We wrote a little bit this past August about the 10-year anniversary of the start of the Subprime Liquidity Crisis, which dramatically impacted the money markets and money fund business. (See our Aug. 11 News, "10 Years Ago: Subprime Crisis Starts," and our Aug. 8 Link of the Day, "10 Years Ago: Subprime Liquidity Crisis Began in Money Markets With ABCP Extensions.") Today, we again look back 10 years, to November 2007, which was one of the worst months of the whole financial crisis (next to Sept. 2008, when Lehman Brothers went bankrupt and the Reserve Fund "broke the buck"). Ten years ago today, we reported that the Florida Local Government Investment Pool halted redemptions, one of the low points of the first stage of the crisis. Earlier in November 2007, we wrote about enhanced cash and ultra-short bond fund troubles, SIV (structured investment vehicle) bailouts, and a number of events that made this month one of the most tumultuous ever for money funds. We review our old coverage below. (See the full November 2017 CraneData.com News Archives here. Note that Crane Data's News Archives are still available online from a decade ago, but that many of the hotlinks in stories we reference are no longer valid. These have been removed.)
In our Nov. 29, 2007 News, we wrote a piece entitled, "State Board Halts Redemptions in Florida Local Govt Investment Pool." It explains, "Following concerns about a handful of downgraded and defaulted SIV holdings and fed by a Bloomberg article, "Florida School Fund Rocked by $8 Billion Pullout," the Florida State Board of Administration today voted to halt redemptions in its Local Government Investment Pool. The pool had been drafting a bailout plan, but Florida Governor Charlie Crist and CFO Alex Sink decided to freeze withdrawals while crafting a possible bailout plan. Exeptions may be made for payrolls.... On an emergency call today, Executive Director Coleman Stipanovich said that $10 billion has fled the now $15 billion pool. The state board on Dec. 4 may seek "credit protections for the pool against the potential for default by approximately $1.5 billion in securities from four issuers: Axon Financial, KKR Atlantic, KKR Pacific, Ottimo Funding and Countrywide". The pool had said it will seek a AAAm (money market) rating and adopt more money fund-like investment policies in the future. But it likely faces eventual liquidation following today's decision. While some government investment pools invest like money market funds, the majority stray beyond money funds' strict Rule 2a-7 quality, maturity, and diversity guidelines."
Crane Data wrote in its Nov. 30, 2007 News, "Money Funds Seeing Inflows From Government Investment Pool Woes." We explained, "The flow of cash from lightly regulated and non-AAA rated local government investment pools into money market mutual funds has accelerated over the past week as Floridian and other cities and towns seek a safer haven for their cash balances. Investors in the frozen $15 billion Florida State Board of Administation's Local Government Investment Pool, which astonishingly attempted to stop its bleeding by halting redemptions ... are moving balances into money funds. The Palm Beach Post quotes County School District Treasurer Leanne Evan, "We are looking for a safe place to put taxpayer dollars." The South Florida Business Journal adds, "The county [Palm Beach] said it is investing incoming funds in money market accounts offered by AIM Investment and Federated Investors and is looking into other short-term investments." Florida's move and aggressive investing has already damaged the $300+ billion local government investment pool market. Fortunately, most other state pools are AAA rated and sport yields similar to money funds."
The chaos had spread earlier in November 2007, as we wrote in our Nov. 20, 2007 News, "More Stories on Enhanced Cash and Ultra-Short Bond Fund Troubles." We explained, "Today, two more stories describing woes with money fund competitors appeared -- Bloomberg writes "Federated Investors Bails Out Cash Fund After Losses" and Kiplinger's writes "Ultra-Short: Still Ultra-Safe? The Bloomberg piece describes two bailouts and one buck-breaking among the handful of 3c-7 "enhanced cash" funds, "private partnership[s] open only to accredited investors". Kiplinger's discusses "Two bond funds designed to beat money-market funds with little extra risk and sponsored by two of the industry's titans are sitting on stiff year-to-date losses, leaving shareholders shocked," saying that Fidelity Ultra-Short Bond Fund (FUSFX) has lost 4.3% and SSgA Yield Plus has lost 8.1% year-to-date. "[T]he damage to the Fidelity and SSga funds ... calls into question whether any ultra-short bond fund is a safe alternative to a money-market fund.... If you want total safety, you're better off going with a money fund," says Kiplinger's."
Our Nov. 16, 2007 News was entitled, "WSJ Says First American Funds Protecting Cheyne SIV Holdings." It told readers, "Today's Wall Street Journal features a story entitled, "More Money-Market Funds Hit Trouble", which says that U.S. Bancorp subsidiary First American Advisors' previously had "purchased all Ottimo Funding Trust secured liquidity notes held" by the First American Prime Obligations Fund. The company also entered into a credit agreement to protect its holdings in SIV Cheyne Finance LLC. CEO Richard Davis was quoted saying, "U.S. Bancorp would support all affected funds." ... The Journal also noted that RiverSource Cash Management "has a tiny percentage in the security." The piece adds, "[O]ther funds also were holding Cheyne-related holdings, although in small quantities.... Valic II Company fund, offered by a unit of American International Group Inc., held less than 1% of its $337 million in assets in one Cheyne security as of early September." The article emphasizes, "No money market fund has broken the buck in the recent turmoil."
Crane Data's Nov. 16, 2007 News was entitled, "What Me Worry? Investors Drive Money Fund Assets Beyond $3 Trillion." It said, "Institutional and retail investors continue to ignore a paranoid press, pushing money market mutual fund assets solidly above $3 trillion to a new record high. The Investment Company Institute reports that money fund assets increased by $24.74 billion to $3.025 trillion in the week ended Nov. 14. Institutions continue to fuel the surge, adding $17.23 billion to funds to hit a record $1.921 trillion. But retail investors also joined the party, adding $7.51 billion to funds to hit a record $1.105 trillion. Over the past 52 weeks, institutional assets have risen by an astounding $577 billion, or 42.9%, while retail assets have risen by a respectable $161 billion, or 17.0%. Investors continue to be unfazed by recent problems with structured investment vehicles (SIVs), by August's asset-backed commercial paper seizure, and by a handful of bailouts and small losses in enhanced cash funds. Quarterly tax outflows could temporarily halt the advance next week, but even greater concerns over investments with true subprime and mortgage exposure should keep pushing assets towards the safety of money funds."
We also wrote in our Nov. 15, 2007 News about "GE Enhanced Cash Redeeming Holdings at 96 Cents Says Barron's." This piece commented, "Barron's put out the article, "Mortgage Woes Damage a GE Bond Fund" late Wednesday, saying that GE Asset Management's $5.6 billion Enhanced Cash Trust is offering investors to "redeem their holdings at 96 cents on the dollar". Reuters initally incorrectly reported that this was a money market fund, but has since corrected its story. This is not a "money market fund", and no "2a-7" money funds have broken below $1.00 a share. GE, though, becomes the first "enhanced cash" fund to publicly "break the buck", though of course these funds never pledged to maintain stable NAVs. Crane Data estimates that these "3c-7" private placement "cash plus" and "enhanced cash" fund assets total $120 billion, down from $150 billion just weeks ago. GE says its other cash plus and money market funds are unaffected by the move. Federated recently reimbursed investors $4.9 million for losses in its enhanced fund and exited the sector, and Columbia's set aside $300 million to protect its mammoth Strategic Cash portfolio. See also Bloomberg's "GE Bond Fund Investors Cash Out After Losses From Subprime"."
Continuing backwards in time, our Nov. 14, 2007 News was about a "Barrage of Money Market Funds Buying Out or Shielding SIV Stories. It stated, "Numerous stories on money market funds taking action to protect or remove their troubled SIV holdings hit today, including a front page one in USA Today, "Money market funds at risk?" The article says Bank of America "set aside $600 million to cover potential losses in its [Columbia] money market funds [$300 million] and an institutional cash fund [$300 million]," which is "not technically a money fund". (We assume the latter is the mammoth $40 billion plus Columbia Strategic Cash, or 'StratCash', an "enhanced cash," "3c-7" private placement fund.) The article also clarifies that Legg Mason "set up a $238 million line of credit for two money funds" and "invested $100 million to buoy an offshore money fund."
Our news brief continues, "The New York Times, on page 1 of the Business section, writes "Investor Safe Haven Becomes a Concern." It reveals that Wachovia may end up suffering as little as $5 million damage on its bailout, and "perhaps nothing". (The Times' chart incorrectly labels a surge in money assets as retail, but this should be institutional.) Associated Press writes, "Money funds set aside cash for trouble but it's unlikely a fund will fail, observers say." AP's article says, "Peter Crane, president of Crane Data LLC, which tracks money market mutual funds, says he doesn't believe this will wind up hurting the average money market client." Finally, The Washington Times writes "Firms prop up money-market funds."
We wrote on Nov. 13, 2007, "Bank of America Discloses $600 Million Columbia Funds Bailout." Our website explained, "Bank of America will "spend $600 million supporting in-house money-market funds that are exposed to troubled financing entities called structured investment vehicles reports The Wall Street Journal. BoA's Columbia Funds are the 7th largest manager of money market mutual funds with over $150 billion in assets. Columbia joins a number of other fund complexes that have taken action purchasing or protecting structured investment vehicle-related commercial paper and medium-term notes, extendible ABCP and other esoteric mortgage-related securities whose value has come into question during the market's recent flight-from-complexity. See Bloomberg's "Bank of America, Legg Mason Prop Up Their Money Funds."
Crane Data's Nov. 12, 2007 News is entitled, "Legg Mason Discloses LOCs To Support SIVs in Citi Inst Money Funds." It explains, "A late Monday Bloomberg.com article says that Legg Mason has taken action to support its money market funds. Legg's Western Asset unit becomes the fourth money fund advisor to publicly disclose support over troubled securities -- Evergreen, Credit Suisse, and SEI have come forward to date. (Visit tomorrow to read about No. 5, SunTrust Bank's STI Classic funds.) Legg Mason's Nov. 9 10-Q quarterly filing says it manages $167 billion in liquidity assets with approximately 6% invested in ABCP issued by SIVs. "The investments have not affected the $1 per share net asset value of the funds and Legg Mason does not expect that they will, although no guarantees are given.... In November 2007, in order to support the [fund's] AAA/Aaa credit ratings, Legg Mason elected to procure letters of credit (LOCs) ... of approximately $238 million," says the filing. Legg Mason "has provided approximately $178 million in cash collateral" and "estimates that, unless the LOCs are terminated during the quarter without being drawn, it will incur a $4.7 million charge to its net earnings in the December 2007 quarter ... representing the net impact of decreases in the fair value of the underlying ABCP through the date hereof."
Also on Nov. 12, 2007, we posted "SEI Provides "Capital Support Agreement" to Funds for Cheyne." This piece commented, "SEI Corp. will announce its quarterly earnings at 9am this morning. A topic of discussion is sure to be a footnote in its recent 10-Q filing, "On Nov. 8, 2007, the Company provided a guarantee in the form of Capital Support Agreements with two mutual funds, the SEI Daily Income Trust Prime Obligation Fund and the SEI Daily Income Trust Money Market Fund." SEI Investments is advisor and Bank of America's Columbia Management is the subadvisor. "On October 30, 2007, S&P advised the Company that it would place any mutual fund that had an AAA rating by S&P and which owned any securities issued by Cheyne Finance LLC (Cheyne) on credit watch with negative implications unless the fund was provided credit support.... Investments constituted approximately 14.0 percent and 7.1 percent, respectively, of the Prime Fund's and MM Fund's aggregate net asset values." Janney Montgomery Scott analyst Tom McCrohan tells us that the $129 million guarantee covers 50% of the Cheyne holdings, which could potenially represent a $7.4 million loss given Friday's valuations. Other money funds holding Cheyne (and other SIVs) may also "guarantee" troubled holding via internal or third party backing instead of buying out the entire holding."
Our Nov. 10, 2007 News recaps the November 2007 MFI article, "Protecting the $1 NAV: Advisors Bail Out Funds." We wrote, "The November issue of our flagship Money Fund Intelligence discusses recent troubles within money market funds and describes fund advisors' actions to protect investors. No money market mutual funds have broken the buck, or fallen below the $1.00 a share level, nor are any likely to due to the August asset-backed commercial paper crisis and the October structured investment vehicle panic reprise. But a handful of advisors running a small number of funds with downgraded or defaulted securities have purchased and removed these securities from their money funds, and others have sought additional guarantees or protections. MFI writes, "We'd guess that perhaps 5 to 10 funds have purchased up to $10 billion in assets, and that more could be coming due to this week's continued SIV stresses."
Finally, at the start of the month, our Nov. 2, 2007 News featured, "Credit Suisse Purchased Money Fund Securities Says Wall St. Journal." The update told us, "In the second confirmed instance of a fund advisor purchasing securities to protect its money market funds during the recent asset-backed commercial paper crisis, Credit Suisse said on its earnings call, "We took steps to reposition certain of our U.S. money-market funds and purchase securities from these funds" to "address liquidity concerns caused by the U.S. market's extreme conditions," reports The Wall Street Journal. Credit Suisse purchased ABCP, FRNs (floating rate notes) and "notes issued by collateralized-debt obligation vehicles and structured investment vehicles" from its CS Inst Prime MMF. The company booked unrealized "value reductions" totaling approximately $125 million and said it saw over $20 billion in money fund outflows, including "offshore" funds and "cash" separate accounts. It was the only money fund manager with substantial asset declines during the 3rd quarter."
