Wachovia Bank last week limited the access of nearly 1,000 colleges and universities to $9.3 billion the bank had held for them in a short-term investment fund, sending jitters through higher education as university presidents rushed to check their schools’ financial vulnerability, the New York Times reported.
Wachovia agreed last week to sell its banking operations to Citigroup, announcing on Monday that as part of that move it would resign from its role as trustee of Commonfund, a fund used by colleges and universities, and limit access to the fund to 10 percent of each of the school’s account value.
By Tuesday, Commonfund announced that it had managed to raise that liquidity to 26 percent by selling some government bonds and other assets. Still, reduced access to the short-term funds held by Commonfund caused concerns on some campuses about meeting payrolls and other obligations, the Times reported.
Several larger colleges and universities had previously arranged other lines of credit, but smaller colleges that hadn’t were hastily trying to on Wednesday, the Times continued. “And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action,” the Times stated.
Colleges and universities have used the fund much like a checking account, according to the Times report, depositing revenues – such as tuition payments – and withdrawing funds for operating expenses – such as payroll, small-scale construction and other projects.
Concerns on the part of colleges and universities revolve around liquidity more than the actual security of the funds, according to the report. Much of the $9.3 billion is held in securities that will become available when they mature, and almost 60 percent of the securities in the fund will mature by December 31, Commonfund announced in a statement, but when the remaining funds will be available is unclear.
“This is a pretty significant event, in the short run, because it’s going to cause dislocation and uncertainty,” Matthew Hamill, senior vice president of the National Association of College and University Business Officers, told the Times. “My estimate is that in the long run, investors will wind up with their money back,” Hamill continued. “But they don’t have access to cash in the short run, so it’s going to cause significant financial and operational changes.”
According to Molly Broad, president of the American Council on Education, a widespread credit crisis will affect a large number of the 1,600 colleges and universities the council represents. “Those folks who’ve been saying that the economy could be seized by a liquidity crisis, well, it’s unfolding before our eyes, and it’s having an impact on colleges and nonprofits,” she said.
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