Just another day by the pool...

The University of Redlands, a private liberal arts and sciences university located in the beauty of sunny suburban Redlands, has a total enrollment of roughly 4,500 students (graduate and undergraduate). According to the U of R website, the operating budget for University exceeds $100 million annually.

Imagine that you are in charge of that $100 million. Aside from creating a budget, your responsibilities include a) putting the money in a safe spot and b) making sure the Universities bills are paid on time (i.e. salaries, utilities, taxes, ect...)

After looking at all of your options, you decide that storing this money at a bank would be much more secure than stacking $100 bills in your office safe. Responsibility a), check!

As for your second task, well that is easy. The bank you chose also has automatic bill pay. Man, this job is a cinch. Responsibility b), check!

Being the smart individual that you are, you know that the $100 million that you put in the bank is earning interest. Let's say that interest rate is set at 4%. Using your superior math skills, you calculate that you are making $4 million in interest every year. Sweet! They should really pay you more for this job...

One day, you find yourself bored at work and decide to take a break from Facebooking your BFF. You update your status to "...is stackin' chedda" and start looking into how you can earn more than 4% on the $100 million you are responsible for, while still upholding your two responsibilities (i.e. keeping the money safe, and keeping it liquid).

First, you think about investing it all in Google. After all, everyone uses Google and they are growing much faster than 4% a year... maybe even 10, or 20%! Thinking back on those economic classes you took your freshman year, you vaguely recall that the "promise" of higher return is the always the result of taking more risk. Smartly, you decide that risking the $100 million dollars that is needed to keep the University running would probably get you fired, and you certainly don't want to have to find a job where you wouldn't be able to Facebook all day. Scratch that idea.

Next, you think about buying some bonds. Bonds are currently earning 5% and are AAA rated, so they are pretty safe. Sadly, after doing some Wikipedia research, you realize that bonds aren't very liquid and you wouldn't have access to the cash you need to keep the University doors open. Damn... there goes your plan to spend that additional million dollars on an Olympic high dive platform for the pool.

While pondering what option to consider next, you get a phone call from your banker/former college roommate...

"Hey, I saw your Facebook status and hear you are looking to earn a slightly higher return on all that cash you have sitting here, while still keeping it safe and liquid. I have the perfect solution for you, it's called The Short Term Fund."

"Sweet. How does that work?"

"Basically, it's a fund that is made up of 80% commercial paper and 20% of this other stuff that will help earn a slightly higher return. It is just like cash and is very liquid. You just have to call me up and I can sell whatever amount you need from the fund and have the money to you the next day. All that and you earn a 4.5% return on it."

"Oh, so it's just like a money market fund?"

"Yeah, something like that..."

"Sweet! Let's move all $100 million over into The Short Term Fund. I'll give you a call every month or so and you can transfer the cash over that the University needs to pay salaries and stuff."

"Ok. Talk to you then. Holler at playa!"

"Peace out, cub scout."

Man, you think to yourself, you are indeed a genius. No wonder the University hired you. You just banked an additional $500,000 for the University.

Feeling like you are on top of the world, you decide to skip out of work early and go hang by the University of Redlands outdoor pool. Obviously, you are there to enjoy the sun after a hard day's work, and not scope out all of the hot freshmen co-eds... err students. Putting on your shades, you start to draw up plans in your head for a new $500,000 outdoor hot tub, and wonder how many co-eds could fit in such a facility at one time, as you drift off to sleep in the warm so-cal sun...

A month goes by and it is time to pay bills. Leaning back in your chair, you press the speed dial button for your banker and wait for him to pick up...

"Uhhh... hello?"

"Hey, I need you to free up $10 millie from The Short Term Fund so I can pay these bills.

"Umm... I can't exactly do that... the fund has been frozen."

"FROZEN?!?! WTF DOES THAT MEAN YOU @!$#%^"

"It turns out that the other 20% of the fund was invested in mortgage backed securities, and when people found that out, they started selling out of the fund. Since we didn't want the fund to close we had to freeze the fund. Don't worry, the University will get their money back, but it might take a while..."

"What the hell are we supposed to do until then? The University needs that cash now to pay their bills."

"Umm... well YOU might want to start looking for another job..."

"Go F*** yourself."

"Haha ok... we still on for the pool this afternoon?

"Yeah, but you better bring the booze."

Back to reality... Over 1,000 colleges and private schools are currently dealing with this sort of problem due to a freeze on over $9.3 billion that is held in The Short Term Fund (which is managed by CommonFund, for which Wachovia served as trustee). This is one of the many ways in which the crisis in the US economy is starting to trickle down to the point where it effects more than just the people that are directly involved. The bailout package would remove the mortgage backed securities from the market, and eliminate the underlying issue that causes problems such as this. In the words of Forest Gump...

"That's all I have to say about that."

Ok, I lied... one more thing I need to mention. I don't know if the University of Redlands actually uses this fund, and I was unable to find a list of which Universities do. Also, for sake of understanding, this example has been simplified to some degree. Obviously, the University of Redlands pool has more than just freshmen hotties hanging out there...

-dunkie