Welcome to First Friday on Wednesday! I am issuing my First Friday report this month two days early because I have some information to share that I hope will be helpful to you as Congress continues today to consider bailout legislation that seeks to address the paralysis in our country's financial system. Additionally, I think this story demonstrates how this crisis, which was caused at least in part by Wall Street's unregulated greed, is going to affect us immediately in the hinterlands.

First, as background, I would like to share with you a link to a panel discussion that occurred last Thursday, Sept. 25, among a group of Harvard professors and administrators called the "Harvard Financial Markets Panel" (http://video2.harvard.edu:8080/ramgen/AAD-PAN/FinMktsPanel.rm; RealPlayer required). These astute individuals drill down into the causes of the current freeze-up of our financial markets better than any of the TV commentators I have seen during the past two weeks. Still, the discussion is mostly at a macro level and until Monday evening I did not believe that this crisis would affect us immediately at ASU. (That is what I get for being an optimist and always considering the glass half full!)

Reality hit when I received a call from Ed Kremers, Interim Vice Chancellor for Finance and Administration, at 5:40 p.m. Monday afternoon, Sept. 29, to tell me that he had just received and was forwarding to me an e-mail notice from Wachovia Bank, trustee of The Common Fund for Short Term Investments. Late Sunday evening, Sept. 28, Wachovia was forced into a "shotgun merger" with Citigroup, Inc. at the behest of the FDIC. This event likely prompted the e-mail that ASU and hundreds of other colleges and universities received on Monday afternoon. ASU has used The Common Fund for Short Term Investments for more than 13 years to park operating capital such as collected fees and tuition, which early in the semester is a substantial amount but is spent down for expenses during the course of the semester. We earn interest equivalent to the three-month Treasury Bill rate on our balances with the Fund. The e-mail from the trustee stated that it was taking steps to terminate the Fund and liquidate and distribute the assets because of recent developments in the credit markets. We were told that in light of these developments, all participants in the Fund would be able to withdraw only 10% of the value of their deposits in the fund immediately, and other withdrawals would be allowed only as the investments matured or the markets thawed. Later we received a similar announcement from Commonfund managers with a disturbing statement that this action by Wachovia Bank had come as a surprise to them, also. On the day of the announcement ASUJ had $9,336,004.10 in the Fund, and immediately withdrew the 10% allowed by the trustee, leaving $8,402,404 on Tuesday, Sept. 30, 2008.

To its credit, Commonfund scheduled a conference call for Fund participants with its president, investment advisors, general counsel and others, at noon, Tuesday, Sept. 30, to discuss the situation. Commonfund, which serves more than 1,800 nonprofit institutional clients, including numerous colleges and universities, also made available an official announcement about the situation. Ed Kremers, Russ Hannah, Sandra Miley, Glen Jones and I, along with ASU System and Foundation officials, participated in this more than two hour call and had all our questions answered. Although there is some market risk and interest is not guaranteed, the good news is that over time the university should receive all of its principal investment back as the Fund allows the AAA commercial paper and other high quality investments to mature. The sobering news is that because there is no market at par or above rates for the securities, payouts can only be made as the investments mature if substantial loss on the $9.3 billion portfolio is to be avoided.

So, a short term investment has turned into a long term one. Fortunately, due to prudent fiscal management, the university has sufficient cash reserves that we can meet all current obligations without immediate access to all of this money and we do not face an immediate financial crisis. We were assured that none of the companies or government agencies who issued the highly rated ‘paper’ in the Fund had defaulted on installment payments or interest, and that an additional 10% and possibly more was being made available on Tuesday (for us that was $1,002,152.06 which we have already had wire transferred back to the university’s account in a local bank with securities pledged to secure the account). An additional $1,117,399.54 was made available and transferred this morning. Thus, as of today we have $6,282,852.09 left in the Fund. Based on maturities of the commercial paper, a minimum of 57 percent of our investment in the Fund will be available for withdrawal by Dec. 31. The remainder of the Fund assets has longer maturities. Assuming that the market for these types of securities does not recover, then it might take until 2011 to fully "cash out" of this Fund. The Chronicle of Higher Education distributed an article this morning about these developments.

Our country’s financial situation is very serious, and it is going to impact all of us in the weeks and months ahead unless our leaders in Washington, D.C., can find the wisdom and courage to craft a fair and effective solution to the current crisis. While no one can predict the future, the university will manage all of its resources in a sound and prudent manner so as to minimize any adverse market impact on university operations. Thanks for your understanding and support as we together face these difficult times ahead.

Sincerely,

Robert L. Potts
Chancellor