In just the second case of a money market mutual fund "breaking the buck," or dropping below the $1.00 a share level, in history, The Reserve's Primary Fund cuts its NAV to $0.97 cents on Tuesday. The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion.

Reserve said in a statement late yesterday, "The Board of Trustees of The Reserve Fund, after reviewing the unprecedented market events of the past several days and their impact on The Primary Fund, a series of The Reserve Fund and taking into account recommendations made by Reserve Management Company, Inc., the investment manager of The Primary Fund, approved the following actions with respect to The Primary Fund only:"

"The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00PM New York time today. As a result, the NAV of the Primary Fund, effective as of 4:00PM, is $0.97 per share. All redemption requests received prior to 3:00PM today will be redeemed at a net asset value of $1.00 per share."

"Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption. The seven-day redemption delay will not apply to debit card transactions, ACH transactions or checks written against the assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000. The Primary Fund will continue to accept purchase orders." It adds, "Effective tomorrow, September 17, 2008, the NAV for the Primary Fund will be calculated once a day at 5:00PM, New York time."

As we wrote Monday, several other firms have protected their investors from fallout from the Lehman Brothers bankruptcy. (The latest disclosure is from AmeriPrise's RiverSource funds, which filed an 8-K yesterday, announcing a $50 million purchase of Lehman CP.) A total of 21 money funds to date have taken action to protect shareholders, but the privately-held Reserve was unable to arrange credit supports in time to prevent a run.

Though money fund investors will undoubtedly be shocked and nervous over yesterday's events, we believe Reserve will be an anomaly. The combination of high yields, hot money and a lack of deep pockets likely will prove fatal to the first, and oldest money market mutual fund. As happened in 1994 with the liquidation of Community Bankers U.S. Government Money Market Fund at $0.96 a share, we expect money market funds to soldier on with just a single case of a fund "breaking the buck." See ICI's "Statement on Money Market Mutual Funds.

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