Daily Links Archives: December, 2008

Reserve Primary Fund "breaking the buck" was one of the top stories of 2008 says the AP. The Associated Press released its "Top business stories of 2008", which includes "10. Money Market Fund Reserve Primary Breaks the Buck." AP writes, "After Lehman filed for bankruptcy, the money market Reserve Primary Fund, which had invested heavily in Lehman debt, 'broke the buck,' with its assets falling to 97 cents for every dollar invested. It was the first time this happened in the money market industry in 14 years. Investors across the country -- who had seen money market funds as being safe as cash -- fled for the exits. Reserve alone saw $40 billion in redemption orders on Monday and Tuesday the week Lehman filed. As the year ended, Reserve was still liquidating its funds." Reserve is also mentioned in the LA Times' "2008 memories: Infamous moments from the meltdown", which says, "5. Most Ironic Press Release of the Year: The Reserve Fund, the nation's first money market mutual fund, positively gushed about itself in a July press release, insisting that its parent firm was 'the world's most experienced money fund manager'.... Less than two months later the fund became only the second in history to "break the buck.'" See also: "Reserve Yield Plus Fund Makes Initial Distribution of $800 Million" and "Reserve Arizona Municipal Money-Market Fund Fully Liquidates".

The Greater Washington Association of Financial Professionals will feature a panel on "Money Market Fund Volatility in Today's Turbulent Environment" at its next monthly meeting on Wednesday, January 14, 2009 at Chevy Chase Bank in Bethesda, Maryland. The discussion, which will "review current market conditions and predictions of future markets," and allow attendees to "`learn how others are managing volatility in todays' markets will feature Marcus Brooks, Senior Managing Director, Promontory Interfinancial Network, Peter Crane, President & CEO, Crane Data LLC, and Nancy Edwards, CTP and Treasurer, Metropolitan Washington Airports Authority, and Tom Owston, Blackrock. Also, see a recent article by Paul Reisz of PIMCO entitled, "Turmoil in the Cash Markets: Did Enhanced Cash and Money Market Strategies Overdo Risk?".

Bloomberg writes "Cash at 18-Year High Makes Stocks a Buy at Leuthold", which says, "The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg." Money funds now total $3.8 trillion, according to the most recent ICI statistics, bank deposits total $4.1 trillion, according to the `most recently available Federal Reserve totals, and "cash" (currency and checking accounts) totals $1.2 trillion according to Fed statistics. Note that Crane Data's Peter Crane appeared on CNBC this morning to partially debunk the bullish "Wall of Cash" theory (see News).

"Tiny yields challenge money funds, investors" writes AP. The article says, "Three months after the government stepped in to prop up reeling money-market funds, the $3.8 trillion industry is largely healthy again, with money flowing back to the safe-harbor investments at a steady clip. But there's one problem: Yields for the safest category of money funds, those that invest in Treasury bills, have sunk to near zero." AP quotes Peter Crane of Crane Data, publisher of the newsletter Money Fund Intelligence, "If Treasury funds yielding zero is your biggest problem in these markets, congratulations." It adds, "Crane, of Crane Data, said even if some of those funds aren't able to maintain yields big enough to offset expenses, they'll have enough financial cushion to ride things out until yields rebound." Crane says, "This is a gradual problem that fund companies will have plenty of time to deal with.... You might see a new account fee, or higher wire transfer fees," comparing the "`situation to banks that begin offering free checking accounts but raise fees for other services such as covering bounced checks." See also, Fund Action's "Assets Likely To Rise Despite Challenges", which says, "Money market fund assets are likely to increase during 2009 in spite of unprecedented low interest rates, possible sweeping regulatory changes and increased costs from maintenance of government insurance. These challenges may also drive some players out of the business. Peter Crane, ceo of Crane Data, believes that investor flight to safety will ease in 2009, but so long as the overall economy remains uncertain, institutions will want to increase their cash holdings. 'Cash is the only true safe harbor, and money funds remain the best way to access that,' he said, particularly for large institutions."

The Reserve announced on its website that the SEC will bring enforcement action against Reserve Management and the Bents. In a release posted last night entitled, "`Important Notice Regarding Reserve Management Company, Inc.," Reserve says, "Reserve Management Company, Inc. serves as the investment adviser to each of the Reserve funds that are registered with the Securities and Exchange Commission under the Investment Company Act of 1940. On December 18, 2008, the staff of the SEC's Division of Enforcement informed counsel to RMCI of the SEC staff's intention to recommend that the SEC bring an enforcement action against RMCI alleging violations of certain provisions of the federal securities laws. The staff also gave notice of its intention to recommend enforcement actions against Bruce Bent, President of RMCI and President and Chairman of the Board of each Fund, against Bruce Bent II, Senior Vice President of RMCI and Co-Chief Executive Officer of each Fund and against Arthur Bent III, Chief Operating Officer and Treasurer of RMCI and Co-Chief Executive Officer of each Fund. RMCI, Mr. Bruce Bent, Mr. Bruce Bent II and Mr. Arthur Bent III expect to defend vigorously against the allegations. Each Fund, through the independent members of its Board of Trustees, intends to cooperate fully with the SEC staff regarding this matter." See also Bloomberg's coverage in "Reserve Says SEC May Allege Securities Violations". Finally, note the apparent reincarnation of Reserve's FDIC insured bank sweep division as the new company Intrasweep.

American Beacon Redeeming in Cash, Not Renewing Insurance. The company's American Beacon Select Money Market Fund filed a prospectus supplemnt saying, "Effective December 12, 2008, the Money Market Select Fund is no longer requiring that redemption requests be satisfied by delivery of cash and in-kind securities." The filing also says, "The Money Market Select Fund and the U.S. Government Money Market Select Fund participated in the U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds, the initial application of which ran through December 18, 2008. On November 24, 2008, the Treasury announced an extension of the Program. The Funds are not participating in the extension period." They explain, "Management believes that the Funds and their shareholders would not benefit from continued participation in the Program, in light of the additional expense that the Funds would bear to participate and the fact that the Program's protection applies only to shareholder accounts of record as of the close of business on September 19, 2008. Accordingly, the Funds have not filed the requisite notice with the Treasury to continue their participation in the Program." Also, see Bloomberg's "Goldman Sachs Bonds Lure Federated as Yields Wither", which says, "Money market funds run by Fidelity Investments and Federated Investors Inc. are looking to buy a new type of bank bond to bolster returns eroded by record-low Treasury yields."

"Treasury money market funds: Doomed?" asks Fortune. "When the Federal Reserve lowered its interest rate yet again last week, the future grew a little bleaker for Treasury-only money market funds, which account for one-fifth of the $3.7 trillion invested in money market funds," says the article. "But most funds have a long way to go before they're forced to shut down altogether, according to Peter Crane, the head of money market research firm Crane Data." It quotes Crane, "The idea of money funds going out of business is incorrect.... Even the Treasury-only funds have fees that they can waive." Fortune adds that "Crane predicts that some funds may consider paying negative yields until the tide turns 'like a checking account with a monthly fee'." See also: "Fed's Rate Cutting Puts Shine on CDs" writes The Wall Street Journal, saying, "With the Federal Reserve's rate cutting driving money-fund yields to razor-thin levels, certificates of deposit are looking like a more attractive place for many investors to stash cash." But the Journal adds, "To investors who want ready access to their cash, attractive CD yields may not matter much."

"Money market funds reel as yields near zero" writes the Financial Times. The article says, "Money market funds, an increasingly popular place to park cash, will need to raise fees or close to new money to remain profitable as yields hover at near-zero, according to industry managers. The funds, which manage $3,800bn and have seen big cash inflows, are reeling from frozen credit markets, subprime exposure and a crisis of confidence triggered by one fund 'breaking the buck', or returning investors less than they paid in."

Bloomberg reports "Reserve Fund Must Unseal Call-Transcript Evidence", saying, "Reserve Primary Fund, the money-market fund liquidating after losing value in the collapse of Lehman Brothers Holdings Inc., was ordered by a judge to unseal excerpts of sales-call transcripts in a fraud lawsuit. Ameriprise Financial Services Inc., which sued Reserve in September, may reveal the blacked-out portions of its complaint that were labeled confidential by Reserve, said U.S. Magistrate Judge Jeffrey Keyes in Minneapolis." Bloomberg quotes the judge, "Defendants improperly designated as 'confidential information' the excerpts of transcripts," The allegations "shall be unredacted," he said. "`Ameriprise argued the sealed evidence would prove Reserve ... tipped its biggest customers about the fund's risks related to Lehman -- a day before the investment bank filed the world's biggest bankruptcy. The money market fund wrote down $785 million in Lehman debt. Reserve argued the evidence should be sealed because it was flawed and difficult to interpret. It would confuse and mislead the public, it said."

S&P writes "Irish Regulator Supports Greater Harmonization Of Irish Money Market Funds Leading To Safer Framework", which says, "Europe lacks standard regulation specifically governing money market funds, comparable to Rule 2a-7 of the U. S. Securities and Exchange Commission. European money market funds therefore may differ across jurisdictions, exhibiting at times a much wider investment scope than their U.S. equivalents. Recently, however, the Irish Financial Services Regulatory Authority (IFSRA) issued a guidance note with the intention of achieving greater harmony across Dublin-domiciled offshore money market funds. Essentially, the IFSRA has set new requirements for money market funds' investment scope, ratings, and asset manager expertise, and has clarified permitted valuation techniques. The IFSRA took into account rating agencies' fund rating criteria to elaborate its guidance, amounting to an endorsement of those ratings and guidelines. Standard & Poor's Ratings Services sees the harmonization of Dublin-based money market funds as an important step toward ensuring the safety of these funds' invested principal and liquidity."

Credit Suisse has filed to liquidating its money market funds. The SEC filing (Supplement to the Prospectuses and Statement of Additional Information) for Credit Suisse Institional Money Market Fund, Inc. - Government and Prime Portfolio says, "The Board of Directors of the Credit Suisse Institutional Money Market Fund, Inc. has concluded that a complete liquidation of the Government Portfolio and Prime Portfolio is in the best interest of the Portfolio and their shareholders. The reason for this is that the Board was informed by Credit Suisse Asset Management, LLC, the Fund's adviser, that it intends to cease managing U.S. money market funds in the near future. Liquidation of the Portfolios does not require approval of the Portfolios' shareholders. The date of the liquidation has not yet been set but is expected to be in the first quarter of 2009. In light of the decision to liquidate the Portfolios, the Portfolios will be closed to new investors effective December 22, 2008. The closing of the Portfolios to new investors can be expected to result in large shareholder redemptions, which could adversely affect the Portfolios' expense ratios in the absence of the expense cap. Currently Credit Suisse is voluntarily waiving fees, but it can cease doing so at any time. We will keep you apprised of information relating to the planned liquidation of the Portfolios once the liquidation date has been determined. Shareholders should consult their tax advisers concerning their particular tax situations and the impact of redeeming Portfolio shares or receiving a liquidating distribution from the Portfolios." For background, see our "Link of the Day" from Dec. 29, 2007, "Wall Street Journal writes 'How Turmoil Melted a Money Fund'".

Fitch's London and Paris offices released, "Rated Money Market Funds Weather Wind Down of SIVs", which says, "Since the onset of the credit crisis in mid-2007, Fitch Ratings has closely monitored money market funds with exposure to asset-backed commercial paper (ABCP) and medium-term notes (MTNs) issued by structured investment vehicles (SIVs). The heightened monitoring was precipitated by the credit and liquidity pressures facing SIVs in general, and most recently, by the receivership of Sigma Finance Corporation (Sigma), which experienced an event of default under its Liquidity Facility on Oct. 2, 2008 and the appointment of receivers on Oct. 6, 2008."

The release continues, "Fitch's review of money market funds globally indicates that funds have successfully reduced their exposures to SIVs over the last year. Specifically, of 47 prime funds reviewed, average SIV exposure decreased to 1% of funds' portfolio balances as of November 2008 from 5% of funds' portfolio balances as of November 2007, including no exposure to ABCP or MTNs issued by Sigma. Furthermore, U.S.-domiciled money market funds have eliminated SIV exposure entirely. The support of institutional sponsors of money market funds has played an important role in reducing SIV exposure, as certain sponsors have provided funding access for funds or otherwise affected the outright purchase of ABCP and MTNs that were no longer eligible money market fund investments."

Finally, Fitch says, "From a credit quality perspective, all remaining SIV exposure underlying money market funds is rated 'A+' or higher, consistent with Fitch's rating criteria for 'AAA/V1+' rated money market funds. The degree of downside risk for remaining underlying SIV collateral is further mitigated by the active support of SIV's sponsoring institutions. For example, Citibank N.A. maintains a number of SIV programs of which Fitch rates the long-term senior notes 'A+', consistent with the long-term rating of Citibank N.A.... Fitch will continue to monitor remaining SIV exposure in money market funds and comment as warranted."

"Money-Market Yields Struggle to Stay Positive" writes SmartMoney, saying, "Money-market mutual funds are typically about as low risk as an investment can get. That's why many people use these funds, consisting primarily of U.S. Treasurys and other super-safe short-term debt, as a parking place for cash. But these aren't typical times. The benchmark federal-funds rate, the target the Fed sets on rates for overnight loans between member banks, is currently at 1%. Keep in mind that's a target. The effective rate, calculated daily, is now pushing 0%, the lowest it's been since the 1950s. Meanwhile, fearful investors hoping to preserve capital rather than grow it have been pouring into Treasury bills, pushing those yields into zero territory. The result? Since yields on taxable money funds are closely tied to the Fed's benchmark rate and many money funds hold Treasurys, yields on hundreds of money funds are dangerously close to going negative."

See the press release, "Legg Mason Reduces SIV Exposure," which discusses the 11th largest money fund manager's sale of SIV Axon Financial. The statement from the manager of the Western Asset and Citi money funds says, "Legg Mason today sold its total holdings in Axon Financial, reducing by $1.7 billion, or 43%, the exposure of the Company and its money market funds to securities issued by Structured Investment Vehicles and other similar conduits (SIVs).... Neither the funds nor their shareholders incurred a loss in this transaction." Mark R. Fetting commented, "This is a significant new step toward eliminating our total SIV exposure. With the sale of Axon, our single largest position, we are meaningfully reducing our downside risk in a persistently uncertain economic and market environment.... We continue to have the resources and the resolve to determine how we choose to eliminate our remaining SIV exposure, acting on behalf of our clients, our funds and our shareholders." In the conference call, Fetting says, "We are well over fifty cents on the dollar with this transaction." The release adds, "Overall, the total SIV exposure in the Company's money market funds has declined from approximately $10 billion in October 2007 to $1.4 billion currently." See also Maryland Daily Record's "Legg Mason cuts SIVs by $1.7B".

Investment News features "Analyst calls rate cuts a foe to money funds". The article says, "Money market mutual funds that invest in Treasuries could cost investors money if the Federal Reserve Bank cuts interest rates further, according to Peter Crane, president of the Westborough, Mass.-based research firm Crane Data LLC. Yields for Treasuries are already less than half a percent and 'if the Fed cuts rates again, you will see [more] firms' giving waivers on fees ... to avoid a negative yield,' he says quotes IN. It adds a quote from Crane, "Negative yield is not akin to 'breaking the buck.' It just means that you are charging more expenses than you are taking in. The investor is paying a fee that is larger than what you are earning. Most firms would waive the fees to avoid paying a negative yield." Also, see Reuters' "Historic low US T-bill rates hammer money funds" and WSJ's "Low Treasury Yields Buffet Money Funds."

"Money-Market Fund Yields May Fall to Less Than Zero, Crane Says" writes Bloomberg. (Note: You can hear Pete Crane discuss this topic on Bloomberg Radio at 2:50pm EST and on Bloomberg TV at 4:12pm EST.) "Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses," says the article by Christopher Condon. "Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts." It quotes Crane, "No one has ever paid above and beyond their interest income to be in a fund.... But if we see another cut, we'll likely see negative yields." Finally, the piece adds, "Money-market managers could impose a system of incremental debits or charge monthly account fees, Crane said."

"Point of no return: Interest on T-bills hits zero" writes AP, saying, "Investors are so nervous they're willing to accept the same return from government debt that they'd get from burying money in a coffee can -- zero. The Treasury Department said Tuesday it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that's happened since the government began issuing the notes in 2001. And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place." The article quotes Lou Crandall, chief economist at Wrightson ICAP, "No one wants to run the risk of any accidents." It also quotes Crane Data LLC's President Peter Crane, "There's a price for safety.... Down slightly is the new up." See also, Bloomberg's "Treasury Bills Trade at Negative Rates as Haven Demand Surges", which also mentions, "Money-market mutual funds that buy mostly Treasuries are starting to turn away new investors as the record low yields pull down returns for shareholders and squeeze managers' fees." Finally, see the U.S. Treasury's "Daily Treasury Bill Rates" page.

In an article yesterday entitled, "Bear market alters mutual fund landscape,"USA Today said, "The largest mutual fund is no longer the American Funds' Growth Fund of America. It's Fidelity Cash Reserves, a $130.7 billion money fund." It adds, "The largest fund company is no longer Fidelity Investments. It's the Vanguard Group. Only one stock fund remains among the five largest mutual funds." The article shows a Lipper table with the five largest mutual funds (assets in billions) -- three of which are money funds -- as: Fidelity Cash Reserves ($130.7), Am Funds Grwth Fund of Amer. ($127.8), Pimco Total Return $126.8, JPMorgan Prime MM $108.5, and Vanguard Prime MM $104.1 $101.2.

"A Money-Fund Manager's Fateful Shift" writes The Wall Street Journal. The article says, "Bruce R. Bent, co-founder of the first money-market fund, was long known in the financial community for espousing an ultra-conservative investment philosophy. So when his Reserve Primary Fund suffered losses with the collapse of Lehman Brothers Holdings Inc. 'breaking the buck,' in Wall Street parlance -- his investors were shocked." It calls Bent "a financier who pioneered a way for small savers to earn more, grew rich in the process, preached a principle of extremely cautious investing for decades, and then abandoned that principle -- in time to see the credit crisis decimate his empire." It adds, "For years, Mr. Bent railed against investing money funds' cash in anything riskier than Treasury bills and bank certificates of deposit. He singled out for scorn commercial paper, short-term corporate debt that's commonly unsecured."

Barron's writes "Money Funds Slowly Get Back on Their Feet", saying, "A money-market mutual fund is one of those things you don't really notice until they don't work. Everyone took notice in September, when many of these supposedly safe, low-yielding funds stopped functioning. But while economists, traders and pundits debate other aspects of the government's bailout package, the money-fund business seems to be responding well to multi-faceted treatment. The market has revived enough to hit a record $3.7 trillion in assets this year. The piece quotes Moody's Marty Duffy saying, "So far the government initiatives are achieving their objectives. Signs that conditions are improving include stable inflows into money funds, longers average maturities, a lower LIBOR, and a reopening of the commercial paper market. It also quotes Peter Crane, "Go down the list. Almost every major component of money funds is being backstopped -- repos, agency securities, asset-backed commercial paper, even certificates of deposit. It's not just belt and suspenders but also parachutes and safety net."

Bloomberg writes "Treasury Money Funds Shun New Investors to Protect Yields, Fees", saying, "Money-market mutual funds that buy mostly U.S. Treasuries are starting to turn away new investors as the lowest yields on government debt in 50 years pull down returns for shareholders and squeeze managers' fees. At least three Treasury money-market funds run by JPMorgan Chase & Co., Evergreen Investments and Allegiant Asset Management recently stopped taking outside cash, according to Web site notices and regulatory filings. The article also says, "Some money-market funds that invest in Treasuries may seek to increase their yields by delving into bank debt backed by the Federal Deposit Insurance Corporation, Crane said." It adds, Douglas Scheidt, an associate director in the SEC's investment-management division, "said in an interview that he has received calls from lawyers representing money-market funds asking whether the FDIC-backed debt would qualify as government securities. 'From what we can tell, the FDIC guarantee would be a government guarantee, so it would be a government security,' said Scheidt."

"SVB Securities Launches New Web Based Trading System for Money Funds Powered by Cachematrix" says a press release. Cachematrix, "the leading provider of institutional money market fund trading technology to financial institutions," said yesterday "that its technology is now powering SVB Securities' Global Investment Portal." Lauri Moss, Head of Global Deposit & Investment Products and President of SVB Securities says, "SVB's commitment to provide the industry's best money fund trading technology to our client base is enabled with the release of the SVB Securities Global Investment Portal. Cachematrix has helped us reach this important goal and simplify account management for our clients in addition to significantly streamlining our trading operations." In other news, see the press release, "IDC Deposits Announces Increase of FDIC Insured Capacity to $12.5 Million," which says, "Investors can now obtain full FDIC insurance on deposits of $12.5 million through IDC's Deposit Network which distributes the funds to multiple banks." Finally, see the latest batch of Reserve Fund press releases: "Reserve Primary Fund's Plan of Liquidation and Distribution of Assets," "Reserve Primary Fund Makes Second Distribution of $14.4 Billion to Primary Fund Shareholders," and "Q&A Regarding Reserve Primary's Second Distribution."

The Federal Reserve announced the extension of three liquidity facilities through April 30, 2009, saying, "In light of continuing strains in financial markets, the Federal Reserve on Tuesday announced the extension through April 30, 2009, of three liquidity facilities: the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF). These facilities had previously been authorized through January 30, 2009." The statement continues, "The extension through April 30 for these facilities is consistent with the term authorized for several other liquidity-related facilities: the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), and the temporary reciprocal currency arrangements (swap lines) with 14 other central banks. The PDCF provides discount window loans to primary dealers. The AMLF provides loans to depository institutions to purchase asset-backed commercial paper from money market mutual funds. Under the TSLF, the Federal Reserve Bank of New York auctions term loans of Treasury securities to primary dealers. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The MMIFF supports a private-sector initiative to provide liquidity to U.S. money market investors."

"Money Funds Re-Up Treasury Guarantee, Despite Cost" writes ignites.com. The article says, "With a deadline looming, a number of large fund firms have announced they will re-enroll in the Treasury's money market insurance program despite its costs for funds battling to control expenses amid the market downturn. The majority of shops that initially enrolled in the Treasury's $50 billion guarantee for money market funds are expected to stay with the program. Leaving the program would preclude these shops from rejoining in the future." It adds, "Invesco Aim, Legg Mason, Federated, Dreyfus and UBS are among the funds that have decided to continue with the Treasury program, according to spokespeople for the firms and SEC filings. T. Rowe Price, Fidelity, Vanguard, Hartford and Oppenheimer say they will soon announce whether they will stay in the program, but industry sources don't see them leaving." The piece quotes Peter Crane, "I doubt anyone will be bold or stupid enough to shed the protection at this point. If they do, they'll likely hear a giant sucking sound -- investors leaving."

Legg Mason Provides Money Market Fund Update, saying "Legg Mason, Inc. today announced additional support for four money market funds with exposure to securities issued by Structured Investment Vehicles and other similar conduits (SIVs). Legg Mason also announced that it had renewed for one year a total return swap with a major banking institution in support of $355 million of SIV securities. In addition, to provide flexibility during a time of prolonged market turmoil, Legg Mason has obtained amendments to its existing debt covenants," said the company in a press release. Mark R. Fetting, the company's CEO, commented, "Legg Mason continues to manage its resources and to take proactive steps in support of our money market funds during difficult market conditions. Today's actions give us financial and operating flexibility to handle potential further market deterioration. We are actively pursuing a number of options to eliminate exposure to SIVs in the money market funds." See also, WSJ's "Legg to Offer Aid to Funds With SIV Assets".