Bank Freeze Leaves Hundreds of Colleges Cut Off From Short-Term Funds

tsdad · October 1, 2008, 9:41am

From today’s Chronicle of Higher Education.

Wachovia bank has frozen the accounts of nearly 1,000 colleges, leaving institutions unable to access billions of dollars they depend on for salaries, campus construction, and debt payments.

The freeze, which affects most institutions that invest their endowment income and other assets through Commonfund, has some colleges worried that they wont be able to make payroll this period, said Verne O. Sedlacek, president and chief executive of Commonfund, which manages investments for nonprofit institutions. Many colleges use the organization’s short-term investment fund for operating expenses, almost as a checking account, he said.

As of last Friday, the Common Fund for Short Term Investments managed approximately $9.3-billion in assets for 900 colleges and roughly 100 private schools.

Wachovia, which agreed to sell its banking operations to Citigroup this week, announced on Monday that it was resigning as trustee of the fund and would allow plan participants to withdraw only 10 percent of their assetsthe value of the securities that had reached maturity. That percentage grew to 26 percent on Tuesday as additional securities reached maturity, and is expected to reach 57 percent by the end of this year and 74 percent by the end of 2009.

But unless the credit markets thaw, enabling a new trustee to sell more of the short-term securities in the fund, colleges wont be able to access all their money until at least 2010.

Conveying Bad News

Yesterday, representatives of Commonfund held a two-hour conference call with rattled college investors. John S. Griswold, Jr., executive director of the Commonfund Institute, Commonfund’s research arm, said the organization empathized with the colleges but had no control over Wachovia’s decision.

Obviously, it couldnt come at a worse time, at the end of the month and the end of the quarter, he said in an interview. So we can understand why people are upset.

The freeze could have the biggest effect on smaller institutions like Bethany College, in Kansas, which has $700,000 invested in the fund. President Edward F. Leonard III said his institution has enough money to cover costs for now because students just paid tuition, but hes worried about the second semester, when the college typically dips into its short-term funds to pay for a variety of operating expenses.

All colleges ride a cash roller coaster, he said. But the smaller colleges, like Bethany, we feel those bumps more than others do.

On Tuesday, Mr. Leonard wrote to his congressman, Rep. Jerry Moran, a Republican, to urge him to support federal legislation intended to rescue the financial sector. Mr. Moran voted against the $700-billion bailout bill, which had been backed by the Bush administration, on Monday.

I just e-mailed his legislative assistant saying, Hey, its starting to hit home, he said. If you think this is something confined to New York City and Washington, D.C., its already hit one of your campuses in Kansas.

Concerns About Making Payroll

Minnesotas private colleges are worried as well. On Monday, the states independent-college association sent a letter to its Congressional delegation, warning that some colleges would be unable to make their payroll obligations this week.

The failure of the House to adopt the recovery plan this afternoon has immediate implications for private colleges in Minnesota, the letter reads. As a result of the frozen capital markets and the failure of Congress to adopt a reasonable recovery plan, many of the members of our association are at the edge of their abilities to adapt. Any further delay by Congress or the administration will have immediate devastating effects on these institutions and the families they serve.

Colleges with larger endowments, like the University of Vermont, may find it easier to adapt. Daniel M. Fogel, the university’s president, said his institution has tens of millions of dollars invested in the short-term funds, but he expects that it will be able to make do.

We may need to rely on some other liquidity sources, but if so, very briefly, because then well be collecting the spring tuition, he said.

Russell K. Osgood, the president of Grinnell College, in Iowa, said his institution has a modest amount invested in the fund and did not foresee any impact. But he said he feared for some of his colleagues.

Im scared thinking about others who are more dependent on it, he said.

Reeves Wiedeman contributed to this article.

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ellemenope · October 1, 2008, 1:28pm

This is scary. I wonder how many other institutions and businesses are in the same boat?

hikids · October 1, 2008, 4:11pm

Lots are in trouble, if the fix does not happen soon, it will start slowly like dominos and then pick up steam. People are alread feeling the credit squeeze.

FLVADAD · October 1, 2008, 5:12pm

I had been wondering about this. I also wonder how much college endowments have been shrinking lately. Thanks for posting.

NJres · October 1, 2008, 6:48pm

Thanks for posting this. I live in Charlotte and with all the angst about Wachovia I did not read (or hear on the news) about this particular fallout.

Another case of a “cash” investment not being as good as cash.

tsdad · October 2, 2008, 8:47am

Follow-up story in yesterday afternoon’s Chronicle.

October 1, 2008
Wachovia Freeze on Short-Term Funds May Affect Colleges’ Credit Ratings

Moodys Investors Service said today that it was reviewing the effect of Wachovias decision to freeze the short-term accounts of nearly 1,000 colleges who invest through the Commonfund.

The assessment, which will initially focus on 20 institutions that use the money as collateral for debt, could affect some colleges credit ratings.

Roger Goodman, a Moodys vice president, said the ratings agency expected to provide more information about the review in the next day or two.

The freeze, announced on Monday, stems from the pending purchase of Wachovia by Citigroup. The move has left 900 institutions unable to get access to billions of dollars they depend on for salaries, campus construction, and debt payments.

A spokeswoman for Wachovia said today that the bank had restricted withdrawals to ensure an orderly liquidation of the fund, which is dissolving on December 31. Without the freeze, some colleges might have withdrawn all of their money at once, leaving the bank without enough cash to cover the remaining investors.

This was done to protect our investors, said the spokeswoman, Laura Faye. We wanted to ensure that every investor in the fund had fair and equitable treatment should they need to withdraw. Kelly Field

tsdad · October 2, 2008, 11:20am

From today’s Chronicle.

A day after almost 1,000 colleges learned that they would temporarily be unable to withdraw most of the money they had invested in a short-term fund managed by Wachovia, they got another piece of bad news: Commonfund, which offered the bank-managed fund, was also limiting withdrawals from an intermediate-term fund.

Commonfund, which manages assets for nonprofit companies, announced Tuesday that it would allow colleges to withdraw only 30 percent of their assets from the intermediate-term fund until the credit crunch subsides. The fund, which contains $1-billion in assets invested by roughly 200 colleges, comprises a mix of securities, including the troublesome asset-backed securities.

This second freeze, however, is not expected to have as broad an impact on colleges as the Wachovia freeze has, because the money invested is less ($1-billion vs. more than $9-billion) and because colleges tend to use that money for longer-term expenditures, such as equipment, said Keith Luke, a spokesman for Commonfund. In contrast, many colleges use the short-term fund that Wachovia managed for payroll.

Mr. Luke said Commonfund had instituted the freeze because the organization, like banks and lenders nationwide, has been unable to sell its asset-backed securities. He said he didnt know how long the restrictions would be in effect, but said he had not heard concerns from college investors.

Obviously, no one likes to have liquidity restrictions, but we have not heard any particular sources of stress among our clients, he said.

In related news, Moodys Investors Service said today that it was reviewing the effect of the Wachovia freeze, an assessment that could affect some colleges credit ratings. Kelly Field

TimeCruncher · October 2, 2008, 2:24pm

To tsdad: Thank you for posting this information. I am keeping a close eye on your thread, as is my daughter (not a CC member), whose federal student loans are administered by Wachovia, and whose school might (or might not) have Wachovia-held Commonfund investments. I promptly alerted my daughter to Monday’s news that Wachovia had been sold to Citigroup, and I told her to expect further developments. I didn’t expect this sort of development.

Since you first posted, I have been trying to find out if my daughter’s school is among those impacted by Wachovia’s Commonfund freeze. I have performed multiple Google searches, researched Wachovia’s and Commonfund’s respective websites, and dug through my daughter’s (enormous) school website, which includes treasurer’s reports disclosing that the school has endowment-based and other assets (used for short-term debt repayment) on deposit with trustees, but not disclosing the name(s) of the financial institution(s) by which those assets are managed and/or invested.

If you should happen to run across a list of schools impacted by Wachovia’s Commonfund freeze, please post that list or a link to that list.

Thank you again for your post (a perfect example of CC’s value).

tsdad · October 2, 2008, 2:41pm

Thank you TC.

Have you asked your daughter’s college’s sfa office if they are going to be impacted?

TimeCruncher · October 2, 2008, 3:16pm

To tsdad: No, I haven’t yet advised my daughter to make a direct inquiry. For now, she and I are trying to find this information in a quiet, behind-the-scenes manner. If we keep coming up dry, then it will be necessary for her to make a direct inquiry, because her FA package (federal loans, work-study, and a generous merit scholarship) is necessary for her to remain in school.

tsdad · October 2, 2008, 4:30pm

TC while I understand your concerns I wouldn’t be overly worried. Colleges will not demand that students pay debts from funds that colleges are supposed to give (or credit them with) that aren’t available to them (the students.) When checks to UW-Madison students were lost in the mail several weeks ago the university did not hold the students responsible and carried them until the checks showed up, which they did.

Any negative impact is going to be on the colleges not the students.

07DAD · October 2, 2008, 4:49pm

I called the comptroller of my S’s college and was given the name and number of the person in charge of the endowment.

In passing, I asked the Comptroller if I was reacting like Chicken Little. Her response was that fully informed parents usually were not a problem. That said, I’ve not yet heard back today from the person over the endowments.

Most colleges disclose that the tuition covers only a percentage of the actual costs. I wonder if things like food service contracts and other reoccurring expenses that directly and immediately effect the students are at risk.

Anyone know if there is a publically available list of the colleges and universities involved?

tsdad · October 3, 2008, 10:02am

10-3-2008 CHE. Based on this article my attempt to reassure TC above may have been overly optimistic. Generally though, students receiving Federal financial assistance should be ok.

Winners and Losers in the Shake-Up

When the stock market plunged 778 points last week, losing almost 9 percent of its value in one day, higher education responded in an uncharacteristic way: It began to buckle.

Colleges have often considered themselves recession-proof. But last weeks events compounded an already-difficult year for many institutions, which have suffered from declining state support, tightening credit, and losses on endowment earnings. As a result, the financial meltdownwith its promise of a prolonged economic downturnprompted some institutions to take radical steps and wreaked havoc on the way colleges do business.

Boston Universitys president announced he would freeze hiring and stop all building projects that had not already been approved. Colorado Gov. Bill Ritter tabled all taxpayer-supported construction, stalling several campus building projects. And Wachovia bank froze the accounts of nearly 1,000 colleges, leaving those institutions unable to access billions of dollars they depend on for salaries, campus construction, and debt payments. Some colleges are concerned they may not be able to make payroll.

Even as Wall Street rebounded a bit from its historic loss, campus leaders told The Chronicle they were considering other responses to the crisis: Public institutions talked about increasing tuition as other revenue falls, while private colleges said they would dip into their endowments to increase student aid and counter a growing scarcity of private student loans. Campus leaders discussed offering classes in the evenings and on weekends to maximize campus efficiency. And they said they would consider hiring more adjunct instructors instead of tenure-track faculty members and look for ways to boost cash flow by borrowing money from auxiliary operations like stadiums and bookstores.

Every downturn has its own unique features, said David W. Breneman, a professor and the director of the program in public policy at the University of Virginia. But this is a financial meltdown the likes of which we really havent seen since the Great Depression.

What also seems clear, though, is that the national economic crisis will not affect higher education evenly. There will be winners and losers.

Well-off private universities with large endowmentsand public universities in energy-rich states with strong balance sheetsare on the plus side. They will weather the financial turmoil and may even improve their standing, poaching faculty members from universities that are struggling and using their stability to attract donors who do have money to give. But small, less-selective private institutions that are dependent on tuition, and public universities in states where the financial outlook is already grim can expect to suffer. Some may even be forced to shut their doors. State legislators and education leaders in Michigan, for example, have already discussed the possibilityhowever remoteof closing a campus within the public higher-education system.

But one longtime university leader warned against overreactions and retrenchment. In times of economic distress, you have to be very prudent. But you also have to start reinvesting, said E. Gordon Gee, president of Ohio State University. The mistake of any university leader would be to hunker down. You invest in turbulent times. I never view it as an opportunity, but we need to take advantage of as much as we can.

Feast During Famine

In higher education, large-scale downturns in the economy have not necessarily been bad for business. When people cant find jobs, they enroll in college. Some officialsparticularly those at community colleges and low-priced four-year institutionsexpect that to happen this time, as well. Downturns are really good for colleges in terms of the supply of people into education, said Claudia Goldin, a professor of economics at Harvard University.

But any enrollment boost the current crisis may bring will probably be overshadowed by the financial pain and belt-tightening it will cause.

If past recessions, like the one in the early 1990s, are any guide, colleges will cut discretionary spending and stop investing in their staff and infrastructure. Campuses became dog-eared, John Nelson, an analyst with Moodys Investors Service, said of the last recession. But they limped along until the economy improved. Colleges are amazingly resilient, he said.

Still, some circumstances of the current downturn are different from those of the past. For one, institutions are carrying more debt. Most colleges devote around 5 percent of their budgets to debt service today, compared with around 3 percent 20 years ago, Mr. Nelson said. Debt service is an inflexible cost, not a place where colleges can tighten up. If the recession is a long and severe one, we would definitely expect the results to be different this time, said Mr. Nelson.

Another big problem: Banks have basically stopped lending money or started charging much higher interest rates to colleges willing to take out loans. For the many institutions with variable-rate debt, which has fluctuated wildly this year, that has taken a far-bigger chunk out of their budgets than they had planned.

Many colleges are also short on cash, said Dean W. Currie, vice president for business and finance at the California Institute of Technology. Whereas large research universities used to invest their endowments in stocks and bonds with a steady interest payout, institutions like Caltech have found they can earn more by investing in less-liquid assets like small start-up companies. But the payout on IPO’s can take months or longer. That creates a cash problem, said Mr. Currie.

It isnt clear yet how the financial crunch will effect personnel, although, like Boston University, other institutions told The Chronicle they would leave unfilled faculty and staff positions open.

Kirk Beyer, president of the board of directors of the College and University Professional Association for Human Resources, said colleges tend to prefer to lose positions across the board through attrition. But buyouts and layoffs are likely to be among the options if budgets continue to tighten, he said. The University of Memphis last week announced a voluntary buyout plan for 115 positions, including administrators, professors, and staff members, that will save the institution $1.5-million.

Some more-well-off campuses will undoubtedly consider this a time to raid professors from institutions that are struggling. Harvard could clean up in bad times, said Ms. Goldin, the economist there. But even deans at Harvard get scared in a bad economy, she said, so it isnt clear that will happen.

Endowment Effects

The health of college balance sheets is closely determined by the vitality of their endowments, which could suffer as earnings and giving drop. Ann E. Kaplan, director of the Council for Aid to Educations Voluntary Support of Education Survey, which tracks private giving to colleges, said donations typically slow down in a recession or stock-market drop, but recover quickly.

Edith H. Falk, chief executive of Campbell & Co., a fund-raising consulting group, said she expects well-established fund-raising operations that have been around longer to do better. Colleges with smaller, newer programs may struggle.

The impact on fund raising varies in different parts of the country: Institutions in places like New York, where the housing market has been hammered and the financial crisis has hit closest to home, are feeling the effects of the down economy more than those in Dallas or Houston, which have been more insulated because of record oil profits.

Some institutions already are changing their plans, based on the economic troubles. The University of Colorado had been gearing up to start a fund-raising campaign but might now delay it, said Ken McConnellogue, a spokesman for the Colorado system.

Westminster College in Missouri was also preparing a fund-raising campaign to double its endowment, starting this year. We may push that off a year because we think that our donors are so nervous about their own money, said Wayne Lowen, vice president for business and finance.

Like other campuses, Westminster had suffered a decline in its endowment earnings even before last weeks market fall.

Westminsters 10-year model had predicted a return of 7.2 percent on its $55-million endowment. But the college changed its forecasting to 0 percent in the last year and ended up making 0.5 percent. Now, the colleges board has asked Mr. Lowen to figure out how Westminster would fare if its endowment actually lost money.

At Winona State University, in Minnesota, which has undertaken its first-ever capital campaign of $10-million, donors are being affected in different ways. Last week at the groundbreaking for Winona States new wellness center, Merchants Bank announced a $500,000 gift to the college, the largest in the banks history. At the same time, James Schmidt, vice president for university advancement, said one of the universitys most loyal alumni, a man in his 80s, has told the college he wont be able to give as much as he would like. The man held more than $750,000 in Wachovia stock and has now lost a significant amount of money on its dividends.

It just about made him sick to tell us that, said Mr. Schmidt.

But some people will make money in this market, and fortunate universities may benefit from that. Consultants say some wealthy donors may actually increase their gifts. And fund raisers expect loyal donors will still continue to give, but it may take longer for them to fulfill their pledges.

Squeezing the Middle Class

Donors are not the only ones whose financial situations are now uncertain. Economic instability is also making it more difficult for families to afford college. That, combined with the shrinking availability of loans and the prospect that the economic downturn may lead to increases in tuition next year, may push some students out of the equation.

Low-income kids counted themselves out of higher ed long before the economy tanked, said Sara Y. Goldrick-Rab, an assistant professor of educational policy studies and sociology at the University of Wisconsins Madison campus who is surveying 3,000 Pell Grant recipients in the state. How will this affect their expectations? Will starting and finishing college be an affordable possibility with a real payoff?

At Fordham University, 150 students who had private loans last year dont this year, says Peter A. Stace, vice president for enrollment. If students financial situations change drastically over the course of the academic year, colleges can adjust their aid forms. A student already on the bubble might become eligible for a federal Pell Grant or for more grant money.

Like many other colleges, Fordham also keeps a pool of institutional aid set aside for students who fill out forms late or have major changes in their financial situations. This year, it has a fund of several hundred thousand dollars.

Vassar College already has had to dip into a contingency fund and into endowment earnings because it is spending $1-million more on student aid than it had planned.

The increase is due to a combination of things. This year Vassar moved to need blind admissions, and more students overall qualified for aid than the college predicted, including upperclassmen whose families were hit by the failing economy. For example, one students parents owned seven large rental properties which provided the bulk of the familys income. But the family suffered foreclosure on all the properties and is selling its own home. Vassar awarded the student a $40,000 scholarship in addition to federal aid.

Building next years class may also present challenges for colleges. In a tight economy, families are likely to focus more on affordability and less on finding just the right college for a student academically, socially, and culturally.

Students will probably apply to more colleges and shop around for the best financial-aid package, said Robert A. Sevier, senior vice president for strategy at Stamats Inc., a company that advises colleges on marketing. As a result, colleges may see their yield, the percent of accepted students who ultimately enroll, go down and become even harder to predict.

Private colleges may also simply lose students to more-affordable two- and four-year public institutions. Enrollment at Tidewater Community College, in Norfolk, Va., is already up this fall to about 26,750 students, continuing a trend of steady growth.

Deborah M. DiCroce, the colleges president, believes the current economic situation will bring even more students to Tidewater. She expects to see not only adults who are out of work or need new skills, but also recent high-school graduates who decide that studying for two years at a community college makes more financial sense than going straight to a more-expensive university. At $1,523 for a 15-hour semester, Ms. DiCroce said, Tidewater costs about a third of what the states four-year colleges do on average.

Campus officials are hoping for the besta quick turnaroundbut preparing for the worst. The crisis will force them to make tough choices: Should they reduce payouts to protect their endowments or increase them at a time when students are sure to need more help? And if they have less to invest in people, programs, and buildings, which should come first?

At a time like this, you have to make trade-offs and do some things, but not others, says Catherine B. Hill, Vassars president. For us, the big question is, Are these financial changes cyclical, or are they permanent?

This article was reported by Elyse Ashburn, Scott Carlson, Audrey Williams June, Eric Kelderman, Kathryn Masterson, Beckie Supiano, and Robin Wilson, and written by Ms. Wilson

TimeCruncher · October 3, 2008, 1:53pm

To tsdad: Thank you for the additional information. (I have no problem with your premature optimism–I can be pessimistic enough for the both of us, believe me.)

I have been doing more digging to find out if my daughter’s school is impacted, and what I’ve learned so far doesn’t look good. I came across an up-to-date independent website which evaluates colleges on a number of administrative factors. My daughter’s school received an “F” for Endowment Transparency, with the comment, “The university has no known policy of disclosure of endowment holdings or its shareholder voting record.” The school also received a “C” for Investment Priorities (“The university aims to optimize investment return….”), and another “F” for Shareholder Engagement, with the comment, “The university has not made any public statements about active ownership or a proxy voting policy.”

My daughter’s school has a very large low-income/middle-income student enrollment, a large workforce, multiple campuses (including overseas campuses), and major building construction projects in progress at several campuses. Student tuition/fees is the school’s second largest source of revenue (exceeded only by health services patient care activities). About forty percent of the school’s investment return (a significant source of revenue) is either temporarily or permanently restricted. Most students qualify for FA, most graduate with significant loan debt, and by the time they repay their loans and take on household and family financial obligations, few have enough money left over to donate to the school. Therefore, the school’s endowment is small, relative to other schools of comparable size and academic stature. Right now, a small endowment might be advantageous (less money to invest and possibly lose) or disadvantageous (less money, period) for the school.

I am not concerned about my daughter getting hit with a reasonable tuition/fees increase (that is almost a given), but I am concerned about her merit scholarship (renewable for up to four years) being significantly reduced or even cancelled if the school should become strapped for operating funds. Without her merit scholarship, my daughter would either have to drop down to part-time status, or perhaps even drop out. She, her Other Parent, and I have been discussing various options for responding to such a personal financial crisis. Yes, I am pessimistic.

In the meantime (as 07DAD mentioned), becoming fully informed is key. I would rather be prepared for what might happen, than be unprepared for what does happen. So, my daughter and I will continue researching this matter privately, and we will continue keeping an eye on your most informative thread.

tsdad · October 6, 2008, 9:51am

From today’s Chronicle of Higher Education

As Credit Woes Mount, Colleges See Hope in Bailout Bill

By KELLY FIELD
Article tools

Colleges See Hope in Bailout Bill

Small private colleges are hoping that the bailout bill President Bush signed on Friday will help stabilize the markets and ease some of the financial pressures on them.

When President Bush signed into law a $700-billion bailout bill for the financial sector on Friday, financial officers at small private colleges were among those who breathed a sigh of relief.

The past few months have been stressful ones for the nation’s less-wealthy independent colleges, which have seen interest rates on their outstanding debt spiral at the same time that borrowing has become more costly. Faced with rising debt payments and a higher cost of capital, many colleges have been weighing budget cuts and postponing new construction.

Now colleges are hoping that the bailout bill (HR 1424), which would allow the federal government to buy up banks bad debt, will help stabilize the markets and ease some of the financial pressures they have been facing.

Were hopeful it will bring back some normalcy to the markets so we wont see 0 percent on our interest earnings and 10 percent on our interest costs, said Charles E. Cross, vice president for business and finance at the University of San Francisco.

A Wild Ride

Interest rates on variable-rate bonds, which many colleges use to finance construction, skyrocketed in September, tripling in the span of a few weeks. At the University of San Francisco, which has roughly $160-million in variable-rate debt, interest rates climbed from 1.5 percent to as high as 9.5 percent, before dropping to 6 percent last week. To put that growth in perspective, consider that each 1-percent increase in the interest rate on $160-million is equal to $1.6-million in interest a year, Mr. Cross said.

Guilford College, in North Carolina, has seen a similar spike in the interest rate it pays on its $15-million in bond debt, said President Kent John Chabotar. The Board of Trustees is now weighing cuts to faculty positions and salaries to make up thousands of dollars in additional interest payments.

Were not panicking, but were hoping [the interest rate] does come back down, said Mr. Chabotar.

One thing the college wont do, he said, is dip into its endowment of $60-million. The last thing we want to do is start raiding the endowment, he said. Thats a slippery slope.

Heidelberg College, in Ohio, meanwhile, is struggling to resell $17-million in variable-rate bonds that investors have tendered, or returned to the institution. Richard Raymond, the colleges chief financial officer and vice president for business affairs, said he hopes that with the bailout, maybe the psychological climate will change, and investors will become more receptive to buying bonds.

Colleges that converted their variable-rate bonds into fixed-rate debt through swap agreements with banks have been more insulated from the market fluctuations. While colleges with such swap agreements may have paid more for that privilege when interest rates were low, they are paying considerably less now that rates are high.

Endicott College, in Massachusetts, for example, is now paying 3.751 percent in interest on its bonds, a little more than half of what it would be charged if it had stuck with variable rate debt. Lynne B. OToole, Endicotts vice president of finance, is relieved the college chose predictability over the potential for lower interest rates.

If it wasnt for that swap agreement, wed be in a really tough position, she said. Wed be talking serious structural deficits.

Postponing Projects

But Endicott College, like many of its peers, isnt looking at taking on new debt any time soon. With bond investors demanding higher rates of return, the college plans to postpone construction on a new dormitory until interest rates come down. The delay is expected to create a housing crunch and could force the university to reduce enrollment next fall, Ms OToole said.

At Robert Morris College, in Illinois, administrators are slowing down projects that are already under development, including a new football complex and an expansion of the graduate school, said President Michael P. Viollt. The college recently paid for a new library and science wing out of its reserves.

Clearly, he said, this Wall Street crisis is reaching into college campuses.

Its not just smaller, less-wealthy institutions worried about the credit markets. At a gathering of college presidents and chancellors in New York City late last week, several leaders of wealthy private colleges and public flagships expressed concern about having access to credit.

Theres significant concern about short-term working capital, said Mark A. Emmert, president of the University of Washington. This is the first time institutions have ever called the bank and said, Hi, wed like our money, and they said, No.

Colleges of all sizes got a shock last week, when Wachovia bank froze the accounts of nearly 1,000 colleges that invest through Commonfund, leaving institutions unable to access billions of dollars in short-term funds they depend on for salaries, campus construction, and debt payments (The Chronicle, October 1). While the accounts have since become more liquidcolleges can now access more than 30 percent of their moneythe surprise move by Wachovia has led many colleges to reconsider their investment strategy.

We have to look at the underlying security of where were putting our money, said Ms. OToole, of Endicott College. We all thought this Commonfund short-term fund was safe, and lo and behold, it wasnt.

At Ursinus College, in Pennsylvania, administrators have directed their bank to invest the colleges cash in U.S. Treasury bills. The money is now earning less interest0.75 percent versus 2.5 percent, according to President John Strassburgerbut it is more secure than it was before. Mr. Strassburger said trustees made the move because they believed we ought to be absolutely battening down the hatches.

On Friday morning, Mr. Strassburger wrote a note from Main Street, Collegeville (the colleges actual address) to his Republican congressman, urging him to switch his no vote to a yes in support of the bailout.

Concerns About Student Loans

Still, many administrators at small, tuition-dependent colleges say theyre more worried about their students access to credit than their own. As lenders flee the private student-loan market and some remaining providers tighten their underwriting criteria, college leaders fear that their students may find it harder to obtain private loans. So far, those fears haven’t materialized. But the possibility that they could if conditions worsen, coupled with rising foreclosure rates that have made it harder for families to refinance their mortgages, has many small colleges concerned that a growing number of students wont be able to afford tuition next year.

Mr. Chabotar, of Guilford College said hes already seen traditional student enrollments declinethough adult enrollments are up. Harold W. Hewitt, executive vice president and chief operating officer at Chapman University, in California, said the college has witnessed a marked drop in enrollment at its off-site campuses this fall.

Many of us are much more concerned about next fallwhat will happen with the economy and the ability of people to borrow, said David G. Healy, vice president for finance and administration at Mount Ida College, in Massachusetts.

The bailout bill could potentially bolster the student lending market, by giving the government the ability to purchase assets backed by student loans (The Chronicle, October 3). But small private colleges arent ready to claim victory just yet. Like Wall Street analysts, they continue to monitor the markets, watching for signs that their students are suffering.

At Prescott College, in Arizona, administrators have begun working with students on an individual basis to make sure they have the resources to remain enrolled.

Were being vigilant, said Steven M. Corey, chief financial officer and executive vice president at the college, which is 90 percent financed by tuition dollars. The worst thing for an institution such as ours is to be caught unaware.

Goldie Blumenstyk and Brad Wolverton contributed to this article.

TimeCruncher · October 6, 2008, 11:28am

To tsdad: Thank you once again for another informative post.

Economics is not my strong suit, so at this point, I don’t know how the bailout/rescue will impact colleges and current/prospective college students.

In the meantime, my daughter and her Other Parent have voluntarily proposed some cost-saving options, none of which involve our daughter dropping down to part time, or dropping out.

I have been keeping up with the news about Citigroup’s and Wells Fargo’s legal clash over the impending acquisition of Wachovia. Interesting stuff.

A question: Once Wachovia is acquired, will Wachovia’s new owner–whether Citigroup or Wells Fargo–have the authority to reverse Wachovia’s decision to freeze Commonfund assets, or will Wachovia’s pre-acquisition decisions (including the Commonfund asset freeze) still stand?

tsdad · October 6, 2008, 11:41am

TC I haven’t a clue on how to answer your questions.

You and others might find interesting how the classroom teaching of professors of economics is being impacted.

Does the Financial Crisis Affect How Economic Theory Should be Taught?

Compiled by ALEXANDER C. KAFKA

That’s what we asked professors of economics, business, and related fields. Here are some excerpts from their answers:

Michael W. Klein, professor of international economics, Fletcher School, Tufts University: Seismologists have earthquakes. Epidemiologists have outbreaks of disease. Political scientists have constitutional crises. And economists have financial collapses.

While no one welcomes these events, they do offer professors unique teaching moments. Incentives, the importance of information, the consequences of moral hazard, the role of regulation: These are all ideas that have been familiar to my students since they were exposed to them in their course work. But they had less background for thinking about the consequences of financial distress for the performance of the macroeconomy, or for the role of the financial sector in long-run economic growth. Even intermediate-level macroeconomics texts will not mention those topics, which have been a focus of analysis for the past 15 years.

In the future, there will be sections of macroeconomics texts that present results from these lines of current research. Years from now, when I use these texts and lecture about the events of the autumn of 2008, I hope I’ll be able to talk about how the country dodged a bullet through the application of regulations and policies based on sound economic principles.

Kevin P. Christ, associate professor of economics, Rose-Hulman Institute of Technology: I am often surprised (and a bit frightened) by the hubris that we’ve somehow nurtured in our students, who often reflexively espouse a level of faith in unfettered markets that many of us once would have viewed with suspicion. Our students know that individuals always make the best decisions, and that the wisdom of crowds always provides the best answers, even to the most complex questions.

At some point, and this is as good as any, we have to ask ourselves if we have been teaching theory or ideology.

What about a return to the idea that economic theory does not offer settled answers but instead offers only an engine of analysis? Are we fearful that if we allow for too much ambiguity in the use of our theories, we will no longer be perceived as proper scientists? If anything, this episode should remind us to remind our students that there may not always be a unique right answer.

Amyaz A. Moledina, assistant professor of economics, College of Wooster: Before the crisis, it was widely believed that financial innovation was a good thing, and that the derivatives responsible for some of the credit crunch were a benefit to the financial system. What was ignored was the systemic risk that such instruments caused and the difficulty and challenges of a consistent and flexible regulatory response. With that in mind, I did change my presentation of derivatives to incorporate discussion of financial-system risk. I also encouraged my students to think differently by exposing them to alternative financial systems, such as those in the Islamic world, which, in principle, prohibit the use of derivatives, not because that is what I want them to do, but because broad exposure to different economic systems could give us clues about how to better regulate ours.

Cristian Ioan Tiu, assistant professor of finance and managerial economics, School of Management, State University of New York at Buffalo: We are used to seeing finance as somewhat of an elitist discipline. Year after year we focus on how to teach our students to be the best hedge-fund managers of tomorrow. In all this grand plan, we don’t bother to make sure that notions such as risk, market efficiency, and time value of money can be simplified enough to trickle down from our ivory towers into Main Street. Why can’t we teach the unemployed guy sitting on the porch of a crumbling house that the price of that house may go down and not just up? Why can’t we teach him what an adjustable-rate mortgage is? Why can’t we take all we know about risk aversion and translate it into prudence? If we taught all that to the average Joe, I bet you that he would have said no to all the greedy mortgage salesmen in the world.

This crisis is built on the foundations of financial illiteracy.

Michael Szenberg, chair and distinguished professor of finance and economics, Lubin School of Business, Pace University: No change is necessary in the way scholars view and teach economic theory.

There is one common, simple factor which brought the collapse of the Soviet Union and the credit crunch to the United States, and that is misplaced application of incentives.

Absence of proper pricing in the Soviet Union and absence of adequate risk as an allocative feature in the United States are equally to blame for the mismanagement of both economies. One advantage the United States has is that we have the built-in political flexibility to peacefully change things.

It is very ironic that the end result of the misplaced application of incentives in the Soviet Union led to the increased role of the market system in that country. In the United States, the misplaced application of incentives is bringing about greater government intervention in the economy.

Douglas K. Pearce, professor and department head, economics, North Carolina State University: It is not that the crisis should change our economic theory. It is that when times are good, some investors and regulators ignore the warnings that economic theory provides.

Mason Gaffney, professor of economics, University of California at Riverside: The key concept that is missing today is land value. Classical economics divided factors of production into three: land, labor, and capital. Beginning around 1920, scholars conflated land with capital. That left them totally unprepared to cope with or explain the crash of 1929. At that time macroeconomics, as we now call it, rose to the fore. For a time it eclipsed microeconomics, which had degenerated into the explanation of the allocation of resources among competing ends. Gradually, microeconomics came back to be integrated with macro, but in the process land value almost disappeared.

Few or no texts recognize that expanding banks, by taking land under and around speculative developments, in effect monetize those speculative land values. When the wave of land values ebbs, and debtors default, banks have to contract, as they are now. Yet economic theorists, and those statesmen whom they have trained, attend mainly to the froth on the waves, ignoring the basic wave of land value that drives the cycle.

Stephen Foreman, associate professor of health-care administration, Robert Morris University: When I began my teaching career, I was able to contrast the economy of the United States with state-managed economies to illustrate how a nation with a market-based economy outperformed central planners. The response to turmoil in U.S. financial markets has forced a total reorientation of my teaching examples: how abandonment of market principles leads to chaos, suffering, instability, and inefficiency. The United States has joined the ranks of state-run economies. Teaching examples now focus on competitive disadvantage and structural inefficiency that follow abandonment of market principles.

Patrick McGuire, professor of economics, Hobart and William Smith Colleges: Perfectly competitive markets clear at the equilibrium price, and there are winners and losers. However, markets in the real world are never perfect, and breakdowns occur. In this case, the breakdown threatens the most venerable of market participants, individuals and businesses that create wealth in the economy. The real losers will be those firms that need to sell their underperforming assets at well below their cost. The winners will be those who need the markets to operate their daily lives.

Economic theory is alive and well a bit battered but functioning.

TimeCruncher · October 6, 2008, 12:46pm

To tsdad: Thank you for another thought-provoking post. It’s no problem that you couldn’t answer my question. (I wasn’t sure how to properly pose the question!)

I agree with Cristian Ioan Tiu’s argument in favor of helping the general populace become financially literate. I count myself (a college grad with additional grad-level training), my daughter’s Other Parent, and my mathematically accomplished daughter–whose intellectually razor-sharp CPA-turned AP Government/Economics teacher often told his equally intelligent but thoroughly befuddled Economics students (including my daughter), “Don’t overthink economic theory; I don’t even understand it!”–among the financially illiterate.

My daughter, her Other Parent, and I are all logical thinkers. We know that if we spend more money than we earn, we will eventually go broke. We know that if we live on borrowed money, our lives will be controlled by whomever we have borrowed that money. This is simple common sense, but when it comes to economic theory, common sense goes out the window. Economic theory makes no sense to us–or to most people–because it makes no sense, and in my opinion, any theory which lacks real-word application is nothing more than junk science.

I think that Tiu’s “average Joe” is in financial crisis not because he is incapable of understanding economics, but because he has been intentionally misled into abandoning common sense.

tsdad · October 6, 2008, 1:23pm

With a nod to Thomas Carlyle: Economics–the dismal science.

“Not a ‘gay science,’ I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science”

[Dismal</a> Science - Wikipedia, the free encyclopedia](<a href=“http://en.wikipedia.org/wiki/Dismal_Science]Dismal”>The dismal science - Wikipedia)

TimeCruncher · October 6, 2008, 2:12pm

To tsdad: Thank you for the link. I’ll be interested to hear what my daughter thinks of the Malthusian growth model. (She’s the math/physics major; I’m “just” an American history grad.)

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