The bankruptcy filing of Lehman Brothers has led to a downgrade of the company's short-term debt by Moody's from P-1 to Not Prime. The impact to money market fund is likely to be contained, however, since Lehman had been a minor issuer in the commercial paper (CP) and medium-term note (MTN) marketplace, with about $3 billion in CP outstanding. There also likely will be repercussions from the company's repurchase agreement and other short-term financings and supports. These issues, though, should be alleviated by the other news of the weekend -- the Fed's move to expand its liquidity facilities, and the takeover of Merrill Lynch by Bank of America.
The Federal Reserve announced Sunday night, "The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.... The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market."
We wrote in Friday's Link of the Day, "Lehman's CP, MTNs and repo remain 'money good,' and the companys acccess to the Fed's Primary Dealer Credit Facility and Term Securities Lending Facility make a default scenario very unlikely." However, it remains to be seen how Lehman's money market debt is treated in a bankruptcy scenario. Stay tuned.... We're aware of just a couple of money funds with material exposure to Lehman debt, and the companies involved no doubt will be updating and reassuring investors as the debt picture develops today. So we don't expect the Lehman downgrade to be a serious threat to money funds overall. But we're still researching these issues and will be updating the site as developments unfold today.
