Colleges and universities became Exhibit A last week of how quickly the credit crisis is extending beyond Wall Street.
Wachovia Bank announced Monday that it had limited the access of more than 900 colleges to $9.3 billion held for them in a short-term investment fund, spurring concerns on some campuses about meeting payroll and other obligations.
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The story, first reported by the New York Times, underscored how a credit crisis was already roiling day-to-day operations not only of businesses, but also of major not-for-profit groups like colleges and universities.
The struggling North Carolina bank said Monday that it was limiting access to 10 percent of each college’s account value to stave off a run on its funds. Its planned merger with Wells Fargo was disclosed only a few days later. Citigroup, which had an earlier deal to purchase Wachovia’s banking operations, announced yesterday that a judge had temporarily blocked the Wells Fargo deal.
Wachovia had been the trustee of a fund used by colleges and universities almost like a checking account, in which they deposited revenues including tuition payments and withdrew funds daily to finance payrolls, maintenance expenses and small construction projects.
The fund is managed by Commonfund, a Connecticut-based investment adviser to nonprofits, whose board is a who’s who of nonprofit leaders. Chairwoman Myra R. Drucker, for instance, is vice chair of the board of Sarah Lawrence College, and a member of the investment committee of the Kresge Foundation.
Wachovia’s move took Commonfund by surprise, John Griswold, executive director of the Commonfund Institute, the firm’s research arm, told Bloomberg News.
“Wachovia was the trustee of the fund, and they resigned and closed it,” Griswold said. “Everybody was upset to hear this news, especially at the end of a quarter, when they have to make payroll and cover expenses.”
Although Commonfund announced Tuesday that it had taken steps to increase liquidity and enable colleges to withdraw almost a third of their holdings from the fund, the bank’s announcement sent officials scrambling to see whether they would be able to meet payroll and other obligations.
The University of Vermont, for instance, said that about half of its liquid operating assets - $79 million - were invested in the fund.
“It appears that the asset is secure,” Richard H. Cate, vice president for finance and administration at the University of Vermont told the Times. “But we’re not real thrilled with the fact that we can’t access all of our money when we want it.”
On Tuesday, officers of Commonfund held a lengthy conference call with representatives of more than 900 colleges and universities, many of whom were audibly upset.
“The whole issue is liquidity,” Commonfund spokesman W. Judson Koss told the Times. “This is a fund that has been in operation for over 35 years, and is invested in nothing but Triple-A government and corporate paper, all top-notch equities.
“We’ve been going along just fine, but Wachovia had a liquidity concern. They asked, ‘What if there’s a run on the bank’ … So they were the ones who pulled the pin on the grenade.”
Many of Commonfund trustees are themselves top officials at colleges and universities:
- Vice Chairman William N. Goetzmann is the director of Yale’s International Center for Finance.
- Trustee Leslie E. Bains is the former chairman of the board of American University.
- Trustee Laurance R. Hoagland is the vice president and chief investment officer of the Hewlett Foundation. Prior to that, he was president and CEO of Stanford Management Company, Stanford University’s $20-billion investment and real-estate organization.
- Trustee Elizabeth (Beppie) Huidekoper is Brown University’s executive vice president for finance and administration.
Commonfund said in a statement on its website that it is seeking a new trustee for the fund, and that to date, no participants have incurred losses on their principal.
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