Daily Links Archives: November, 2008

"Emergency action resurrects sector" writes the Financial Times, saying, "Money funds might just be the true come-back kid of the current financial crisis. Hit by a near-fatal blow to their safe-as-cash reputation in September, US money market fund assets have now been resurrected to pre-crisis levels." It quotes our Peter Crane, "Money funds had a near-death experience.... [But] 'unprecedented levels of support' from the US Treasury, Federal Reserve, and the companies that sponsor the products, 'appear to have saved the industry and solved the problem'."

The U.S. Treasury has issued its first rejections of money funds applying to its Temporary Money Market Fund Guaranty Program. In its press release, "Reserve Announces Participation of Some Funds in the Treasury Guarantee Program", The Reserve reveals that the following funds have been rejected from the Treasury program: Primary Fund, U.S. Treasury Fund, Interstate Tax-Exempt Fund, California Municipal Money-Market Fund, Connecticut Municipal MMF, Florida Municipal MMF, Massachusetts Municipal MMF, Michigan Municipal MMF, New Jersey Municipal MMF, Ohio Municipal MMF, Pennsylvania Municipal MMF, Virginia Municipal MMF, New York Municipal MMF, Arizona Municipal MMF, Louisiana Municipal MMF, and Minnesota Municipal MMF. Reserve says, "Although the following funds also applied to participate in the Program, the Department of the Treasury has informed The Reserve that these funds did not meet the Program's eligibility requirements." The following funds have been accepted into the Treasury's Temporary Guarantee Program for Money Market Funds: `Primary II Fund, Reserve Liquid Performance Money Market Fund, U.S. Government Fund, U.S. Government II Fund Treasury & Repo Fund. This latest Reserve release adds, "Other than the U.S. Treasury Fund, the Board of each of the ineligible funds has voted to approve the fund's liquidation. The Reserve continues to work diligently to expeditiously sell the assets of these funds at or above amortized cost and make distributions to fund shareholders. Aside from Primary Fund, Reserve expects that all fund distributions will be made based on a net asset value of $1. Accordingly, Reserve believes that the ineligibility of these funds to participate in the Program will not be detrimental to shareholders. U.S. Treasury Fund will continue its operations. The Reserve believes that even absent participation in the Program, the U.S. Treasury Fund's investment strategy to invest exclusively in securities backed by the full faith and credit of the U.S. government limits the potential for the net asset value of the Fund to fall below $1.00."

"Investors wary of state pool" writes The Miami Herald on the Florida local government investment pool. It says, "A year after many local governments yanked their money out, Florida's local government investment pool has made improvements. But investors still fear they won't recoup their funds." The article quotes Peter Crane, president and CEO of Crane Data, a money market and mutual fund information company, "Holding back redemptions is the kiss of death for money market funds and investment pools.... Safety can be taken for granted. But liquidity is what you count on when you invest in these funds."

A "Notice Regarding Reserve Primary Fund's Net Asset Value" states that Reserve is modifying a previously posted NAV on its ill-fated Primary Fund. The company says, "The Fund is announcing today that, contrary to previous statements to the public and to investors, the Fund's net asset value per share was $0.99 from 11:00 a.m. Eastern time to 4:00 p.m. Eastern time on September 16, 2008 and not $1.00. This change resulted from an administrative error in computing the Fund's NAV on September 16, 2008, and is not the result of any change in value of any portfolio holding, including Lehman Brothers Holdings, Inc., subsequent to 11:00 a.m. ET on September 16." (Click here to monitor Reserve's latest updates.) See also IBD's "Reserve Still Has Hold On Muni Fund Assets", Bloomberg's "Reserve Primary Broke the Buck Earlier Than Announced", and the recently-released no-action letter, "Reserve New York Municipal Money-Market Fund listed on the SEC's "No-Action" Letter Page.

"Reserve Primary Fund Announces Second Distribution Time Frame". The company says, "Reserve Management Company Inc. is pleased to announce that the second cash distribution for the Reserve Primary Fund will take place on or about December 5, 2008. We anticipate distributing approximately $14 billion. If we are able to sell additional securities at amortized cost (without a loss) between now and the distribution date, those proceeds will be included in the distribution. On a positive note, over the past few weeks the market for certain Fund securities has improved, enabling the Fund to sell $5 billion in securities at a profit, rather than waiting for them to mature." For other Reserve releases, click here.

Pensions & Investments writes "Crisis aftershocks to hit cash management", which says, "Cash management -- long a sleepy money management backwater -- might undergo some of the most sweeping changes in the industry because of this year's unprecedented capital markets volatility. In a year where money managers have had to spend billions of dollars propping up 'safe, boring' money market and securities-lending collateral vehicles, there has been a 'fundamental change in how people think about cash,' said Barbara Novick, vice chairman, BlackRock Inc.." It adds, "Some observers downplay that prospect. There'll be some consolidation as part of broader trends in the financial services industry, but no big wave, said Peter G. Crane, the president and chief executive officer of Crane Data LLC, a Westboro, Mass.-based company that tracks the money market sector. With money fund assets at a record $3.7 trillion in November, any shakeout would be more on the order of one in 10 managers leaving the scene, not five in 10." Also, see the "Federal Reserve's "Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup". Finally, see Bloomberg's "Treasury Traders Paid to Borrow as Fed Examines Repos", which discusses the push to fix the "fails" in the Treasury repurchase agreement market.

On Thursday, Bloomberg wrote "Union Bank of California Sues CBS for Return of $72.3 Million", which says, "Union Bank of California sued the television network CBS Corp. for the return of $72.3 million withdrawn from Reserve Primary, the first money-market fund to drop below $1 a share in 14 years. The bank, based in San Francisco, claims it sent the money to CBS on Sept. 15, after the broadcaster requested a withdrawal from Reserve Primary. The fund confirmed the redemption request and didn't distribute the cash to Union Bank, according to the suit, filed on Sept. 29 in the U.S. District Court's Southern District of New York." This appears to be a case of a money fund "portal" paying out a distribution before it had received the redemption cash from an underlying money fund. We believe there are more cases of this and that many "portals" have since changed their policies to pay out only after funds have been received.

ICI's latest weekly "Money Market Mutual Fund Assets" report show that assets increased by $43.88 billion to a record $3.681 trillion the week ended Wednesday, Nov. 19. Money fund assets rose for the ninth consecutive week, following two weeks of declines due to Reserve Primary's "breaking the buck" and have increased by $225 billion since Sept. 24. Retail assets rose by $8.41 billion to $1.273 trillion, while Institutional assets rose by $35.47 billion to $2.408 billion. Prime Institutional assets increased by over 2% for the second consecutive week, gaining $24.5 billion to $1.098 trillion. In other news, see WSJ' "Treasury Will Help Liquidate Reserve Fund".

The Associate Press writes "SEC puts off vote on rules for rating agencies", saying, "The Securities and Exchange Commission on Wednesday delayed a plan to adopt new rules aimed at stemming conflicts of interest in Wall Street's credit rating industry." The SEC will next discuss the issue at a public meeting Dec. 3. Regarding money funds, AP says, "The SEC also proposed another set of rules that could reduce the influence of the credit rating industry by, among other things, making it possible for money-market funds to buy short-term debt without the current requirement that it be highly rated by the agencies. The SEC will consider all the proposals at next month's meeting, though the conflict-of-interest rules may be the only ones adopted." Another link to check today is the Federal Reserve's H.4.1 "Factors Affecting Reserve Balances" Series, which discloses weekly totals in the Fed's "Asset-backed commercial paper money market mutual fund liquidity facility" (currently $80.2 billion, down $11.5 billion from last week) and its "Net portfolio holdings of Commercial Paper Funding Facility LLC" (which total $249.9 billion). They will also post the MMIFF numbers once the program goes live next week.

"Fitch Publishes Presale on 5 Money Mkt Investor Funding Facility Related ABCP Programs," says a press release on MarketWatch via Businesswire. The release says, "Fitch Ratings has published a pre-sale report on 5 money market investor funding facility related (MMIFF) asset-backed commercial paper (ABCP) programs. As detailed in the report, Fitch expects to assign an 'F1' [First Tier] rating to each of five ABCP programs that have been created in conjunction with the MMIFF. This Federal Reserve Board initiative is designed to provide liquidity to U.S. money market investors by facilitating the sales of money market instruments in the secondary market. The five programs are structurally identical and differ only with respect to each one's unique list of approved obligors." ABCP will be issued by the following programs: Hadrian Funding, $220 billion; Trajan Funding, $150 billion; Aurelius Funding, $140 billion; Antoninus Funding, $70 billion; and Nerva Funding, $20 billion. The MMIFF program is expected to go live next week. Also, see Bloomberg's "ABCPMMMFLF Spells Fed Relief for JPMorgan, Citi Shadow Banking", which says, "The U.S. Federal Reserve's emergency lending programs, intended to thaw commercial paper and money markets, are also helping banks limit losses from some of their $4 trillion in off-the-books guarantees and loan commitments," and Bloomberg's "Citi Agrees to Acquire SIV Assets for $17.4 Billion". Finally, see Reserve Yield Plus Update and "Joseph T. Monagle, Jr. Hired to Advise on [Reserve] Money Fund Liquidation."

"Guarantee for money-market funds facing renewal question" writes New York Daily News. The article says, "After The Reserve Primary Fund broke the buck ... two months ago, investors began to question the safety of all money market funds. Many pulled their cash out. What got them to return is the U.S. Treasury's Temporary Guarantee Program for Money-Market Funds, which is set to expire next month." It quotes our Peter Crane, who expects the guarantees to be extended. "It's almost certain to be renewed. December is too soon.... The big question would be: Is anyone bold enough to step out of the program?" NY Daily News adds, "Crane even sees a possibility that the program will be expanded" and speculates that there's a good chance that the program may eventually become permanent. In other news, Bloomberg writes "AIG, GMAC Help Drive Up Bank Rates Amid 'Insanity' for Deposits", which quotes Pete Crane on some of the highest bank rates, "These banks have to offer a higher rate than anyone else to get over the stigma attached to their names."

Investment News writes "Panel to weigh changes to money funds draws critics", which discusses the ICI's recent announcement to establish a Money Market Working Group. The article says, "A panel that is charged with recommending changes to the ways money market mutual funds operate is being met with skepticism by money fund experts who worry that changes might be unnecessary". It quotes Peter Crane, president of Crane Data LLC, a Westborough, Mass.-based money fund research firm, "Money market mutual funds bring in more revenue per year than Hollywood does at the box office.... It's in the range of $13 billion or $14 billion. You don't want to kill the golden goose." IN quotes `Karen McMillan, general counsel for the ICI, "The working group is still very much in the preliminary stage.... No decisions have been made."

ICI's weekly "Money Market Mutual Fund Assets" series shows a gain of $21.28 billion to a record $3.637 trillion in the week ended Nov. 12. Retail market money funds decreased by $3.71 billion to $1.264 trillion while Institutional money funds increased by $24.98 billion to $2.373 trillion. Prime Institutional assets jumped by $21.04 billion to $1.074 trillion, their largest increase since July 9. Government Institutional funds (including Treasury funds), however, remain the largest fund category with $1.113 trillion in assets. In other news, see "Reserve U.S. Government Fund Makes Initial Distribution of $4.5 Billion to Shareholders", NY Times' "Money Fund Thaws a Bit to Return Some Cash", WSJ's "Banks Wage Rate War for Deposits", and Bloomberg's "Reserve Primary Leaves Investors at Odds Over Liquidation Plan".

Reuters writes "Aviva moves to calm money market fund investors". The article discusses the move by "offshore" money funds Aviva Investors Euro Liquidity Fund and the Aviva Investors Sterling Liquidity Fund to shift to a variable NAV from constant NAV. Reuters says, "Aviva Investors said on Wednesday the pricing of its Sterling and Euro liquidity funds will now be allowed to fluctuate according to mark-to-market valuations. Previously, both funds used a constant net asset value (CNAV) policy to keep NAV stable at 1 pound per share by distributing profits to investors or using dividend yield to boost NAV should it fall.... Richard Warne, Aviva Investors' head of institutional distribution, denied the move signalled the funds were poised to 'break the buck', or fall below the 1 pound NAV implied by CNAV." Some speculate the move was intended to avoid an immiment downgrade from Moody's based on the ratings agency's new parental support criteria (see Crane Data News from Wed.). See also `"Moody's changes ratings designation of Aviva GBP and Euro Funds "

"Money Funds Lag Despite U.S. Action" is another muckraker on money funds by The Wall Street Journal. It says [incorrectly], "Investors have been pulling assets from money funds since September, when a big offering called the Reserve Primary fund slumped because of its stake in commercial paper tied to dissolving Lehman Brothers Holdings." [Note: Money funds have seen assets break over $3.6 trillion recently, a new record level.] Also, WSJ writes "Spike in Failed Repos Strains Market" and Bloomberg writes "Fed Says Overnight Securities Excluded From Backstop". In rating news, see "Moody's assigns Aaa/MR1+ money market fund ratings to Sterling Gilt Liquidity Fund", "Moody's changes ratings designation of Aviva GBP and Euro Funds", and "Nedgroup Investments Funds PLC Assigned 'AAAf/S1+' Fund Credit Quality And Volatility Ratings".

New York Fed Releases Additional MMIFF Details. The website says, "The Federal Reserve Bank of New York on Monday announced it would begin funding purchases of eligible money market instruments on or about November 24, 2008 through the previously announced Money Market Investor Funding Facility (MMIFF). Additionally, the frequently asked questions and terms and conditions documents have been revised to provide further details, including enrollment information for eligible investors. The Federal Reserve Board authorized the MMIFF on October 21, 2008 to support a private-sector initiative designed to provide liquidity to U.S. money market investors. The MMIFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit." Click here for MMIFF Terms and Conditions and here for MMIFF FAQs. Also, see WSJ's "Fed Delays Its Big Plan to Shore Up Money Funds". In other news, see USA Today's "Reserve fund's woes undercut mantra of safety, liquidity" and "Primary Fund shareholders put in a bind", as well as Reuters "Money fund groups calls for global liquidity fix".

Dallas Morning News writes "Weighing risk and return: For some, savings accounts, CDs, money markets are the way to go". The article says, "Given the financial turmoil engulfing the world, it's tempting to stash your cash only in super-safe places, like Joanne and Bill did, and not subject your hard-earned money to the vagaries of the stock market. If that's your objective, your alternatives include money market mutual funds, money market deposit accounts, certificates of deposits and savings accounts."

The Associated Press writes, "Not earning much on Treasury bills? Get used to it". The article quotes Wells Fargo portfolio manager Jay Mueller, "If you're a bank that needs to borrow reserves, great. If you're a lender, a saver, an investor in money market funds that tend to buy short-term debt, you're not getting paid much on your money.... People think of cutting interest rates as this wonderful thing that helps everybody. It's a misunderstanding -- it helps some people and hurts others." The piece adds, "To be sure, money has been flowing back into money funds for a few weeks now, a reversal that appears to be letting the funds take on more risk, said Peter Crane, president and publisher of Crane Data LLC. Still, he added, no one is letting go of government debt just yet." It quotes Crane, "Funds continue to buy Treasurys as well. They want to have that liquidity war chest, be stocked to the gills in case anything else occurs."

"Money market funds warm to commercial paper again" writes Reuters, which states, "Prime institutional money funds, the sector hardest hit by outflows following the Reserve Primary fund's 'breaking the buck' downturn, saw assets increased overnight by $5 billion on Tuesday and by $19 billion over the past week, according to data released on Wednesday by Crane Data, a money-market research firm in Westborough, Massachusetts." It quotes Peter Crane, "Prime money funds are the largest purchaser of commercial paper, so commercial paper demand depends heavily on these asset flows.... Everybody is watching the flows. If money funds do not fear redemptions, they will return to commercial paper. Investors are gingerly returning back to money market funds, which allows them to expand their commercial paper holdings. If the Fed buys longer-term paper, then companies will be able to refinance and take back their short-term paper if need be." Also, Bloomberg writes "U.S. Commercial Paper Borrowing at Fed Slows as Rates Plunge".

"Your money market mutual fund is safe, for now" says USA Today. The Q&A says, "Money market funds are usually safe. And that's never been more true. I'll explain why in a bit." In other news, more on Reserve's travails in the Chicago Tribune's "Fund losses fuel customers' anger", which discuss the "angry TD Ameritrade customers whose almost $1 billion in assets are frozen in a short-term bond fund called Reserve Yield Plus." Finally, see the South Florida Sun-Sentinel's "Fear in money market sector easing after intervention". It quotes Peter Crane, "It looks as if it's still a delicate situation, but the money markets in general have been recuperating."

American Beacon Advisors, Inc. announced that the following American Beacon Funds have been accepted to participate in the U.S. Treasury Temporary Guarantee Program for 2a-7 money market funds: American Beacon Money Market Select Fund (ASRXX), American Beacon Money Market Fund Institutional Class (AADXX), American Beacon MMF PlanAhead Class (APAXX), American Beacon MMF Cash Management Class (AAEXX), American Beacon MMF BBH ComSet Class (ABHXX), American Beacon Money Market Mileage Fund (AVMXX), American Beacon U.S. Government Money Market Select Fund (AAOXX), American Beacon U.S. Government MMF PlanAhead Class (AUPXX), American Beacon U.S. Government MMF Cash Management Class (AAUXX). The press release says, "The Funds' portfolio holdings are S&P rated A-1+, P-1 for credit quality and do not include holdings in Lehman Brothers Holdings, Inc., American International Group, Inc. (AIG), Washington Mutual, Inc., Wachovia Corporation, or any of these entities' subsidiaries. Each Money Market Fund's net asset value as calculated on September 19, 2008 was $1.00 per share. The U.S. Treasury Temporary Guarantee Program provides a guarantee to participating money market mutual fund shareholders based on the number of shares invested in the Fund at the close of business on September 19, 2008. Any increase in the number of shares a shareholder holds after the close of business on September 19, 2008 will not be guaranteed.... If the number of shares a shareholder holds fluctuates over the period, the shareholder will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less. The Program expires on December 18, 2008, unless extended by the United States Treasury."