Some 1,000 Schools Find It May Take Years To Recover Money Placed With WachoviaA fund that invests cash for about 1,000 colleges and private schools suddenly froze withdrawals this week, leaving school finance managers scrambling to make sure they have enough money for payroll and other bills.
For 34 years, colleges and schools parked cash in the now $9.3 billion fund, which offered returns slightly above U.S. Treasury bills. That it now might take years for the institutions to get all of their money back shows how widely credit-market woes are reverberating beyond Wall Street.
Monday, Wachovia Corp., the fund's trustee, said it was terminating the fund, liquidating its assets, distributing the proceeds and resigning as trustee, "to ensure that all investors would get equal treatment and that there would be orderly and equal distributions," says Laura Fay, a Wachovia spokeswoman. That stunned some of the colleges, which had believed they could get immediate access to the money if needed.
Wachovia became concerned that there might be the equivalent of a run on the fund, given recent woes with other short-term debt funds, Ms. Fay says.
The Short Term Fund is offered by Commonfund, a Wilton, Conn., nonprofit that advises colleges and schools on money management. Verne O. Sedlacek, Commonfund's chief executive, says 85% of the fund was in "high-quality" commercial paper from blue-chip issuers. The rest is largely in securities backed by assets like mortgages -- the kind of investments that are being especially shunned in the credit crisis. He estimates those are selling for about 89 cents on the dollar.
The shutdown of the fund came just as the government facilitated a sale of the bulk of Wachovia to Citigroup Inc. Ms. Fay said that the decision on the fund didn't have any connection to the Citi deal and that the part of Wachovia that handled the fund isn't moving to Citigroup.
The fund's fate shows how investors who stretched for a modestly better return by taking on what they thought was almost no additional risk have been burned. At first, colleges Monday were told they could redeem only 10% of their holdings, but the figure has since risen to 33%. Schools will be able to withdraw at least 57% of their money by year end and the rest in installments through 2011, Commonfund says.
In central Kansas, Bethany College, a Lutheran school with 600 students and a $12.5 million budget, has $700,000 parked in the fund. "Wall Street has hit Swensson Street," says Edward F. Leonard III, Bethany's president, referring to a street that runs through the campus.
Dr. Leonard says the school has four to six weeks to figure out whether it has enough cash for coming bills and, if not, to identify alternatives, such as securing bank lines of credit or tapping into the school's $25 million endowment, which he says could amount to a "long-term hit" on the school's finances.
Commonfund says none of the securities have defaulted, and the fund should be able to return the money to shareholders as the securities mature. The firm says it is working with clients to try to find them lines of credit.
Several Minnesota schools and some Michigan colleges had money in the fund, including Macalester College. Spokeswoman Barbara Laskin said the school had a modest amount invested with the fund and the developments won't affect day-to-day operations.
Grinnell College in Iowa had about $5 million in the fund, but the school also has a $1.5 billion endowment. Russell K. Osgood, Grinnell's president, says the school established a variety of new accounts over the summer to make sure it was diversified and that no one fund could lead to a cash crunch.
Amy Falls, chief investment officer for the endowment of private high school Phillips Academy in Andover, Mass., pulled money out of the fund a year ago and put it in Treasurys, she says. "In times like this, you want cash."
By: John Hechinger and Craig Karmin
Wall Street Journal; October 2, 2008
