Daily Links Archives: October, 2008

WSJ writes "Signs of Life Emerge in Commercial Paper", saying, "The floundering commercial-paper market sparked back to life this week after some much-needed resuscitation by the Federal Reserve." It quotes our Peter Crane, president and publisher of Crane Data LLC, "The reversal of flows out of general-purpose money-market funds is an almost equally significant event and the two should soon feed off each other." Also in CP coverage, Bloomberg.com writes "U.S. Commercial Paper Soars Most on Record as Fed Becomes Buyer", citing this week's Federal Reserve "Commercial Paper Outstanding" data, which showed the biggest jump ever in CP. The article says, "U.S. commercial paper outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, the Fed said today in Washington. It was the first gain in seven weeks, reversing a 20 percent decline during the previous six weeks." Bloomberg quotes Peter Crane, president of Crane Data LLC, "Confidence is coming back. Knowing the Fed will buy the longer term means companies will be able to refinance and take back their short-term paper if need be." See too, Bloomberg's "Fed Buys $145.7 Billion of Commercial Paper to Start". For more on the Fed's Commercial Paper Funding Facility, click here.

Moody's rates BGI Sterling Government Liquidity Fund Aaa/MR1+. The release says, "Moody's Investors Service announced today that it has assigned a money market fund credit rating of Aaa/MR1+ to Barclays Global Investors Sterling Government Liquidity Fund (the Fund)." Moody's also withdrew the ratings of twelve Vontobel Management SICAV funds. Also, see Reuters news brief "US money market funds post $4.4 bln inflows in week," which cites iMoneyNet's weekly Money Fund Report and says, "Taxable money market fund assets rose by $6.37 billion as taxable government institutional funds added $20.32 billion, offset by $14.37 billion in outflows from taxable retail funds.... Tax-free fund assets fell by $1.96 billion." The story adds, "Taxable yields rose by 9 basis points to 1.54 percent, while tax-free yields fell by 73 basis points to 1.81 percent."

The New York Times writes "Reserve Fund's Investors Still Await Their Cash", which says of Reserve's investors, "At least 400,000 people, and perhaps as many as a million, can't get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments." It adds, "And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history -- its founder, the legendary Henry B. R. Brown, had invented money market funds. Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail. The news occasionally posted on the fund's Web site got steadily worse."

Invesco Aim confirmed acceptance of Money Market Funds in U.S. Treasury Department's Temporary Guarantee Program. Legg Mason's Western Asset Management, Federated Investors, First American, and American Century have also confirmed acceptance. Other funds should be hearing shortly. Invesco Aim's statement says, "Invesco Aim has been informed that the applications submitted for each of its SEC-registered 2a-7 money market funds to participate in the U.S. Treasury's Temporary Guarantee Program have been accepted. The Temporary Guarantee program provides coverage to fund shareholders for amounts up to the amounts they held in Invesco Aim's money market funds - both retail and institutional - as of the close of business on September 19, 2008. The program will exist for an initial three-month term, ending Dec. 18, 2008, after which the U.S. Secretary of the Treasury will review the need and terms for extending the program. For more information about the Temporary Guarantee Program, please refer to the information posted on the U.S. Department of Treasury's web site at www.ustreas.gov."

The press release, "Fitch Comments on Shift Away from MTM Pricing for Money Market Funds", was posted Thursday, saying, "Temporary changes in mark-to-market (MtoM) pricing procedures, resulting from the extreme market dislocations and illiquidity, may alleviate net asset value (NAV) pressures facing money market funds but do not entirely mitigate potential asset illiquidity or redemption risk, according to Fitch Ratings." Also, see "Fitch Expects to Rate 5 Money Market Investor Funding Facility Related ABCP Programs 'F1'". The release says, "Fitch Ratings expects to assign an 'F1' rating to each of five asset-backed commercial paper (ABCP) programs that have been created in conjunction with the recently announced Money Market Investor Funding Facility (MMIFF)." The programs and approximate sizes are: `Hadrian Funding Co., LLC ($220 billion); Trajan Funding Co., LLC ($150 billion); Aurelius Funding Co., LLC ($135 billion); Antoninus Funding Co., LLC ($60 billion); and, Nerva Funding Co., LLC ($35 billion). Finally, see Federated Investors, Inc. Reports Third Quarter 2008 Earnings; Total Managed Assets Increase to Quarter-End Record $344 Billion.

AP writes "TD Ameritrade 4Q net income fell 14 percent", which says, "TD Ameritrade Holding Corp. said Thursday that quarterly profit fell 14 percent, to $172 million, as the brokerage's expenses soared 40 percent, including a nearly $36 million loss on money market funds.... This fall, Ameritrade pledged to spend up to $55 million to help cover losses its customers suffered while investing in troubled money market mutual funds. About $50 million of that will go to those who invested in Reserve Management Corp.'s Primary Fund and up to $5 million will help clients invested in The International Liquidity Fund." Also, see WSJ's "Yields Bedevil Money-Market Managers".

A flurry of articles appear today on the Federal Reserve's new "Money Market Investor Funding Facility". These include: NY Times' "Fed Adds to Its Efforts to Aid Credit Markets", Bloomberg's "Fed to Provide Up to $540 Billion to Aid Money Funds", AP's "Fed announces new plan to help money market funds", and Bloomberg's "BlackRock, Amid Outflows, Backs Fed Money-Fund Plan". The Bloomberg article quotes BlackRock's Larry Fink, "The Fed action today is going to cause more stability. It will allow people like BlackRock and other money-market funds to start extending purchases of commercial paper. It gives flexibility." The article adds, "Money-market funds are the biggest buyers of the short-term debt. Commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses."

S&P rated MTB Money Market Fund AAAm. S&P's MTB release says, "The MTB Money Market Fund commenced operations in June 1988 and currently has approximately $2.6 billion in assets. In addition to the MTB Money Market Fund, we maintain 'AAAm' ratings on MTB U.S. Treasury Money Market Fund, MTB U.S. Government Money Market Fund, and MTB Prime Money Market Fund. The fund's investment advisor is MTB Investment Advisors Inc. (MTBIA). MTBIA began managing assets as a registered investment advisor in 1995 and adopted its current name following a reorganization with M&T Bank in 2003."

BankRate writes on CNBC.com, "Explainer: How the New Money Market Guarantees Work". It quotes Peter Crane on funds signing up for the Treasury guaranty program, "Fidelity and Vanguard had the luxury of waiting.... It's more that Fidelity and Vanguard didn't experience significant outflows. Most of them feel, 'why buy it anyway?' This is really a public relations move. Nobody expects to use the insurance. This is really just to put investors at ease. Certainly, had the run that was starting in money funds developed into a full-blown run, everyone would have needed it. You stop the run and you don't need the insurance. You don't stop the run and you're dead anyway." It also quotes Crane, "There was this massive shift in the high end of the institutional market; but the retail market was barely impacted.... Overall, the money funds were fortunate to keep a lot of that cash in the house. Undoubtedly, some money went to banks, but if you look at the numbers, it seems most of the assets stayed in fund complexes and merely shifted from prime into Treasury or government."

American Century's "Perspective on Money Markets" video features fixed-income CIO Dave MacEwan discussing "money markets and the American Century Capital Preservation Fund, 100% invested in short-term U. S. Government Treasuries." MacEwan says, "Money markets are foremost on people's minds because they own them for capital preservation and maximum liquidity. With some of the events that have happened over the last few days, some of the money markets in the institutional space have had some problems. Most important for investors right now is the plan that's been proposed in Washington ... they've essentially proposed guarteeing money market funds.... There's no reason for investors to be concerned about their money market funds right now."

The Reserve issued a couple more updates on the status of the frozen Primary and Government funds. The Primary Fund release says delays in payment were caused because, "The Reserve had to adjust its computer systems due to a decline of the net asset value of the fund's shares below $1.00.... In doing so, they've identified a number of transactions that have raised issues, most of which have been resolved between The Reserve and its custodian, State Street Bank & Trust Company." The Government Fund release says, "As you know, the U.S. Government Fund did not hold Lehman Brothers debt in its portfolio and has maintained a $1.00 Net Asset Value. Nevertheless, it experienced very heavy redemptions over a short period of time amid an almost illiquid market. That being said, we have concluded that it is in the best interest of all shareholders to liquidate the Fund and return your cash and accumulated interest as quickly as possible without undertaking any fire sales. In order to make periodic cash distributions, we are modifying existing functionality in our software. Our broker-dealer clients, who are linked with our systems, must also make modifications and adjustments to protect the interests of their accounts." See also, CNN Money's "Warning: Extra yield - extra risk" and Bloomberg's "BNY Mellon's Profit Falls 53% on Money Fund Bailouts".

S&P published "Amortized Cost Pricing In Rated Money Market Funds", which says, "the use of amortized cost pricing for instruments with legal final maturities of 60 days or less in U.S.-registered money market funds and less than three months in Irish-domiciled money market funds would not have a negative impact on its 'AAAm' rated money market funds" if several conditions were met, including the security being rated A-1, not on Creditwatch, and not experiencing liquidity or credit events. Also required, "Consistent with our 'AAAm' criteria, rated funds provide a rationale for the process by which fund management has chosen to suspend mark-to-market pricing and details regarding the frequency of review and by whom it is undertaken." S&P's move echoes the SEC's Friday night move to allow amortized cost "shadow pricing" in certain cases. (See last Friday's Crane Data News "SEC Allows Amortized Cost 'Shadow Pricing' for Money Market Funds".)

Declaration of the Luxembourg Government on money market funds says, "In a declaration to Parliament on the international financial crisis, the Luxembourg Prime Minister Jean-Claude Juncker stated today that the Luxembourg Government together with the Luxembourg Central Bank will take all necessary steps to secure the liquidity of money market funds established under Luxembourg law. This can be done through the temporary provision of special liquidity for the benefit of such funds against the supply of eligible collateral to the Central Bank. Money market funds in Luxembourg will thus benefit of the same protection as in other European countries." In other news, see WSJ's "Pimco Tapped to Manage Fed's CPFF".

The Reserve issued a statement delaying its planned Primary Fund distribution payment. The release says, "On September 29th, The Reserve Fund announced that its Board of Trustees had approved the distribution from the Reserve Primary Fund of $20 billion to be distributed to all investors pro rata in proportion to the number of shares each investor held in the Primary Fund as of the close of business on September 15, 2008. The announcement stated that the distribution was expected to occur on or about October 13th. The distribution will not occur in the time frame stated in the announcement. The process of determining accurately the number of shares each investor held in the Primary Fund has proven to be extremely complex and could not be completed in the originally anticipated time frame.... We apologize for the delay but we trust that you understand that it is in the best interests of all the investors in the Primary Fund to make certain that the amounts distributed reflect accurately each investor's interest in the fund. We will post an update on our website no later than Friday, October 17th, if the distribution has not been made prior to that date."

"Institutional investors returning to money-market funds" says Financial Week. The article, which is subtitled, "Government backstop fuels sizable increase in institutional money-market assets," writes, "Institutional assets in money-market funds have increased for the first time in more than a month, a sign that investors are regaining some confidence in the safety of these temporary parking spots for cash. Overall, assets in institutional money-market funds rose by $39.6 billion during the week ending Oct. 9, according to data from the Investment Company Institute, to a total of $2.2 trillion. The nearly $40 billion jump was the largest one-week increase in institutional money-market assets since the week of July 9, when assets jumped by $42 billion."

Bloomberg speculates that "China's CIC May Have $5.4 Billion Frozen in Money-Market Fund" based on recent filings. The article says, "The fund had placed $11 billion in U.S. money-market funds, according to filings with the U.S. Securities and Exchange Commission.... A Sept. 29 SEC filing shows that Stable Investment held 11.1 percent of Reserve Primary's institutional shares at the beginning of the month. Based on the 48.9 billion institutional shares outstanding as of May 31, the most recent information available, Stable Investment's stake would have totaled about $5.4 billion. Stable Investment has also invested roughly $5.9 billion in three other U.S. money market funds, according to documents filed earlier this year with the SEC. That includes $2.1 billion in the Invesco Aim Liquid Assets Portfolio; $2.3 billion in the JPMorgan Prime Money Market Fund; and $1.5 billion in Deutsche Asset Management's DWS Money Market Trust." Also, listen to NPR's "Money Market Managers On Loans To Businesses", which quotes money fund managers Deborah Cunningham and Kathy Roy. What would convince money funds to invest more in CP? Cunningham says, "Time and additional confidence and a turn in market sentiment."

Chicago Tribune writes "The science of frozen liquidity". It is subtitled, "Vanguard and says, "Anyone who thinks irrational panic is all that's behind the financial crisis sweeping the globe hasn't had a conversation with David Glocke. As the manager of $138 billion in Vanguard Group money market funds, Glocke's behavior helps explain why the credit markets have seized up. But his motives are nothing if not rational. For more than a year, Glocke and countless fund managers like him have watched the banking sector come undone, causing them to slowly pull back on billions of dollars that help lubricate the nation's financial system. Now, as world financial leaders try to entice them out of their shells with one extraordinary step after another, Glocke and his colleagues are in no hurry to comply."

Money fund trading "portal" Citibank Online Investments announced the addition of U.S. domestic institutional money market funds from Morgan Stanley Investment Management. Citi now offers "access to over 100 institutional funds, including U.S. dollar domestic, offshore, tax exempt, tax efficient, government, Treasury and non-dollar currency (Euro, Sterling) funds through a single channel making it easier and more efficient for companies to manage their liquidity." The portal has also added a new "News" page feature. Citibank Online Investments is a "global, secure, Web-based investment system offering a wide variety of short-term investment choices." For other money fund news, see InvesTech's Jim Stack writes in Forbes, "Money Market Funds: How Safe Are They?" and Washington Post's "Funds Turn To Treasury Guaranty".

"Money-market funds flock to guarantee program" Associated Press via BusinessWeek.com. The article says, "Treasury Department spokeswoman Jennifer Zuccarelli declined to specify how many firms applied for guarantees by Wednesday's deadline, but she said, 'We have seen significant interest.'" It continues, "Through Wednesday, the agency reported receiving $337 million from funds paying upfront fees to participate. For the vast majority of eligible funds, the fee is one 'basis point,' or $1 for each $10,000 in fund assets. Based on that fee level and the $337 million in fees paid, applications have been filed to cover virtually all the $3.4 trillion in money fund assets. On new money it quotes, "But even those new, uncovered investments 'are much safer than they were before the guarantee program,' said Peter Crane, president of Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence," says the AP. Other articles of interest: "U.S. Weighs Backing All Bank Deposits", "Reserve Aims to Liquidate 14 of Its Funds", "Q: Is My Money Fund Safe? A: Maybe", and "Reserve says its money funds seeking guarantees".

Yesterday, the U.S. Treasury released the statement, "Treasury Announces Conclusion of Enrollment Period for Temporary Money Market Guarantee Program and Technical Correction". The brief says, "The Treasury Department announced today a technical correction that would permit additional money market funds to participate in Treasury's Temporary Money Market Fund Guarantee Program. Funds that have a policy of maintaining a stable net asset value or share price that is greater than $1.00 and had such policy on September 19, 2008 are now eligible to participate, provided the fund meets all of the other original requirements." Crane Data believes this is meant to include variable annuity money funds such as the $12.5+ billion CREF Money Market Account. (See TIAA-CREF's statement.) Treasury says, "The enrollment deadline for these funds that are now eligible as a result of this technical correction is 11:59 p.m. Washington, DC time on October 10, 2008. This technical correction does not extend the original deadline [last night at midnight] for funds that maintain a stable share price of $1.00 and that qualified under the program originally announced on September 29, 2008."

Both Fidelity and Vanguard will participate in the U.S. Treasury Guaranty Program for Money Market Funds. Vanguard says, "Vanguard's money market funds will apply for the U.S. Treasury Department's program to support the account values of money market mutual funds. Trustees of the funds decided to participate in the program because they believe it is a helpful step toward stabilizing the credit markets in general, which should benefit investors in all money market funds." Vanguard CIO Gus Sauter says, "The program is one part of broader efforts to get the credit markets functioning more normally. It will remove some uncertainty in the minds of investors, and we think our shareholders will agree that taking part is the right thing to do. Frankly, Vanguard does not anticipate ever needing the Treasury's coverage, because we've always managed our money market funds with extreme prudence." Fidelity says, "Fidelity and the Trustees believe that it is in the interests of our fund shareholders to participate in the program. Even though it is highly unlikely that the insurance will be needed for any of our funds, we expect the program to reassure our investors that their money market funds will continue to provide safety and liquidity for their cash investments".

"SEC to Rewrite Money Fund Rule 2a-7" posits mmexecutive.com, quoting the SEC's director of the division of investment management Andrew Donohue, "Money market funds have been stable throughout some of the most challenging environments. The model is to be improved. The goals of stability, liquidity, income can sometimes be in conflict with one another." MME says, Donohue said yesterday at ICI's Equity, Fixed Income & Derivatives Markets Conference, "There are three classes of money market fund investors: redeemers, purchasers and investors. It is easy in times of stress to focus on the needs of one and not the needs of all. Rule 2a-7 must be rethought, even though it has worked well for 27 years." See also, Smart Money's "Many Money Markets Yet to Apply for Insurance".

Here is the latest list of money fund families that have applied for the Treasury's Temporary Money Fund Guarantee Program:: Allegiant, Alpine, American Beacon, American Century, American Funds, American Performance, Barclays, BlackRock, Calvert, CNI Charter, Columbia, Credit Suisse, Deutsche Asset Management, Dreyfus, Evergreen, Federated, First American, Flex-Funds, Fortis (Aston/ABN Amro), Goldman Sachs, Invesco AIM, Janus, JPMorgan, Legg Mason (Western Asset), MFS, Morgan Stanley, Munder, Nationwide (pending), Neuberger Berman (Lehman Brothers), Northern, PNC, Putnam, Reich & Tang, Russell, Schwab, SSgA, State Street Inst, Tamarack, TCW, UBS, Victory, Virtus (formerly Phoenix Insight), and Wilmington Trust. Fund companies planning on joining with pending announcements include: HSBC and Wells Fargo. Fidelity, and Vanguard are the only major firms yet to declare.

"Money fund rescue smacks banks" writes the latest Financial Week, a weekly publication from Crain Communications. It says, "Already, Bank of New York Mellon, Legg Mason and Northern Trust have reported that their efforts to firm up money-market funds and cash strategies this year will weigh on their Q3 earnings." The piece adds, "According to an estimate by money-market research firm Crane Data, 21 financial institutions have pumped more than $5 billion in capital into their money-market funds during the last 13 months -- the most since 40 money-market funds were bailed out almost 15 years ago." Finally, FW says, "Five companies that have propped up their funds in the past few weeks -- Evergreen Investments, RiverSource Investments, Columbia Management, Russell Investments and Dreyfus -- each acknowledged that they had money-market funds holding Lehman debt after the company filed for bankruptcy. Combined, the five firms had at least $1.5 billion in Lehman exposure among them, according to company filings. Not all of the companies disclosed how much they would infuse into their funds to compensate for the Lehman debt, but Mr. Crane estimates the figure at a combined $1 billion."

"What's safe? Anything insured" says USA Today. It says, "Faith in money funds was severely shaken on Sept. 16 when the Reserve Primary fund fell below $1 a share. The news sparked a run on money funds, mostly by institutional investors. In response, the Treasury Department announced a plan to temporarily guarantee money funds.... The guarantee is limited to assets in money funds as of Sept. 19, and will only remain in effect for three months. Participation by money funds is voluntary, and they must pay a fee. So far, eight [now 9] of the 11 largest money fund managers have signed up, says Peter Crane of Crane Data." The article continues, "And what about money invested after Sept. 19? While those funds won't be covered by the guarantee, the program has made money funds safer for new investors, too, Crane says. That's because the guarantee stopped investors from pulling their savings out of money funds, which was the biggest threat to their survival, Crane says. Finally, it says, "The Reserve fund blowup also caused money funds to 'get religion' and invest their assets more conservatively, Crane says."

Reserve Posted a Notice on Fund Distributions from its Government and Primary Funds Thursday. The company says, "We will be distributing $20 billion out of the Primary Fund on or about October 13, 2008. That distribution is about 32% of the assets as of the opening of business on September 15, 2008." The notice asks, "Will investors who redeemed after the Fund 'broke the buck' be treated differently than those whose redemption orders were received before the fund 'broke the buck?' We can't answer this yet. We are working with the SEC to develop a plan of liquidation that will be fair to all shareholders. As soon as it available we will post it on `our website." The Reserve has also begun posting daily holdings of the funds on its website. Other news stories of note: Bloomberg's "Reserve Management Will Liquidate Its Government Fund"," "Commonfund Restricts Withdrawals From a Second Fund," and "Reserve Primary Sued by Univision Over Lehman 'Tip'."

One of the oldest bank STIF funds, or Short-Term Investment Funds (not a "money market fund"), The Common Fund, has closed and is liquidating. See link: STF Fund Closes: Update on Common Fund.) Their website says, "Commonfund and investors in the Short Term Fund received notice on Monday, September 29th from Wachovia Bank, in its capacity as Trustee of the Short Term Fund, of its decision to initiate the termination of the Short Term Fund, to stop accepting deposits, to establish procedures for an orderly liquidation and distribution of the fund's assets and to resign as Trustee of the Short Term Fund." It is described, "The Short Term Fund has existed as a liquidity vehicle offered solely by Commonfund to colleges, universities and private secondary schools since 1974. As of the close of business on Friday, September 26th, the STF managed assets of approximately $9.3 billion on behalf of about 1000 clients. The fund is structured as a bank common trust with Wachovia Bank." A transcript of a recent conference call discussing the closing says, "Recall that unlike 2a-7 money market funds, the STF is a mark to market fund and thus susceptible to the impact of price volatility." The Fund will hold another call Thursday, Oct. 2 at 1pm. Click here (go to bottom) for details. See also: "Moody's Investors Service today downgraded the rating of SFT Collective Investment Fund from Aaa/MR1+ to Ba/MR1+; and rating is also being withdrawn, "Reserve Fund Losses to Be Spread Among More Investors," "Money Funds Seek Insurance," and Kiplinger.com's "Is Your Money-Market Fund Still Safe?".

The following is a list of statements from fund companies regarding their participation in, or consideration of, Treasury's Money Market Fund Guaranty Program. A number of new funds have announced participation today, including Allegiant, Columbia, Putnam, Russell (statement not available on website yet) and Schwab. Statements from companies include: Allegiant, Alpine, BlackRock, Columbia, First American, Invesco AIM, Legg Mason (Western Asset), Putnam, Schwab, TCW, Vanguard (considering), and Virtus (formerly Phoenix Insight). Russell said in its communication, "The Board of Trustees of Russell Investment Company has approved plans and an application has been submitted to participate in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds. The Russell Money Market Fund, a SEC registered 2a-7 money market fund, continues to trade at $1.00 per share. Russell's participation in the Guarantee Program is intended to provide investors in the fund on September 19, 2008, with an additional level of protection."

"Wachovia to Purchase Lehman Holdings from Evergreen Money Market Funds" says a press release. "Evergreen Investments today announced plans by the firm's parent company, Wachovia Corporation, to purchase the Lehman debt held in Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, and Evergreen Prime Cash Management Fund.... Earlier this month, Wachovia announced that it had entered into support agreements" with the funds. The release adds, "Wachovia has now decided to purchase the Lehman debt holdings out of the Funds.... In addition, Evergreen confirmed that it had submitted the necessary documentation and paid the required fee to participate in the Money Market Guarantee Program established by the U.S. Treasury Department. According to information published by the Treasury, the program will guarantee the share price of any publicly offered eligible money market mutual fund that applies for and pays a fee to participate in the program." In other news, see WSJ's "Short-Term Markets Remain on Tenterhooks" and "Reserve Fund Will Return $20 Billion to Investors".