My Two Cents

More evidence that reaching for yield doesn’t pay….

Chris Farrell Oct 2, 2008

…at least not with “safe” money. The auction rate preferred market froze up. Now, a number of colleges and universities are scrambiling for cash, according to this story in today’s Wall Street Journal.

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….

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 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.

You can read the full story here.

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