As distress in the markets that buy and sell credit reached its crescendo in late September, the university’s finance office received some sudden news: On September 26, a short-term investment fund in which the university held some $45 million in operating capital would be frozen.
The affected account, which paid a modest interest rate and was used to hold university money for short-term needs like paying vendors and employees, was virtually inaccessible for several weeks. During this time, the university relied on funds in its checking account and accessed an emergency line of credit, set up several years ago, to meet its immediate obligations.
The problems began when a string of bank failures and forced sales, spurred by widespread instability in the credit markets, led to fears that some banks might be unable to meet their obligations to depositors. In late September, these fears extended to Wachovia Bank, which was then considering being acquired by either Wells Fargo or Citigroup (it reached a deal on October 9 to merge with Wells Fargo).
Like many other institutions, Rockefeller University had funds invested with a nonprofit investment management firm catering specifically to colleges, universities and private secondary schools, Commonfund. One of the firm’s products was a fund, known as the Short Term Fund, designed specifically to provide return on working capital. As of mid-September, the Short Term Fund managed approximately $9.3 billion on behalf of over 1,000 clients, and it had provided yields surpassing the average three-month Treasury Bill continuously since its inception in 1974. “It is a well-managed, conservative fund run by a very highly regarded firm,” says Jim Lapple, the university’s treasurer and vice president for finance.
The Short Term Fund, however, used Wachovia Bank as its trustee, allowing the bank to run the day-to-day operations of the fund including buying and purchasing the underlying securities and processing deposits and withdrawals. On September 26, fearing significant withdrawals from the fund as a result of rumors swirling about the bank’s future, Wachovia made the decision to freeze the fund’s assets and begin an “orderly liquidation.” “This decision, which Wachovia is legally allowed to make under the terms of its agreement with Commonfund, had the effect of preserving the value of the fund’s securities that it might otherwise have been forced to sell at a loss,” says Mr. Lapple. “Unfortunately, it also meant that the assets held in the fund would be temporarily unavailable.”
Because the fund held mostly short-term debt — primarily loans made to the government or to companies with excellent credit — many of the securities have already reached their maturity dates. As of November 24, 65 percent of the fund’s assets have become liquid and have been made available for withdrawal. Most of the remaining balance will become available in 2009.
The university has since transferred the withdrawn money to a new account at JPMorgan Chase & Co., has begun repaying the line of credit it recently accessed, and is working with members of the Board of Trustees to identify other ways to invest its working capital in the short term. The cost, several hundred thousand dollars in unexpected interest payments, will need to be absorbed in this fiscal year.
“The situation appears to be resolved,” says Mr. Lapple. “We have sufficient working capital liquidity to meet our ongoing obligations and we are able to respond to various challenges ahead. We are continuing to monitor cash flow on a daily basis and are looking at all our options about how best to manage our operating cash in this difficult environment.”