Below, we cite some of the highlights from Moody's "Money Market Funds Update" Teleconference. The call, which featured an "Overview of Money Market Funds Markets, a Funds Analytics Update, a U.S. Government Programs Review, and an Outlook for the Sector, gave a nice summary of events and issues. It also revealed that over 1/3 of the 100 largest money funds have received some kind of parental support, that almost all of the temporary outflows from Institutional Prime funds went into Institutional Government funds, and that we might even see a "reexamination of the CNAV product".
Moody's Senior V.P. Henry Shilling first gave the industry overview, saying, "The liquidity turned credit crisis in money market funds that began in July of 2007 and which took a decided turn for the worse following the Lehman Brothers Chapter 11 filing on Sept. 15 has had a profound impact on constant net asset value money market funds both in the U.S. and in Europe. In fact, the stresses that money market funds have been exposed to over the last 17 months have been unprecedented, without parallel in the 37-year history of the existence of money market funds. The experiences are expected to have a material effect on the industry in the future.... That said, money market fund assets in the U.S. are now at peak levels of $3.7 trillion while European funds are not that far off their highs at about $615 billion."
Shilling says their were 12 P-1 to D (default) downgrades in the period prior to Lehman Brothers, including Ottimo, Axon and Cheyne Finance. "Liquidity dried up and spreads widened.... In response, money market funds built up liquidity while at the same time they withdrew from the ABCP market and structured market generally, along with other liquidity investment pools." During the pre-Lehman phase, money market conditions improved but remained challenging, investors maintained confidence in money funds, and no funds broke the buck.
Shilling cited the huge buildup in Prime Institutional fund assets prior to September. He says, "This development ultimately meant that less stable, hot money was finding its way into money market funds, through portals or direct routes, the effects of which we observed after 9/15, and also much larger dollar amount exposures that fund companies had to support to preserve their prime funds' net asset values, both in terms of dealing with liquidity and impaired securities.
As for parental support, our research indicates that between August of 2007 and the end of August 2008, based on a review of activities involving the top 100 prime funds -- these include both rated and unrated funds -- a total of 32 funds received support through Sept. 12. Another five funds held Lehman paper, including one that had already received support previously, for a total of 36 funds within the top 100 that received support in one form or another to that date. This compares to 145 funds that, according to our research, received parental support prior to August of 2007, and the order of magnitude is staggering."
To listen to the full replay, click here, or see the upcoming December issue of Money Fund Intelligence for a full discussion of Moody's outlook, the state of government support programs, and the current status of the money fund industry in aggregate.
