2:12 pm, October 1, 2008
Some colleges and nonprofits in Ohio are trying to figure out how the termination and liquidation of a popular investment fund will affect them and when they might get back the money they have invested.
Wachovia Bank N.A. on Monday notified the institutions involved in the $9.3 billion Common Fund for Short Term Investments that, as trustee, it would be terminating the fund and distributing the assets. Commonfund of Wilton, Conn., manages investments for thousands of nonprofit institutions, including Baldwin-Wallace College, Oberlin College and the University of Akron.
Wachovia’s email to the institutions said the decision to terminate the Short Term Fund was one of several options officials at Wachovia and Commonfund had considered in recent months. The Short Term Fund will be terminated as of Dec. 31.
“Recognizing that the market for certain high quality, short-term debt instruments has become increasingly disrupted over the course of the past several months, and in order to ensure fair and equitable treatment of all investors in the Fund, Wachovia implemented the termination and liquidation plan this morning,” the email said. “Effective immediately, no further contributions to the Fund will be accepted.”
John Case, chief financial officer at the University of Akron, on Wednesday said the university does not have access at this time to the $750,000 it has in the Short Term Fund and he was not sure how that would affect the school.
“They’re coming back with information on how we get it back,” Mr. Case said. “It’s restricted now, so we can’t get it.”
Oberlin College has about $7 million invested in the Short Term Fund, but the school has access to other cash accounts, so it doesn’t need the money immediately, said Ronald Watts, chief financial officer for Oberlin.
But, Mr. Watts said, many colleges, especially smaller schools that might not have as much money spread around in various investments, could have difficulty making payroll or paying bills.
“For some schools, this could be a real nightmare,” said Mr. Watts, who noted that many colleges invested their money in the Common Fund because it was supposed to be “conservative and safe.”
Doling out the cash in dribs and drabs
According to a Sept. 30 statement by Commonfund, Wachovia on Friday, Sept. 26, restricted liquidity in the fund to 10% of each participant’s account value. That amount mirrored the value of maturing securities in the fund as of Monday, Sept. 29.
“The remaining 90% of the fund will be available to investors over the coming weeks and months as securities in the portfolio mature and as the fund’s advisers are able to sell underlying securities when markets return to normalcy,” the Commonfund statement said.
Commonfund said at least 26% of the fund is available today, Oct. 1, and 57% of the fund would mature by Dec. 31. So far, no securities in the Short Term Fund have defaulted and they continue to pay principal and interest.
The limited access to money in the Short Term Fund will be enough to enable Baldwin-Wallace, which has about $30 million in the Short Term Fund, to meet its operating obligations, said George Richard, assistant vice president and director of college relations at Baldwin-Wallace.
“It was operating cash and you don’t have loads of that laying around,” he said. “But, we’re fortunate.”
Mr. Richard said he expects Baldwin-Wallace to make changes in how it invests its money going forward, but it does not expect to lose what it has in the Short Term Fund. Though B-W’s endowment also is managed by Commonfund, he said the college does not expect that money to be affected by the termination of the Short Term Fund.
“Schools will get that money back, but they may have to wait for those investments to mature,” he said.
Problems with the Short Term Fund did not arise overnight. The statement from Commonfund said the Short Term Fund “has been exposed to significant price volatility since last spring as the credit crisis continued to unfold.”
New trustee hard to come by
The volatility over the last six months was mostly concentrated on 15% to 20% of the securities in the Short Term Fund, namely mortgage- and other asset-backed securities. The credit markets became frozen, however, after the recent failure of Lehman Bros., the federal government’s bailout of American International Group, and the failure of Congress to pass a bill to salvage the faltering financial market.
“Yesterday, 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 Commonfund statement said.
As Commonfund waits for the market to stablize, it is trying to find ways to help its investors gain access to cash and have a place to put their Short Term Fund money once they have access to it. Those are proving to be difficult tasks.
Though Commonfund has asked several unidentified banks to extend credit to institutions who need immediate access to cash, it hasn’t had any takers, said Judson Koss, managing director of Commonfund.
Commonfund also hasn’t found a trust bank to act as a new trustee to succeed Wachovia in managing the Short Term Fund, he said. Commonfund has 60 days to find a new trustee.
“It’s not a good time to be in the banking business,” Mr. Koss said. “The candidate list of new trustees is pretty finite as organizations go belly up. We’re going to take our time.”
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