The following is excerpted from this month's Money Fund Intelligence, which interviewed Mary Jo Ochson of Pittsburgh-based Federated Investors, the fourth-largest manager of money funds with $230 billion. Federated was among the first to offer a tax-free money market fund and currently offers the most extensive lineup of state-specific tax-free funds with 16.
As Senior VP, Senior PM, and CIO for the Tax-Exempt Money Market Group, Ochson has been there since the beginning of tax-free money funds, 26 years ago. We first asked, "What's the difference between these new money-fund eligible securities being issued by closed-end funds and the old auction-rate securities?"
Ochson explains, "The most important difference is that variable-rate demand preferreds (VRDPs), the new securities being issued by the closed-end funds, have an unconditional put, a contractual obligation, for the investor to put back the security to a high-quality financial institution. Auction-rate securities had no contractual obligation for the investor to put them back to the underwriter. There was no put. It's as simple as that.... There seems to be a misperception in the marketplace that they're (VRDPs) somehow related to an auction process. There is no auction."
Are there any worries about monoline insurer downgrades impacting money funds? Ochson says, "The concerns are diminishing because the use of monolines has gone down tremendously. Many of the monoline insurers, that historically have made up from 20% to 50% of the muni money markets, are rated too low to be eligible under Rule 2a-7. So they are not in use. There are certain monolines that are still being used as credit support in the municipal money funds, such as FSA, Assured Guaranty, and Berkshire Hathaway. We are continuously monitoring the market and the credit quality of these insurers on an ongoing basis, and we are comfortable using them.... We obviously saw the [recent Moody's] downgrade warning. That's just part of our credit monitoring system."
Ochson tells us, "There were no bailouts of the muni money funds. The primary reason is that the structured instruments in the muni money funds, which are primarily variable-rate demand notes (VRDNs) or tender-option bonds (TOBs), have as part of their structure a contractual obligation for a high-quality financial institution to honor a put to buy back their securities. To my knowledge, no money fund has ever lost a tender facility (put) in the muni money funds since the credit crisis started last August. When the insurers got to a certain rating level, the muni funds would put the securities back to the liquidity providers.... Each put was honored, nobody broke a buck, and nobody needed a capital infusion. It was an orderly process."
