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Schools scramble as investment fund curbs withdrawals

Limits on redemptions force about 1,000 institutions to find other short-term cash.

October 03, 2008|From the Associated Press

NEW HAVEN, CONN. — An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.

Wachovia Bank, trustee for the $9.3-billion Short Term Fund offered by Commonfund, said Monday that it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could withdraw only 10% of their money, but that figure was increased to 34% by Wednesday and 37% by Thursday.

Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday that it put a 30% limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, managing director of Commonfund.

About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment and plant purchases, he said.

"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."

Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.

"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."

Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, said Matthew Hamill, senior vice president of the National Assn. of College and University Business Officers. That means taking on borrowing costs that effectively reduce their rate of return in the original investment, he said.

Hamill said he did not expect the issue to affect students and their families and noted that the crisis had eased somewhat with a greater percentage of cash allowed to be withdrawn.

Assumption College in Worcester, Mass., had about $20 million in the fund but was able to get back nearly a third of that, said Christian McCarthy, the school's executive vice president and treasurer. The redemption and other funds enabled the college to pay all its bills, he said.

"It's been a tremendous inconvenience," McCarthy said. "It really did come as quite a shock. It is disconcerting."

Bethany College -- a Lutheran school in Lindsborg, Kan., with 600 students and a $12-million budget -- has $700,000 invested in the fund.

"Obviously we weren't planning on withdrawing all at once," said spokeswoman Aubrey Streit. "We're just reevaluating our plan for how we will work with the cash flow over the course of the next academic year."

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