Daily Links Archives: November, 2007

Following the run on Florida's LGIP (see yesterday's News and today's WSJ rehash of a previous MarketWatch story, "Florida Halts State-Fund Withdrawals"), the Georgia Office of Treasury and Fiscal Services has issued a letter on its Georgia Fund I Local Government Investment Pool, saying "The purpose of this letter is to assure you that Georgia Fund 1 is not invested in, nor has ever been invested in, the types of subprime-backed investments that are generating such losses." For more on the Florida's Local Government Investment Pool, see New York Times' "Florida Freezes Its Fund as Governments Pull Out".

Reuters says "US money market fund assets swell to record". Citing iMoneyNet's Money Fund Report, the article says assets continued their dramatic climb. ICI's larger weekly asset series, which we use, should also show a large increase when it comes out late this afternoon. Institutional investors continue to move away from a Fed-depressed funds levels and distressed bond and money market securities and into higher-yielding and well diversified money funds.

WSJ says "Cheyne Creditors Near Revamp Plan for SIV". The article, which was short on details, says, "Creditors in the $7 billion structured investment vehicle formerly known as Cheyne Finance are moving closer to a deal that would allow them to avoid being forced to realize hundreds of millions of dollars of potential losses in the short term, people familiar with the situation said."

Edgy mutual fund info site MaxFunds.com asks "Can Money Market Funds Fail?" The basic-level overview says, "Money market funds have only been around for about three decades, making them the young'ns of a mutual fund business.... Whenever we suffer a credit crisis of some sort, the same question comes up - are money market funds safe?"

"HSBC Becomes First Bank To Bail Out Troubled SIVs" writes The Wall Street Journal. The Journal says, "In recent weeks, managers of money-market funds, including Atlanta's SunTrust Banks Inc., have moved to insure investors against losses on the funds' investments in SIVs, which hold a total of $300 billion in securities." (Crane Data estimates total money fund SIV holdings to be around $100 billion.) The WSJ notes that Janus held about $600 million, or 2.7%, in Cullinan and Asscher, which "which has since been reduced" and Federated holds about "$350 million in Asscher in its five largest money funds". WSJ surmises, "HSBC's move, particularly if followed by other banks, also may help relieve stress among SIVs by taking responsibility for a big chunk of the sector's assets."

Marketplace radio says "HSBC looks to plug losses in 2 SIVs". The public station interviews Peter Crane on the HSBC SIV backing. Crane says, "They don't want to do it. But it's the lesser of evils. Small investors could benefit too.... Money market funds invested about $6 billion in one of the SIVs. HSBC's structured vehicles aren't the only ones in the shop."

The Federal Reserve Bank of New York issues "Statement Regarding Repurchase Agreements Covering Year-End". "In response to heightened pressures in money markets for funding through the year-end, the Federal Reserve Bank of New York's Open Market Trading Desk plans to conduct a series of term repurchase agreements that will extend into the new year," says the release. See Bloomberg, Financial Week, and Wall Street Journal stories. WSJ says, "The New York Fed's announcement follows a similar announcement by the European Central Bank Friday that it stood ready to provide funding over the year-end to counter strains in the euro-zone money markets."

New York Daily News features "Securing money market cash, amid subprime mortgage mess". "The subprime mortgage mess is bleeding into money-market funds, but consumers with cash tied up in them may not have much to worry about at this point," says the article, which briefly describes the handful of recent bailouts. It quotes Peter Crane as saying the odds of consumers losing money are "None".

"SIV-Plan Founders to Seek More Support for Superfund" Says The Wall Street Journal. Bank of America, Citigroup, and JP Morgan Chase are about to "start soliciting" additional bank support, a "significant step in forming the so-called superfund" created to provide a liquidity "alternative for off-balance-sheet entities called structured investment vehicles that have run into trouble amid a lack of liquidity in credit markets," says the WSJ. The Journal adds, BlackRock is "expected next week to be named the manager for the $75 billion to $100 billion fund".

AFP writes "Cautions for Treasurers on Auction Rate Securities". The Association of Financial Professionals (www.afponline.org) has posted an interview with John Rieger, AFP's director of financial accounting and reporting, on recent concerns with auction rate securities. Rieger discusses failed auctions and the "significant impact" on AFP member corporations. "The failure of an auction means that companies now own those securities, and the underlying securities are generally 20 or 30 years to maturity," says the brief. See also, Bloomberg's "Rigged Bids, SEC Help Dealers as Auction Bonds Fail".

"Money fund father blasts how many are now run" says Reuters. Reserve founder and money fund creator Bruce Bent tells Reuters that many of today's money fund managers are not cash managers. They "imposed the psychology of managing stocks and bonds on money funds and they are wrong," quotes the article, which also discusses funds breaking the $3 trillion level and the handful of recent bailouts. Bent does not see anyone "breaking the buck, saying, "My bet is they are not going to lose a penny on it. Because there's nothing wrong with the underlying credit. It's just a temporary market aberration." See also, Baltimore Sun's "Money fund checkup is easy" and bizjournals.com's "U.S. Bancorp pledges to back troubled money-market fund".

Investment News says "Subprime problems are hitting money funds". IN says, "Recently, Wachovia Securities LLC of Richmond, Va., acknowledged a $40-million-dollar loss related to bailing out certain securities from its Boston-based Evergreen Investments money market funds". The article quotes Evergreen spokeswoman Laura Fay, "This was meant to send a message of confidence to investors.... It was positively received," she said, noting that "asset flows into the funds increased after Wachovia took that step".

"Money funds get bailouts to stem run: 'Enhanced cash' suffers big drains" writes FinancialWeek. The article reviews the GE Enhanced Cash Trust price decline, outflows in "enhanced cash" funds, and some bailouts in money market funds. "With enhanced-cash, Libor-plus and ultrashort bond funds, a few bad apples may ruin the party for everybody. This is a serious blow to the asset segment," it quotes Peter G. Crane.

Bloomberg writes "Merrill, Morgan, Citi Get Help From Clients' Cash" on a lawsuit over low-interest brokerage cash sweep accounts. The article says, "Merrill, Citigroup, Morgan Stanley, Charles Schwab and Wachovia, which are being sued by shareholders for the practice, last year took in a combined $186 billion in deposits swept from broker customers, according to their clients' lawsuit".

BusinessWeek interviews Crane Data's Peter Crane in "Money-Market Funds: A Safety Check". This week's issue features a Q&A with the publisher of Money Fund Intelligence. Crane tells BW, "There has been all of this Sturm und Drang over the possibility of losing a penny on the dollar. Everything the fund industry has done to date shows it will protect a fund's net asset value come hell or high water. See also Fox Business' "Experts Say Money Market Funds Still Safe for Mom and Pop" and BankRate.com's "How safe is your money fund?"

"Investors getting nervous about short-term funds" by Reuters recaps the GE Enhanced Cash Trust $0.96 redemption offer, and quotes Pete Crane, "We think the big, bad news is all out there. But there will be others." It also quotes an advisor who speculates that investors are "questioning the safety" of money funds. Also, see (and hear) Public Radio MarketPlace's story, "GE fund reports 'breaking the buck'".

MarketWatch.com's Jonathan Burton writes about "Mounting concern about money-market funds: Investments seen as safe and secure face threat from bad debt holdings". "There's no such thing as a dangerous money fund," the article quotes our Peter Crane, president of CraneData.com. "These types of problems have occurred in money funds before, and every time the funds adjust and adapt.... Nowadays, signs point to lower interest rates, taking pressure off money funds that hold higher-quality investments, such as Treasury and government agency bonds, because these top-rated assets may actually get a boost from declining rates." Also, see MarketWatch's "Advisers warn against dumping money-market funds".

More Government Investment Pool Problems. Bloomberg describes more problems with GIPs, saying government investment pools should be held to the same standards as money market funds in, "Florida Holds $2.2 Billion of Debt Cut to Junk Status". The article says, "The Florida State Board of Administration said none of its clients have lost money and it has negotiated to recoup its investments." Bloomberg follows up with "Public School Funds Hit by SIV Debts Hidden in Investment Pools".

Given the interest surrounding money market funds recently, we thought we'd reprint some links on money market fund regulations. Rule 2a-7 of the Investment Company Act of 1940" is the quality, maturity and diversity guidelines which allow money market funds to maintain a $1.00 share price. `ReedSmith, a Pittsburgh law firm, has a "`Money Market Fund Compliance & Resources" Page" The SEC website, contains the last round of amendments to 2a-7, 1997's "Technical Revisions to the Rules and Forms Regulating Money Market Funds".

WSJ Says "SEI, Rival Money Funds Go on Offense to Avoid 'Breaking the Buck'". The article quotes Money Fund Intelligence, saying "2007 is beginning to rival 1994's derivative crisis as the most dangerous event" in money fund history. It discusses credit enhancements sought by SEI, STI and others to protect SIV holdings. SEI chief executive Alfred West said, "We understand that others in our industry are taking similar action." (See our News brief yesterday on SEI's "Capital Support Agreements".) The Journal adds, "About 5% of prime money-market mutual-fund assets have SIV-related investments, according to estimates last week from Bank of America analyst Michael Hecht.

E*Trade Shares Plummet" Says Wall Street Journal. The article says, "E*Trade uses some $40 billion of customer cash from its bank and brokerage to make investments. The company said its $3 billion portfolio of asset-backed securities includes about $450 million of so-called collateralized debt obligations and second-lien securities," citing concerns that savers may pull deposits. Other brokerages using "bankerage" models, or FDIC insured deposit accounts instead of money market funds, have seen big losses on the re-investment side of their businesses.

"Banks Said to Agree on Credit Backup Fund" Writes the Sunday New York Times. "Officials from Bank of America, Citigroup and JPMorgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed," said the article. "`Bank participants, money market investors and even some managers of the troubled investment vehicles that would benefit most had considered previous versions of the fund to be infeasible, casting doubt over a final plan," noted the Times.

"Planners Accelerate Work on SIV Rescue: New Credit Woes Add To Pressure to Finalize Details of Super-Fund" Says Wall Street Journal. "The bailout fund intends to buy SIV assets using money raised in the market for asset-backed commercial paper, where banks and companies borrow for periods from one day to a month or so," says the article.

Reuters writes "Moody's cuts, may cut, $33 bln of SIV debt", which says "include debt issued by three Citigroup SIVs -- Beta, Centauri and Dorada; HSBC's two SIVs, Asscher and Cullinan; and WestLB's Harrier and Kestrel vehicles. The Wall Street Journal says "SIV Rescue Plan Faces New Pressure". "The three SIVs whose capital notes [not CP] were placed yesterday on review ... have a combined $50 billion in assets. Of the seven SIVs, 7%, or nearly $6 billion in assets, are invested in U.S. mortgage-backed securities", says WSJ. The bank adds, "[T]he SIVs have no direct exposure to U.S. subprime assets" through investments in collateralized debt obligations.

"Interest Rates Defy Fed's Recent Cuts" Writes The Wall Street Journal. The article says rates haven't fallen along with the Fed's 75 basis points in rate cuts so far. "That's fine with savers. Average yields on money-market mutual funds, for example, whose yields typically move in line with changes in the Fed funds rate, are hovering at 4.76%, compared with 5.06% in mid-September -- roughly half the amount they'd be expected to drop, says Peter Crane of Crane Data LLC".

"Commercial-Paper Market Hit by New Investor Anxiety" Reports WSJ. Monday's Wall Street Journal says the CP market is again experiencing stress, though "the current pullback in the commercial-paper market hasn't reached the intensity of August. For example, an HBOS-run conduit called Grampian, one of the largest conduits, with about $35 billion in paper outstanding as of August, has recently tapped the market." The Journal says, "This time around, investors appear to be backing away from commercial paper in part because of anxiety about banks, which typically guarantee the conduits' debts but could now be facing a new wave of write-downs on their own holdings of subprime-backed securities."

"Managers of money funds may take the hit" writes Saturday's LA Times. Tom Petruno says in his "Market Beat" column, "Now we're reminded that the free lunch concept extends to money market mutual funds.... Although there's no government guarantee on money funds, some fund management companies in recent months have demonstrated that there's an implicit guarantee against loss on the funds, even though the companies can't officially say as much." It quotes our Pete Crane, "Investors obviously believe they have nothing to fear in money funds. Assets have surged this year to record levels. That has given fund managers more breathing room to wait out the credit mess, Crane said." Look for more on current and historical bailouts in the pending November issue of Money Fund Intelligence.

The Bond Buyer weighs in with "Merrill's Downgrades Affecting TOBs". As WSJ mentioned yesterday, some are spreading rumors that a Merrill Lynch downgrade may impact the tender-option bond market, a mainstay of municipal money market funds. But, as BB points out, ratings are determined by underlying assets and guarantors, not by who put together the trust. "Merrill's TOB programs have grown to $40 billion or more," says the article, though only a fraction are lower-grade and may be impacted.

The Chicago Tribune's Gail MarksJarvis serves up overly sensationalized "Paper losses put scare in money market funds". She says, "With close to $3 trillion in money market funds, financial institutions make about $11 billion a year operating money market funds, said Peter Crane, president of Crane Data LLC." To clarify, that's $11 billion in revenue.

Wall Street Journal writes "Money Funds Fret Over Merrill Downgrade". In an apparent attempt to write an article a day on money funds, the Journal speculates that a downgrade of Merrill Lynch may impact tax-exempt money market funds. "The downgrade is raising questions about whether these mutual funds -- primarily tax-exempt, money-market funds -- can continue to hold some short-term municipal securities tied to Merrill. The securities in question total an estimated $4 billion to $6 billion," says the WSJ.