonfund’s Board of Trustees—restrict the Fund’s advisors to investments in high quality corporate securities, mortgage- and asset-backed securities, U.S. Treasury and government agency securities, and commercial and bank paper. These guidelines, however, did not prevent the Commonfund’s investments from being affected by the credit markets.
“[As of Sept. 29] virtually none of the non-government securities held in the Fund could be sold at par—including the highest rated commercial paper with maturities of less than two weeks,” the Fund’s Sept. 30 statement reads.
According to Meerts, when the Commonfund stopped accepting deposits, the University had about nn20 million in the short-term cash fund—nn12 million of which is currently frozen.
“We cannot get to the money until the Commonfund sells the underlying assets of the Fund as they mature, which will then allow them to return the money to the University,” Meerts said. “We have other sources of cash that we can use to cover our obligations while we wait for the Commonfund to return the remaining money on deposit with them to us.”
The University proved to be luckier than many other colleges invested in the Fund. According to an Oct. 2 article in The New York Times, the University of Vermont invested nn79 million, or half of its liquid operating assets, in the Commonfund, and cannot access the majority of its money until the securities mature.
“We have not lost a single dime and we don’t expect to lose any money on deposit with the Commonfund,” Meerts said. “That is why [Wesleyan] doesn’t have a cash crunch problem in spite of the situation with the Commonfund.”