Money Market Funds Might Be Affected

H

Hook N. Sinker

Some money market funds might hold Lehman Brothers debt or debt in other troubled companies.

http://www.ft.com/cms/s/0/696e3dc0-84e4-11dd-b148-0000779fd18c.html

Fear of money market funds ‘breaking the buck’
By Deborah Brewster in New York and Joanna Chung in Washington

Published: September 17 2008 19:32 | Last updated: September 17 2008 19:32

Operators of money market funds, which manage a record $3,500bn, were on Wednesday rushing to reassure investors while bracing themselves to make further bail-outs of their funds. There were fears of a run on funds following news that one had “broken the buck”.

Wachovia said it would back $494m (€350m, £280m) worth of Lehman Brothers debt held in its Evergreen money market funds, rather than let the funds fall below the amount investors paid in – or “breaking the buck”.

The Reserve Primary Fund, the oldest in the US, said on Tuesday night that investors could lose money as a result of it holding debt in Lehman, which has filed for bankruptcy.

It is the first time in 14 years the value of a money market fund has been allowed to fall below the amount investors paid in and is a signal that ripples from the financial crisis have begun directly to affect retail investors.

Money market funds’ safety has been of serious concern to regulators because they are considered by retail investors to be as secure as a bank account – but they have lost value during the credit crisis and are not backed by any government guarantee.

In a sign that it expected further bail-outs, the US Securities and Exchange Commission said on Wednesday that management companies providing support for their money market funds did not have to bring the funds’ assets on to balance sheets.

Fund group parents – such as Wachovia and Legg Mason – have already spent more than $8bn since the start of the credit crisis bailing out their money market funds to prevent them from “breaking the buck”, fearing this could trigger a run on the funds and inflict lasting reputational damage on the parent company.

Money market funds have attracted huge inflows in the past year as investors have looked for a safe haven amid credit market turmoil and faltering stock markets.

Invesco, which has $90bn in money market funds, on Wednesday said: “None of our US money market portfolios has any exposure to Lehman Brothers, AIG or Washington Mutual.”

Both Deutsche Bank and Fifth Third told investors their money funds held no Lehman or AIG debt. Northern Trust, another big operator, said it held Lehman debt as well as stock in its funds – it did not specify which funds – and it was actively monitoring the holdings. Legg Mason said its money market values remained stable.

Regulatory officials have heightened their vigilance of the funds in recent weeks.

On Wednesday the SEC told investment managers that on-balance sheet accounting for supported money market funds was not required if the sponsoring financial institution did not “absorb the majority of the expected future risk associated with the money market fund’s assets”.

However, SEC staff would expect adequate disclosure of the nature of the support provided.

“As a result of recent market events, it is possible that some money market funds could become exposed to declines in the creditworthiness of troubled assets,” the SEC said. “To protect investors’ principal investment in these funds, sponsoring financial institutions can provide various types of financial support.”

Only once before has a money market fund seen its net asset value fall below $1 a share. In early 1994 Community Bankers Mutual Fund was adversely affected by quick changes in interest rates.
 
I was in the Reserve Primary for my sweeps. What I don't get is the exposure in the fund to Lehman issued bonds was said to be 1.2 percent, how then could I lose 3 cents on the dollar? This is thru TDAmeritrade. Anybody?
 
Quote from omegapoint:

I was in the Reserve Primary for my sweeps. What I don't get is the exposure in the fund to Lehman issued bonds was said to be 1.2 percent, how then could I lose 3 cents on the dollar? This is thru TDAmeritrade. Anybody?
More...

They probably marked down the value of other investments.
 
Quote from omegapoint:

I was in the Reserve Primary for my sweeps. What I don't get is the exposure in the fund to Lehman issued bonds was said to be 1.2 percent, how then could I lose 3 cents on the dollar? This is thru TDAmeritrade. Anybody?
More...

This is the story, as I understand it. As of Friday, that fund had roughly $65B in assets (ballpark, I forget the exact number). However, they were holding ~$765M (~1.1% of assets, more or less) in LEH short term debt, which is apparently now worthless.

The problem is this... On Monday and Tuesday of this week, that fund was hit with over $40B worth of redemption requests, which apparently they funded. It wasn't until Wednesday, that they halted new redemptions, and repriced to break the buck. At that point, the $765M LEH loss was spread over an asset base of roughly $25B, which now represents a 3% loss. To summarize, those redeeming their funds Monday and Tuesday at full price left the losses to the bagholders that were left in the fund as of Wednesday.
 
Quote from EricP:

This is the story, as I understand it. As of Friday, that fund had roughly $65B in assets (ballpark, I forget the exact number). However, they were holding ~$765M (~1.1% of assets, more or less) in LEH short term debt, which is apparently now worthless.

The problem is this... On Monday and Tuesday of this week, that fund was hit with over $40B worth of redemption requests, which apparently they funded. It wasn't until Wednesday, that they halted new redemptions, and repriced to break the buck. At that point, the $765M LEH loss was spread over an asset base of roughly $25B, which now represents a 3% loss. To summarize, those redeeming their funds Monday and Tuesday at full price left the losses to the bagholders that were left in the fund as of Wednesday.
More...

I appreciate this. Now, how do I prove TDAmeritrade liquidated their position in the fund on the day they said they did? Guess I have no recourse. Class action suit? Very astute for TDAmeritrade to be the bagholders. And, after some sort of insurance provision was floated to protect money market investors.
 
Quote from EricP:

This is the story, as I understand it. As of Friday, that fund had roughly $65B in assets (ballpark, I forget the exact number). However, they were holding ~$765M (~1.1% of assets, more or less) in LEH short term debt, which is apparently now worthless.

The problem is this... On Monday and Tuesday of this week, that fund was hit with over $40B worth of redemption requests, which apparently they funded. It wasn't until Wednesday, that they halted new redemptions, and repriced to break the buck. At that point, the $765M LEH loss was spread over an asset base of roughly $25B, which now represents a 3% loss. To summarize, those redeeming their funds Monday and Tuesday at full price left the losses to the bagholders that were left in the fund as of Wednesday.
More...

After thinking about this, isn't it a coincidence that the parties that left the fund -- in mass-- got out before the tanking of Lehman and just before the NAV got under a dollar leaving the remainder with the bag. My question is, did they get out because they say it coming or were certain parties exempted from holding the bag? Any lawyers or do you any interested in a class action suit?
 
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