Two years ago today, the money market mutual fund industry, and the world economy, were irrevocably changed as Reserve Primary Fund "broke the buck" following the bankruptcy of Lehman Brothers. This event triggered a near panic in the money markets and an unprecedented level of government intervention and support. As we did last year, below we excerpt a number of quotes from Crane Data's September 2008 News Archives, including the week which will live in infamy, September 15 through Sept. 19.
Sept. 15, 2008, as the unexpected Lehman bankruptcy news hit, we expected to see yet another cluster of routine support actions from money fund advisors. Crane Data wrote (incorrectly, it turns out) early Monday, in "Fed Moves, Limited Exposure Should Shield Money Mkts From Lehman," "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."
Later that day (Monday, 9/15/08), we wrote, "Evergreen Issues Statement Supporting Lehman Holdings in Funds," "A number of money market mutual funds are in the process of issuing statements either saying that they have no exposure to Lehman Brothers, which was downgraded to 'Not Prime' from P-1 ('First Tier') earlier today, or saying that they are taking steps to support their funds (or that their holdings are not large enough to impact the $1.00 NAV). Evergreen Investments was the first to issue a statement today saying that they've taken action to support their money funds. Though Lehman CP and MTN holdings are not widespread in money funds, other announcements are expected to follow."
On Tuesday, September 16, 2008, Crane wrote, "Lehman Support Actions Push Money Fund Bailouts to 20 Total, which said, "We wrote yesterday about money funds' limited exposure to Lehman Brothers and about the support actions taken by investment advisors so far. Evergreen and Russell have disclosed support agreement for their funds, while some other funds have disclosed Lehman holdings and pledged to maintain their $1.00 NAVs. The vast majority of money funds appear to have no direct exposure to Lehman, though they're now answering questions on AIG, which was downgraded to A-2 but is still P-1 (short-term ratings), and WaMu."
It continued, "The latest crisis should bring Crane Data's tally of the number of advisors supporting their money funds over the past 13 months to 20. Besides Evergreen, money funds disclosing or showing holdings of Lehman in recent public filings include: Columbia Cash Reserves, which held $400 million, or 0.73% of its assets; Reserve Primary; and Russell Money Market Fund. All are expected to protect their funds from any threat to the $1.00 a share NAV should it become necessary.... [A] Dow Jones story also says, [S]everal money funds reported holdings in Lehman paper in their most recent filings.... One example is the Primary Fund managed by New York money manager The Reserve. As of May 31, the $64.85 billion Primary Fund had some $785 million in Lehman commercial paper and medium-term notes.' It added, 'The Reserve has historically protected the NAV of its money funds as needed.'"
But it soon became clear that Reserve would not be able or not choose to bail out its fund. Describing events the afternoon of Sept. 16, 2008, Crane Data wrote, "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." (Note that we were unaware at the time that many of these redemptions were halted.) (See the full 2008 story, Reserve Primary Fund "Breaks the Buck" Following Run on Assets and see our October 2008 Money Fund Intelligence for more details.)
Reserve said in its statement, "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 ... 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 ... 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." (Note that Reserve Primary Fund shareholders have since received $0.99 cents per share to date.)
Finally, Crane Data wrote on Sept. 16, 2008, "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 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'."
