Liquidated Commonfund Creates Severe Financial Dilemmas for Colleges

With the abrupt liquidation of the widely held short-term investment fund managed by Connecticut-based Commonfund, more than 1,000 colleges across the country suddenly confront serious financial problems. With Wachovia Corp. as trustee, the $9.3 billion Commonfund for Short Term Investments Fund basically provided colleges with a “checking account” out of which they could pay for salaries, supplies and other expenses.

Without any prior warning, Wachovia sent an e-mail to schools on September 29 explaining that ongoing market turmoil forced the firm to give up its role as trustee of the Commonfund. Approximately 20% of the fund’s mortgage and asset-backed securities suffered because of market conditions.

According to the terms of the liquidation, participants could withdraw approximately 34% of their funds as of October 1. The amount grows to as much as 57% by the end of the year. Any remaining funds can be withdrawn as other securities mature.

Unfortunately, as of September 29, hardly any of the fund’s non-government securities could be sold at par.

How will colleges cope? The University of Vermont, just one participant in the Commonfund, invested almost $80 million. Right now, the school can only withdraw $16 million. The withdrawals allowed over the next few months won’t provide enough cash to pay the school’s operating costs for the rest of this year, according to the Burlington Free Press in an October 2 article. Because of Wachovia’s decision to liquidate, administrators at the University of Vermont and many other schools now must scramble to find other financing sources.

This entry was posted on Wednesday, October 15th, 2008 at 3:13 pm and is filed under Bond Losses. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.