Oh boy, this is badly timed. The run on money market funds appears to have abated, thanks to the insurance plan implemented by Treasury, but the commercial paper market, important for day-to-day business funding is still under big-time stress because the amount of money committed to short-term, non-government holdings has contracted.
The new bit of bad news comes in the New York Times. A Wachovia $9 billion short-term investment fund (note this is NOT a money market fund and thus not subject to the $1 net asset value commitment) has restricted access by its investors, who are almost entirely higher education institutions.
Wachovia maintains that the fund is sound (where have we heard that one before?) but the issue is liquidity. Even AAA bonds have taken a hit, falling 6.5% in September (I have yet to see comparable info on shorter-dated paper), and in a stressed market like this, selling more than fairly small amounts could well have a disproportionate price impact. Presumably, the hope is that once the bailout bill has passed and the next TAF auction, three times as large as the last one (October 6) has concluded, the stress will alleviate. But the fund understandably cannot make any promises.
The initial reports appear to be that the colleges in question are for the most part,troubled rather than disrupted by this action, although a few said they would face some difficulties (there is so far no sign this development will lead to extreme moves like delay of payrolls or immediate expenditures). The limit seems to be large relative to the holdings (initially 10%, now 26%) but the idea that you can’t get your hands on the bulk of your money is nervous-making, to say the least.
The New York Times does not give any figures on the aggregate amount committed to this sort of fund, but it is a no-brainer that this sort of news will lead some investors to withdraw funds from similar entities (if nothing else in an anticipatory fashion), which in turn will lead to selling of fund assets (placing further stress on short-term funding markets), with the potential for other funds to similarly restrict withdrawals, which will only pour gas on this new credit market fire.
From the New York Times (hat tip reader Dwight):
In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.
Wachovia, the North Carolina bank that agreed this week to sell its banking operations to Citigroup, has held the money in its role as trustee for a fund used by colleges and universities and managed by a Connecticut nonprofit, Commonfund.
On Monday, Wachovia announced that it would resign its role as trustee of the fund, and would limit access to the fund to 10 percent of each college’s account value. On Tuesday, Commonfund said that by selling some government bonds and other assets held in the fund, it had succeeded in raising its liquidity to 26 percent.
Still, Wachovia’s announcement sent shock waves through higher education, sending hundreds of college presidents rushing to check their financial vulnerability on every front.
Some smaller colleges that had not previously arranged lines of credit were feverishly seeking to negotiate those on Wednesday. And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action.
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,” said Richard H. Cate, vice president for finance and administration at the University of Vermont, because, he said, much of the $9.3 billion is held in securities that will become available when they mature. “But we’re not real thrilled with the fact that we can’t access all of our money when we want it.”
Wachovia’s action was perhaps the most tangible signal yet that the credit crisis could have a powerful impact on higher education. Another sign came on Tuesday as Boston University, saying it needed to respond to the financial crisis with cautionary steps, announced an immediate hiring freeze and a moratorium on new construction projects. That decision was unrelated to the action by Wachovia, where Boston University was not an investor.
On Tuesday, officers of Commonfund held a lengthy conference call to provide details of Wachovia’s action to representatives of more than 900 colleges and universities, many of whom were upset, said W. Judson Koss, a spokesman for Commonfund.
“The whole issue is liquidity,” Mr. Koss said. “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 and we can’t redeem these securities?’ So they were the ones who pulled the pin on the grenade.”
Colleges have used the fund, formally called the Commonfund Short Term Fund, almost like a checking account, depositing revenues including tuition payments and withdrawing funds daily to finance payrolls, maintenance expenses, small construction projects and other short-term needs, college officials said.
Nearly 60 percent of the securities in the fund are scheduled to mature by Dec. 31, and thereafter would be available to investors, Commonfund said in a statement. When the remaining funds would become available was unclear. The fund said it was seeking a trustee to succeed Wachovia.
To date, none of the securities have defaulted, and all were continuing to pay timely principal and interest, the statement said.