The financial crisis in the United States has started to affect operations of smaller colleges and universities. The New York Times reported yesterday that Wachovia Bank has limited access to a fund used by many smaller institutions for short-term financing of their day-to-day operations. This move has forced some institutions to scramble to find the money for payroll and other immediate obligations.
Until Monday, Wachovia Bank served as the trustee for the Commonfund, where some 1,000 institutions in the U.S. deposited their cash receipts, then drew out funds using lines of credit to pay staff, purchase supplies, and conduct other day-to-day transactions. On Monday, according to the Times, Wachovia resigned from its trustee role with Commonfund. The bank also limited access by institutions to the estimated $9.3 billion in the Commonfund to 10 percent of their accounts' value. On Tuesday, Commonfund was able to sell some of its government-backed securities to increase its liquidity.
For institutions depending on Commonfund, Monday's announcement hit hard. The University of Vermont says that half of its liquid assets--some $79 million--are in Commonfund. The University of Akron had $800,000 in Commonfund, but could withdraw only $80,000 when it heard the fund was in trouble. Many institutions have been forced to negotiate separate lines of credit with other institutions at a time when credit is tightening.
Wachovia was one of the banks hit particularly hard by the financial crisis. Citigroup announced this week the purchase of Wachovia's banking operations. Commonfund had invested its funds in high-rated government and corporate bonds, avoiding the the mortgage-backed securities considered among the root causes of the financial crisis. But the central role of Wachovia with Commonfund appears to have crippled the fund's work.
The Times also reports that Boston University, while not a Commonfund participant, announced a freeze on hiring and new capital projects as a precaution, given the uncertain financial conditions.
UPDATE, 3 October 2008: Associated Press reports this morning that Wells Fargo & Co. will acquire all of Wachovia's assets, pushing aside the earlier deal with Citigroup.
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What really is a credit crunch?
A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs).
We are currently facing a severe one globally.