Wachovia Bank limited the access of nearly 1,000 colleges to a short-term investment fund last week, prompting concerns that the credit crisis will have a significant impact on higher education.
Wachovia, the trustee of the $9.3 billion Short Term Fund offered by CommonFund, said it was terminating and liquidating the fund’s assets. It imposed a 10-percent restriction on withdrawals for all college investors, though the limit has since changed to permit withdrawals of up to 38 percent, CommonFund Managing Director Keith Luke said.
Luke said Wachovia’s decision was a result of a fear, in light of current unstable market conditions, that the market would freeze, causing an overwhelming demand to withdraw and a difficulty in selling securities.
Luke, however, emphasized that so far the fund has incurred no losses, and there is no evidence suggesting that a sudden increase in withdrawal requests may occur.
“They just acted preemptively in the event that this did happen,” he said.
The fund has generally been used as an investment account from which colleges withdrew funds to satisfy their short-term operating needs, Luke said, such as payroll payments.
University Chief Financial Officer Yoke San Reynolds said the move came as a shock to the higher education industry. The University does not invest in the CommonFund Short Term Fund, though, so it will not be affected by this particular decision, Reynolds said.
Reynolds said the University is more concerned with cost-cutting as a result of progressively decreasing state revenues. Virginia Gov. Tim Kaine has asked higher education institutions to draw up plans to cut their spending by up to 15 percent, which Reynolds said would represent $22.8 million of the University’s budget.
There are also concerns that the deteriorating credit crisis and economy will have a detrimental impact on the University’s revenue sources, Reynolds said, citing more demands for financial aid, cuts in aid appropriation and a decrease in endowment funds as examples.
She said, though, that the University does not anticipate any problems with working capital, the operating cash drawn from short-term funds.
“We have put measures in place to ensure we have enough liquidity,” Reynolds said. “It’s not a question of how much to spend, but when to spend it.”
Though the University remains unaffected by Wachovia’s action, the bank’s decision will have an impact on many higher education institutions, notably smaller colleges. Luke said that although most universities have access to multiple funds and will thus be able to ride out the crisis in the short term, smaller institutions with the Short Term Fund as their sole source of liquidity will have challenges meeting their operating cash needs.
To aid these institutions, Luke said CommonFund, in conjunction with other banks, is drawing up plans to extend temporary credit. CommonFund is also actively searching for a successor trustee, Luke said, adding that it has spoken with 15 banks in the last three days. Once a successor is designated, the fund will be set up in largely the same format as it was before, although this will not occur before Dec. 21, when Wachovia’s trusteeship officially ends.
In the meantime, Luke said the restrictions will continue to ease, specifying that investors should be able to access at least 57 percent of funds by the end of this year, even if market conditions continue to deteriorate.
“That’s the conservative, worst-case scenario,” Luke said.
Although the final number is contingent on unstable market conditions, Luke said CommonFund was “comfortable and confident” that full access will eventually be allowed.
“We fully expect that investors will be able to get their funds out,” Luke said. “It’s a just a matter of timing.”
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