Daily Links Archives: December, 2007

"Money-Market Rates Fall as Bank Action Eases Gridlock" writes Bloomberg. The article notes that money market pressures continue to ease, saying, "The cost of borrowing in dollars, euros and pounds fell, extending two weeks of declines, as cash injections by central banks eased the gridlock in money markets." It adds, "Money markets are being 'helped by substantial central bank liquidity in the system,' Lena Komileva, an economist in London at Tullett Prebon Plc, wrote in a note to clients today."

The Wall Street Journal writes "How Turmoil Melted a Money Fund", which discusses how Credit Suisse Prime Institutional Money Market Fund Prime grew from $1 billion to $25 billion and back down to $10 billion. The piece says, "While money funds at several U.S. banks have been hit with similar losses, the Credit Suisse fund has suffered the most dramatic investor outflows. One reason: Other funds had more-stable investor bases anchored by longtime individual customers." It quotes our Peter Crane, "Credit Suisse was the only money-fund family to see significant outflows during the recent turmoil."

"Asset-Backed Commercial Paper Shrinks for Fifth Month" says Bloomberg. ABCP continues to shrink though overall CP rose by $1.2 billion to $1.785 trillion according to the Fed's latest statistics. Bloomberg discusses CP supply, the Canadian ABCP workout plan, the super SIV, and the Cheyne rescue in an overall update of the ABCP marketplace.

"Yields fall below 4% on money funds" reports the LA Times. The article says, "The average annualized yield on taxable money funds fell to 3.99% in the seven days ended Tuesday, down from 4.08% a week earlier and the first time the average has been below 4% since March 2006, data tracker iMoneyNet Inc. said Wednesday." (Note our Crane 100 Money Fund Index above, currently 4.49%, is higher due to its focus on the largest funds.) Also, see The Wall Street Journal's summary article, "Individuals Boost Money-Market Funds".

New money fund filings from Strategic Insight's SimFundFiling.com include: RBC Tamarack Prime Money Market, RBC Tamarack US Government MM, and GE Money Market Institutional. The brokerage RBC Dain Rauscher will distribute three retail share classes (1, 2, and 3) which will be managed by Voyageur Asset Management. The new GE fund will be managed by GE Asset Management and will charge 25 basis points.

WSJ says Cheyne SIV Portfolio Assets To Be Sold to Goldman Sachs. The biggest default in the money market crisis of 2007 appears to be nearing resolution, as Cheyne Finance's SIV assets are to be taken over by Goldman Sachs. The Journal writes, "If successful, the deal will end months of investor uncertainty and will be the first restructuring of a stand-alone SIV.... SIV Portfolio, formerly Cheyne Finance, was managed by London hedge-fund group Cheyne Capital Management (UK) LLP, and was one of the first SIVs to have trouble funding itself in August." See Bloomberg too.

Donogue says "[M]oney funds are likely to be safer than uninsured bank deposits" in MarketWatch column. Bill Donoghue, who probably did more to popularize the money market fund than anyone, says in his latest piece, "Uninsured money funds are likely to be safer than uninsured bank deposits. If decades of money-fund safety during all previous crises -- including the savings and loan crisis and recent bank failures -- haven't convinced your advisers of their value, then you need to consider better informed advisers. Over the past 12 years, uninsured bank accounts have only returned 72 cents on the dollar in the event of a failure, according to the Federal Deposit Insurance Corporation. Insured accounts were of course safe.... SEC regulation and reputational concerns of money-fund managers has proven more effective than FDIC insurance and bank regulation."

FT says "Superfund collapse 'embarrassing' to Treasury". The article comments, "As rumours spread that the deal was to be shelved, the reaction in the money market was relief rather than anxiety." It adds, Peter Crane, of Crane Data, told Reuters: "It is akin to not having to use your insurance policy - the reasons for the fund to be there have gone away, which is good news."

"U.S. Treasury Yields Climb as Fed Steps Ease Demand for Safety" says Bloomberg. The credit crisis is easing and the flight to Treasuries is abating, "signs that central banks were adding enough funds to the financial system to spur bank lending," said Bloomberg today. See also MSNBC's "Credit markets crisis forces funds rescue".

"The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets" said a statement from the Federal Reserve Board of Governors. Separately, see Reuters' "Moody's slashes rating on Victoria Finance SIV debt".

"Muni Insurance Proves Worthless as Borrowers Shun MBIA, Ambac" writes Bloomberg. This Bloomberg article should alleviate concerns about municipal bond insurance companies MBIA and Ambac. "States and cities will reduce the amount of debt they insure to as little as 35 percent of total borrowings in the first half of 2008, according to a Dec. 13 report by New York-based Bear Stearns Cos. That's down from more than 50 percent over the past five years, based on Thomson data.... Wisconsin, California, New York City and about 300 other municipal issuers sold bonds without buying insurance in recent weeks," says Bloomberg.

SmartMoney asks "Is Your Cash Safe at the Banks?" The article discusses bank savings, money market funds, and bond funds, and says, "Your savings or investments are most likely secure". It says of money funds, "Unlike bank accounts, money-market mutual funds don't carry FDIC insurance. In theory, this means you could lose money if the fund went under. But that's highly unlikely.... That's because money-market funds, unlike enhanced cash funds, are regulated by the strict Securities and Exchange Commission guidelines regarding the quality, maturity and diversity of their underlying investments."

"Brokers, managers seen sharply cutting SIV risk" says MarketWatch article. A research report by Banc of America Securities' Michael Hecht says asset managers currently hold just 3.1% of assets in structured investment vehicles, or SIVs, and this percentage "should fall to around 1.4% of assets by the end of January, and then to 0.4% by mid-2008". Hecht cites money funds' recent strong inflows, saying, "The sharp increase in inflows in 2007 is a function of not just a flight to quality but also retail money funds' continued yield premium vs. bank deposits."

"Municipal Debt Securities May Be Next Danger Zone After SIVs" says Bloomberg. The article cites a report by CreditSights "The Muni Meltdown - Are TOBS the next SIVs?", and asks if the $400 billion tender-option bond marketplace, which sells some debt to municipal money market mutual funds, may be the next "financial danger zone". The article and report cite concerns over bond insurers MBIA, FGIC and Ambac as potential risks to the TOB and variable-rate demand note (VRDN) marketplace. See also, "Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC".

"Banks Reiterate Backing For the SIV Rescue Fund" says WSJ. The M-LEC, or Master Liquidity Enhancement Conduit, a "super-SIV" fund designed to take on assets of structured investment vehicles, is steaming ahead regardless of other banks' decisions to back their own SIVs. "SIVs and SIV sponsors have taken several constructive measures over recent weeks to address liquidity-related issues. We applaud these positive steps. M-LEC is a private-sector initiative intended as another solution to help facilitate orderly short-term credit markets as they relate to SIVs," said a statement to the Journal.

Bloomberg.com writes "Money Market Rates Tumble; Central Banks Inject Funds". The European Central Bank "added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock through year-end" says the article. Bloomberg adds, "The TED spread, or difference between what the U.S. government and banks pay for three-month loans, narrowed for a fifth day to 186 basis points, indicating an increased willingness among banks to lend."

Wall Street Journal speculates "Credit Crunch Could Worsen if... Bond Insurers Sink, 'Buck Breaks'". While the "scenarios have, by all accounts, a slim chance of occurring", that doesn't stop the Journal from wondering if bond raters all get downgraded and what would happen if money funds lost investors confidence. Thankfully, it's pure fiction. WSJ also writes "Legg Lags in Year to Forget" which describes overblown concerns about SIV exposure and Moody's recent downgrade (see Saturday "Link of the Day").

Investment News writes "Loan fiasco leads to money fund concerns". The article gives limited anecdotal evidence of some advisors moving to Treasury funds, and discusses enhanced cash. "Peter Crane, president and chief executive of Crane Data LLC of Westborough, Mass., is worried that confusion between money market funds and other cash-management investments will hurt the money market industry." Crane tells IN, "Thankfully, investors have been astute enough to know the difference to date. Money continues to move in to money markets whereas it's moving out of these other sectors." See also, IN's article on ultra-short bond funds and Schwab HighYield Plus Select Fund (SWYSX).

Jane Bryant Quinn writes in Newsweek "A Safe Harbor In the Storm". Quinn writes in her "Capital Gains" column, "The 'safe savings' of individuals, however, are doing fine. You're even getting some benefit from the market's pain.... So far, seven sponsors are known to have supported their funds, says Peter Crane of Crane Data, which tracks the industry. They're blue-chip names: Bank of America (Columbia funds), Wachovia (Evergreen funds), Credit Suisse, First American (a unit of U.S. Bancorp), Legg Mason, SEI Investments and SunTrust Bank." See also WSJ's "More Money-Market Funds Hit Trouble".

Bloomberg TV interviews Peter Crane on "Citigroup's Bail-Out of Seven SIVs". On Citi's plan to back its affiliated structured investment vehicles, Crane says, "Money-market mutual funds are one of the biggest investors in SIVs, so this is good news for money funds themselves and for money fund investors.... This removes a bug chunk of worry from those funds." Crane adds that the move won't impact Citi as much as some expect, "The SIVs don't really need all the money at once. What citigroup will be doing in effect is extending lines of credit as the issues of commercial paper and medium-term notes come due."

"SuperSIV fund is not derailed by Citi news - investor" writes Reuters. The article quotes Federated's taxable money fund head Deborah Cunningham on the Super-SIV, "There is still a need, not for a quick fix, but for a longer term solution." Our Peter Crane comments, "The entire problem may be solved by the time the SuperSIV gets there.... But there may still be some pieces of the market that remain, so there may still be a function for it."

U.K. Treasury website GTNews interview Mark Allen of Goldman Sachs Asset Management in its "Series on Liquidity Investment". The summary says, "Mark Allen at GSAM considers the impact of recent market turbulence on liquidity investment and offers investors advice about effective risk management strategies." The discussion also includes SIVs, differences between European AAA rated money funds, and enhanced cash funds.

SIVs Don't Need Superfund Anymore. Today's Wall Street Journal writes "Enthusiasm Wanes for Fund to Bail Out SIVs". It says that Gordian Knot, manager of Sigma Finance, the largest SIV, "doesn't intend to sell assets into the fund". With this decision, Citi's SIVs, which have been reduced by almost half over the past several months, remain the only major programs left in need of backing. Today's Journal also writes "Some Lending Pressures Ease, A Bit".

WSJ's "Why Borrowers May Not Benefit From Rate Cut" mentions the impact of a higher LIBOR rate on money fund investors. "Higher Libor rates have helped sustain healthy returns in money-market mutual funds. These funds' holdings of Libor-linked debt have helped to offset declining yields on other investments. An estimated 20% to 25% of money-market assets are in floating-rate debt, much of which is linked to Libor, says Peter Crane of Crane Data LLC."

Standard & Poor's released two reports, "Credit FAQs On Government Investment Pools" and "Report Examines Trends And Performance Of Rated Enhanced Cash Funds". S&P says, "Illiquidity combined with diminishing or negative returns caused sharp declines in assets under management for some funds. Many investors, nervous about contagion risk, opted for the safety of money market funds. The flight to quality has been so severe that several funds are now effectively dormant, and some have requested rating withdrawals." Standard & Poor's has scheduled a teleconference for Thursday, Dec. 13, on these topics .

Barron's asks "Why Money Funds Are Thriving in the Chaos"? Columnist Jack Willoughby quotes Peter Crane, Bruce Bent, and Peter Rizzo in a contrarian story which discusses whether the press and institutional investors have overreacted and hurt the money markets, and whether problems merit the concern shown to date. Barron's writes, "Some classes of fund investments are holding up just fine despite these folks -- and the credit storm and fears of a busted buck. Among them are money-market mutual funds, says Crane."

"How Much Is a Fund Really Worth?" asks The Wall Street Journal. The piece discusses recent market turmoil and money funds' use of amortized cost accounting (vs. mark-to-market). "While regulators and boards of directors overseeing money funds are kept up to speed on the actual prices of portfolio holdings, investors are allowed to be kept in the dark," claims the Journal.

MarketWatch says "Analyst sees Schwab unwinding SIVs in money markets: But no threat to credit risk of its money markets seen". "Despite an estimated exposure of some $8 billion in potentially risky structured investment vehicles in September, assets at six money market funds run by Charles Schwab don't appear to be in any immediate danger of being pulled down by the ongoing meltdown in credit markets," says the article, citing research by Sanford Bernstein. "Like other large mutual fund complexes, Schwab is unlikely to ever allow its funds to drop below a dollar," the article quotes analyst Brad Hintz.

More Municipal SIV Stories (Though Nothing Like Fla.). Bloomberg writes, "Orange County Funds Hold SIV Debt on Moody's Review", and discusses (minor) SIV holdings in the O.C. It also reviews the 1994 O.C. bankruptcy and state pool problems with SIVs to date. See also, Bloomberg's "Florida Fund's Value 'Indeterminate,' BlackRock Says" and Wall Street Journal's "How the Credit Crunch Turned Local".

WSJ writes "How BlackRock Forged a Plan To Rescue Fund". The article describes BlackRock, the 4th largest manager of money funds', role in shaping the Florida LGIP rescue plan. The plan, which was accepted yesterday, is to split the pool in two and to permit limited redemptions on the higher-quality (86%) "Pool A".

Bloomberg TV interviews Peter Crane in "In-Depth Look: Florida's Investment Pool Trouble". Yesterday, Crane said of the Florida LGIP, "Although this is not a money market mutual fund, it's just like one. Money market mutual funds are in effect bank account substitutes.... It's a game of confidence. The first thing you want is investors to rest assured that their money is saf. So if Florida steps and, says they're going to back everything, most of the problem goes away." See also Crane's comments in MarketWatch's "Florida allows some withdrawals from troubled pool".

The Wall Street Journal Writes "SIV Exposure Seen at Some Money Funds". The Journal writes, "Funds recently holding some of the SIVs include some from Barclays PLC's Barclays Global Investors; UBS AG; Charles Schwab Corp.; Deutsche Bank AG; BNY Hamilton Funds and Morgan Stanley. The funds range in asset size from $2 billion to $36 billion, and hold about 1% to 2% of their investments in some of the SIVs." No funds have "broken the buck" and, given the small sizes of positions, advisors "do not expect these positions to have any adverse impact on the NAVs".

Treasury Strategies will host a free web call, "Do I Need to Panic: Managing Liquidity in This Turbulent Market" Tuesday, December 4 at 9 a.m. and 2 p.m., with partners Mike Gallanis and Tony Carfang. The presentation "offers an overview of the current short-term liquidity marketplace and recent events and will tell listeners "how to think through risks and trade-offs for your short-term liquidity alternatives", including "treasuries, commercial paper, money funds, and bank deposits". Sign up here for the 9 a.m. EST session. Click here for the 2 p.m. EST session.

The Kansas City Star's Mark Davis writes "Some money market funds flirt with 'breaking a buck'". The "Road to Riches" column describes renent turmoil and bailouts, saying, "Still, some money market mutual funds have flirted with breaking a buck recently and sparked intervention by the companies that own companies that manage the funds.... Money fund owners have no reason to panic. These companies aren't about to let their reputations collapse over even the hundreds of millions of dollars it takes to shore up a wobbly money market fund. But the event is a stark reminder that any return on your money involves risk to your money." Also, see story on Canadian money fund bailouts, "Take the hit, avoid the crisis".

"E-Trade Boosts Some Rates" reports The Wall Street Journal. E*Trade, among the most embattled of the "bankerages" (brokerage with bank), raised its savings rates to 5.05% APY and its 6-month CD to 5.25%. The Jane Kim article says, "Still, consumers have been spared much of the decline in market rates, partly because of the continued tightness in credit markets and banks'
eagerness to attract consumers' deposits. Average yields on money-market mutual funds have dropped to 4.57% from 5.06% in mid-September, says Peter Crane of Crane Data LLC. By contrast, with a federal-funds rate at 4.50%, average yields on money funds would typically be around 4.25%, he says."