Thu 2 Oct 2008

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10 Responses to “ Steal This Post ”

Comments:

1. frank uible says:
   October 2nd, 2008 at 6:52 am

   The sky is falling.

2. Larry George says:
   October 2nd, 2008 at 8:28 am

   I did not read Wick’s piece but there are reports that many colleges, especially the less rich ones, have begun to have trouble getting their hands on their operating funds. Part of this was because many of the institutions had put them in a fund Wachovia was holding; that particular problem should be easing up with the Citicorp takeover of Wachovia, but other, more serious, ones may emerge.

   And all endowments will be falling. The recent days of big construction and adding luxe housing/dining/recreation offerings should soon be over (but I would think Harvard will go ahead with adding its additional campus and that the Stetson/Sawyer project will be completed). At schools with small or no endowments and those relying heavily on state funds in jurisdictions that face huge shortfalls, things must be especially scary.

3. Ronit says:
   October 2nd, 2008 at 9:41 am

   The problem Larry George describes was in the WSJ today (and the part of Wachovia that manages these funds was not taken over by Citigroup):

   A fund that invests cash for about 1,000 colleges and private schools suddenly froze withdrawals this week, leaving school finance managers scrambling to make sure they have enough money for payroll and other bills.

   For 34 years, colleges and schools parked cash in the now $9.3 billion fund, which offered returns slightly above U.S. Treasury bills. That it now might take years for the institutions to get all of their money back shows how widely credit-market woes are reverberating beyond Wall Street.

   Monday, Wachovia Corp., the fund’s trustee, said it was terminating the fund, liquidating its assets, distributing the proceeds and resigning as trustee, “to ensure that all investors would get equal treatment and that there would be orderly and equal distributions,” says Laura Fay, a Wachovia spokeswoman. That stunned some of the colleges, which had believed they could get immediate access to the money if needed.

   Wachovia became concerned that there might be the equivalent of a run on the fund, given recent woes with other short-term debt funds, Ms. Fay says.

   The Short Term Fund is offered by Commonfund, a Wilton, Conn., nonprofit that advises colleges and schools on money management. Verne O. Sedlacek, Commonfund’s chief executive, says 85% of the fund was in “high-quality” commercial paper from blue-chip issuers. The rest is largely in securities backed by assets like mortgages — the kind of investments that are being especially shunned in the credit crisis. He estimates those are selling for about 89 cents on the dollar.

   The shutdown of the fund came just as the government facilitated a sale of the bulk of Wachovia to Citigroup Inc. Ms. Fay said that the decision on the fund didn’t have any connection to the Citi deal and that the part of Wachovia that handled the fund isn’t moving to Citigroup.

   The fund’s fate shows how investors who stretched for a modestly better return by taking on what they thought was almost no additional risk have been burned. At first, colleges Monday were told they could redeem only 10% of their holdings, but the figure has since risen to 33%. Schools will be able to withdraw at least 57% of their money by year end and the rest in installments through 2011, Commonfund says.

   In central Kansas, Bethany College, a Lutheran school with 600 students and a $12.5 million budget, has $700,000 parked in the fund. “Wall Street has hit Swensson Street,” says Edward F. Leonard III, Bethany’s president, referring to a street that runs through the campus.

   Dr. Leonard says the school has four to six weeks to figure out whether it has enough cash for coming bills and, if not, to identify alternatives, such as securing bank lines of credit or tapping into the school’s $25 million endowment, which he says could amount to a “long-term hit” on the school’s finances.

   Commonfund says none of the securities have defaulted, and the fund should be able to return the money to shareholders as the securities mature. The firm says it is working with clients to try to find them lines of credit.

   Several Minnesota schools had money in the fund, including Macalester College. Spokeswoman Barbara Laskin said the school had a modest amount invested with the fund and the developments won’t affect day-to-day operations.

   Grinnell College in Iowa had about $5 million in the fund, but the school also has a $1.5 billion endowment. Russell K. Osgood, Grinnell’s president, says the school established a variety of new accounts over the summer to make sure it was diversified and that no one fund could lead to a cash crunch.

   Amy Falls, chief investment officer for the endowment of private high school Phillips Academy in Andover, Mass., pulled money out of the fund a year ago and put it in Treasurys, she says. “In times like this, you want cash.”

   The example of Phillips Academy demonstrates why large endowments need to be professionally managed by a chief investment manager, and not remain in the part-time hands of trustees.

4. current eph says:
   October 2nd, 2008 at 10:28 am

   Does Williams have any money in the fund? Does anyone have any idea of what Williams’ exposure to the investments that have tanked has been?

5. frank uible says:
   October 2nd, 2008 at 10:36 am

   It would be good for the national character to get over the wide spread, faulty notion that one should expect to lead a risk free life and that consequently one need not be vigilantly prudent.

6. Soph Mom says:
   October 2nd, 2008 at 11:23 am

   Frank,

   I don’t know much about finance but it seems to me that all the prudence in the world would not safeguard one if banks collapse. Unless of course, you have no mortgage, no kids in college, a private supply of food, medicine, gas, etc. etc… and lots and lots of cash in your mattress.

7. JG says:
   October 2nd, 2008 at 12:13 pm

   Wick says:
   

   Do any of us really how close we are to finding even our checking accounts empty or inaccessible? The press must ask this.

   While some of the concerns may be valid with regard to some types of funds, your checking account is really not at risk in the same way, and Wick should find another bank if they can’t explain the basics of deposit insurance (it is quite simple, check out the website). Obviously if the whole system collapses this might be different, but we really are not that bad off.

   Even in the event of a failure or fire sale, good old fashioned bank deposits will be available - possibly with no interrupted service, but at the very least within 48-72 hours. That is the whole point of FDIC insurance. The banks pay an insurance premium (”assessment”) based on their volume of deposits, and that goes into the Deposit Insurance Fund. The DIF has to be mantained at certain levels in relation to overall deposits, and premiums on the banks are raised accordingly if it falls below the mandated levels. In the event that the fund is exhausted (highly unlikely), FDIC has a line of credit at Treasury. Federal deposit insurance is backed by the full faith and credit of the United States government, and no depositor has ever lost a single dollar of insured funds. Ever. When a bank fails, the FDIC acquires the assets and sells them, and hopefully an assuming bank will take on the insured deposits (cheap way to expand the customer base). The proceeds from selling assets go toward replenishing the DIF as well. If a $30 billion bank fails (*cough, Indymac, cough*), that doesn’t mean it is a $30 billion hit to the fund. Estimates on that are reported to be $4-8 billion. That is a lot, but the fund is far larger…

   Investments are obviously a whole other situation, and the two shouldn’t be conflated - it makes people panic and withdraw money, thereby furthering reducing capital on hand for other things. Investment entails risk - some things are riskier than others, bank deposits aren’t risky and therefore the interest on using your money is lower. Make your own decisions accordingly.

8. frank uible says:
   October 2nd, 2008 at 12:35 pm

   Mom: True - then I quess that means we all have dispensation to be foolishly improvident.

9. Larry George says:
   October 2nd, 2008 at 1:07 pm

   Ronit -
   Thank you for post #3. I had heard bits and pieces but had been too busy to look into it.

10. Larry George says:
    October 2nd, 2008 at 8:47 pm

    My Congressman just sent me this piece on signs of student loan money drying up locally. http://www.news8.net/news/stories/1008/558396.html
    I take it that he is voting “Yea.”

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