What a difference one month can make. On Sept. 29, Wachovia Bank told the 1,007 colleges - including Brown - that had assets in its short-term investment account that they would only be able to access 10 percent of their money, sending some schools scrambling to make sure they could cover operating costs. As of Oct. 27, colleges can access 52 percent of their portion of the $9.3 billion in the account.
At the time of the freeze, Brown had about $5 million in a Commonfund account, a small portion of the amount - which fluctuates throughout the year between $50 to $150 million - it invests in similar funds, said Executive Vice President of Finance and Administration Elizabeth Huidekoper.
The account is operated by Commonfund, a Connecticut-based financial group, but as the fund's trustee, Wachovia bears full fiduciary responsibility, giving them sole discretion to freeze the account, according to Keith Luke, Commonfund's managing director. Wachovia has also announced its plan to resign as the fund's trustee, effective Dec. 31.
Many colleges and universities use short-term investment accounts like the Commonfund Short Term Fund to cover operating costs, Huidekoper said. The fund's short-term nature means it acts as a sort of checking account for the University.
The schools most affected by the freeze were those without bank credit set up and without other liquid assets, Luke said. But most have been able to meet normal operating costs now that more than half of the account is available, he added.
Wachovia decided to restrict liquidity because it feared a rush to withdraw money could force it to sell securities in the account at lower than their intrinsic value, Luke said. At the end of September, the market for highly rated commercial paper, which constituted the majority of the Commonfund assets, was shrinking because "no one wanted the risk," Luke said.
At any given time, colleges have some of their cash flow directed in and out of these accounts to provide maximum liquidity while still making returns of about 1 to 3 percent, Huidekoper said. Though larger institutions keep the bulk of their assets in long-term endowment investments that can be drawn from when necessary, many smaller schools do not have significant reserves to draw from.
Over the summer, the University decided to reallocate most of its holdings in the Commonfund to what were considered safer investments, Huidekoper said. When the fund was frozen, Brown had approximately $5 million in the account. About $3 million remains frozen in the account as the University moves money into Treasury securities, Huidekoper said.
The exact balance of liquid assets in these accounts fluctuates throughout the year, depending on when inflow like tuition payments and gifts is received and when money is withdrawn to cover University expenses.
"Every year (the allocation of funds) changes, so nothing is stable," Huidekoper said. "It is constantly being managed" by the Investment Office.
Huidekoper is one of 12 Commonfund board members but is not involved in specific fund-management decisions, she said. She helps to oversee the overall direction of Commonfund's various short- and long-term accounts and represents the interests of the higher-education community on the board.
Wachovia will remain involved with the fund until a successor trustee in named, Luke said. Commonfund is considering changing the structure of its short-term account and may decide to manage the fund without the oversight of a trustee. In the interim, because deposits are not being accepted for the Wachovia-run account, a short-term government securities fund has been set up by Commonfund, Luke said.
"It is very clear that the entire liquid management business has changed dramatically," Luke said. "But we know there is an absolute need" for such funds in the education community.
Commonfund will continue to liquefy assets as quickly as possible in accordance with the fund's investment strategy, Luke said. None of the securities held by the account have defaulted and all are still paying timely dividends and interest. At least 66 percent of the total funds will be available by Dec. 31 based solely on maturing securities, Luke said.
Commonfund has provided interested clients with the contact information of banks that were willing to lend directly to schools and have kept them informed as decisions are made about the management of the fund, he said. They will continue to give schools access to their money as soon as possible while simultaneously working to set up a new short-term investment fund, Luke said.
Some schools that invest in Commonfund include Washington University in St. Louis, in Missouri, Grinnell College in Grinnell, Iowa, and Assumption College in Worcester, Mass.
