Daily Links Archives: February, 2008

BankRate.com's Laura Bruce writes on money fund bailouts, SIVs and money market mutual funds. She quotes us advising against the move to Treasuries, "Peter Crane, publisher of Money Fund Intelligence and Crane Data, doesn't make light of the situation but says individual investors who have no evidence something may be amiss in their money market fund should stay put". In other news, see Bloomberg's "Auction-Rate Bond Mess Is Fault of Issuers, Dealers: Joe Mysak", and Janus' SEC Filing revising "impairment charge" for SIV Stanfield Victoria Funding LLC.

The article says, "[A]n increasing number of municipalities are being hit with sharply higher interest on their variable-rate demand notes because dealers of the debt are having trouble selling it." It adds, "With limited room on their balance sheets to hold the ballooning inventory of variable-rate demand notes, firms such as Bear Stearns Cos., Lehman Brothers Holdings Inc. and Morgan Stanley have bounced bonds back to 'backstop' banks or notified them that they may do so in coming days and weeks if their sales efforts continue to founder."

Also today, see MarketWatch's "The 15-minute tip: A money market tour".

Finally, note Bloomberg's "Moody's May Cut $27 Billion of Sigma Finance Debt" and Reuters' "Moody's says may cut Gordian Knot's Sigma".

The Reuters article says S&P will soon start assigning AAA ratings to Berkshire Hathaway Assurance Corp.. The piece says, "One of the new businesses Berkshire Hathaway is winning is from tender option bond trusts, some of which are eager to replace troubled insurers, Jeffrey Previdi, a Standard & Poor's analyst, told Reuters. TOBs earn returns by "selling lower-yielding floating-rate paper to money market funds and investing the proceeds in higher-yielding long-term munis, which are often insured." It adds, "Money market funds fear that these tender option bonds will not be eligible for their portfolios if bond insurers are downgraded, so trusts are looking for solutions, including solid insurers."

The Financial Times article says, "StanChart executives yesterday offered renewed apologies for their failure to rescue Whistlejacket, which collapsed into receivership this month and is now in the process of being wound up." It quotes Peter Sands, Standard Chartered's chief executive, "The complexities of the post-receivership situation and the continuing movements in asset classes made it very difficult to work out how to get to a solution.... We are acutely aware that some of our customers - like us - have taken some losses."

The Wall Street Journal writes, "The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis." It adds, "FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich have warned of a pickup in bank failures."

Kathleen Pender writes about municipal money market funds in todays San Francisco Chronicle. The article, however, appears late to the party since tax-exempt money fund yields have begun rebounding sharply (up 32 bps Friday) following the collapse in supply and yields, and as the threat of bond insurer downgrades to muni money funds recedes. The piece quotes Oppenheimer tax-free money fund manager Cameron Ullyatt, "Money market funds are supposed to be very conservative.... We are selling that paper right and left."

Today's Wall Street Journal discusses outflows from stock and bond mutual funds year-to-date in 2008. But the accompanying table shows that bad news is good news for cash, which has seen huge inflows into money market mutual funds in the U.S., Canada and France. Fund flow tracker AMG Data Services estimates that U.S. money funds have saw inflows of $160.7 billion in January. Crane Data's upcoming March issue of Money Fund Intelligence will feature money market mutual funds in Canada. We also recently wrote about the problems in "dynamic" French money market funds, which saw substantial outflows in 2007.

"Sallie Mae Close To New Financing, But At A Price" writes Dow Jones via CNNMoney. The article writes about a big refinancing in the asset-backed commercial paper (ABCP) market, "Sallie Mae, which needs the financing for its student-lending business over the next year, will likely secure the deal at costly terms, said an asset-backed commercial paper investor.... This market, where a borrower such as Sallie Mae secures funding through an asset-backed commercial paper line with a pool of student loans it holds, has steadily shrunk in size since last fall as investors fearful of exposure to souring risky mortgages have scaled back." It continues, "I don't think money-market funds have been buying new Sallie Mae paper for some time now," said Peter Crane, president of Crane Data LLC in Westboro, Mass., a service that tracks money markets, which are heavy investors in commercial paper.

San Jose Mercury News writes "Feeling the squeeze of interest rate cuts on savings". The article, subtitled, "Fed's interest rate cuts are bad for investors looking for safe yields," warns, "But yields have sunk so low, so fast, that experts fear rate-sensitive investors will switch to much riskier instruments such as so-called 'high-yield' mutual funds that invest in junk bonds". It cites some decent yields from banks "staggered by the mortgage meltdown", institutions luring customers to bank online, and banks and credit unions trying to get new customers. But it warns, "We have to be fine-print savvy in everything we do in life," the article quotes Greg McBride of BankRate.com.

AFPonline.org features "ARS: Week After Failed Auctions, Liquidity Specialist Discusses Impact". The Association of Financial Professionals interviews Zachary Green, liquidity product specialist for Western Asset Management and Rob Amodeo, senior muni portfolio manager, about what they are hearing about auction rate securities (ARS). "Many of these clients have obviously been spooked by the recent wave of failed auctions and there is a flight to quality happening. They are focusing less on performance and yield and more on true safety and liquidity that they will find in the 2a-7 muni funds."

Bloomberg's "SocGen Reports Record Loss on Trading" cites French "money fund" outflows. The article says of Societe Generale's earnings, "Earnings from investment management fell by two-thirds to 50 million euros as the bank had to meet client withdrawals from some money market funds.... Frederic Oudea, the bank's chief financial officer, said on the conference call that some further writedowns in money market funds may be necessary in the first quarter if credit markets don't improve." France is where the money market crisis started, with AXA and BNP "LIBOR-plus" funds being incorrectly called "money markets", and where the term "money fund" doesn't carry the stringent quality, maturity and diversity guidelines like the U.S.. SG says in its earnings release, "The liquidity crisis prevailing since the summer 2007 has led to a substantial outflow from dynamic money market funds in France, a segment in which SGAM had a significant market share. SGAM decided to ensure the liquidity of some of its funds ... and therefore felt the effects of this crisis".

First American Funds files to allow First American Tax-Free Obligations Fund to invest up to 20% in taxable money market securities, says Strategic Insight's SimFund Filing. A handful of tax-free money funds have recently altered investment guidlines in order to purchase small positions in taxable securities, if necessary, due to the lack of suitable supply in the municipal market. "Due to current market conditions, however, the fund now expects to invest in such taxable securities from time to time, in an amount not to exceed 20%," says the prospectus supplement. (See also Crane Data News 2/13/08 "Threat to Tax--Exempt Money Funds Over, Poor Yields Now Main Concern".)

Iceland's 120-year-old, Landisbanki, has launched a new Canadian operation, Landsbanki Canada, and website, www.landsbanki.ca. "Landsbanki is an internationally rated (Moody's Aa3 and Fitch A) full-service bank that offers various treasury products, including 30-day to five-year term deposits, denominated in both Canadian and US dollars, says the site. National Director of Treasury Products Tom Burrow tells us that the bank is seeking Canadian dollar money fund managers.

Denver Post's "Out of the frying pan to little gain" says, "Investors, many fleeing the stock market, have poured $215 billion into money market funds so far this year. That's grown the base of assets in these funds to a record $3.36 trillion. Unfortunately, all that cash is producing less income as the Federal Reserve has been cutting short-term interest rates, says Peter Crane, who runs Crane Data, a tracker of money funds. The average yield is 3.64 percent, down from September's 5.06 percent." Also, see Jane Kim of The Wall Street Journal's "Good Deals for Income Investors".

ASF offers Securitization Institute. We received the brochure today for this 13-week course in asset-backed securities. "The American Securitization Forum is pleased to offer the ASF Securitization Institute, an industry-developed education and training curriculum covering core securitization market topics and concepts for securitization industry professionals," says the website. Classes are Monday nights in New York City, Feb. 25 through May 19, 2008. The April 7 session is "ABCP -- Concepts and Topics".

WSJ writes "Standard Chartered Offers Two Plans to Bail Out SIV". "Standard Chartered PLC said it submitted two proposals to rescue its $7.15 billion Whistlejacket structured investment vehicle from receivership, in an effort to protect the interests of clients who invested in the vehicle's debt," says the Journal. It adds, "Meanwhile, HSBC Holdings PLC on Thursday said investors in its $26 billion Cullinan SIV agreed to a restructuring plan that could serve as a framework for managers of other troubled SIVs."

"CacheMatrix Adds Customizable Compliance" says company press release. The company, which builds online money market trading portals and systems, says its new checks and features module includes: maximum dollar amounts per fund, maximum percentages of funds owned, trade blocking, and audit trails. "One reason so many banks and financial institutions have turned to CacheMatrix is to help their corporate customers streamline the regulatory and reporting requirements of Sarbanes Oxley," said Jim Etten of CacheMatrix. "Having this module in place will strengthen a corporation's compliance with SOX by providing an automated way to track and audit compliance to their investment policy."

Calamos asks "Are All Money Market Funds Created Equal?". Yesterday, Calamos Investments hosted a webinar discussing why money funds aren't created equal, how funds differ, and how ratings matter. The call discussed the Calamos Government MMF and featured portfolio manager and money fund veteran Frank Rachwalski, research analyst Chris Proctor, and director of cash management Doug Gasher. "Due to their credit strength, U.S. government securities receive preferential treatment for investment purposes for many entities, including banks, insurance companies, and state and local government entities," says Calamos.

SmartMoney writes "Bond Insurer Downgrades Carry Far-Flung Ramifications". It quotes our Peter Crane, "The likelihood is very thin that there will be any credit or liquidity issues [because of the insurer downgrades], but it certainly is a headache for fund managers." The article adds, "Money-market-fund investors are unlikely to get hurt -- the funds aren't in danger of 'breaking the buck,' according to Crane -- but the same cannot be said for the bond issuers themselves." It adds, "The states and municipalities are going to bear the brunt of this problem," Crane says. See also, Board IQ writes "Latest Subprime Twist for Funds: Downgrades of Bond Insurers".

"Student-Loan Issues Under Stress" says Wall Street Journal. This piece erroneously implies that money market funds are associated with auction-rate securities, saying, "Wall Street's financial-engineering machine bundles together long-term student loans and uses them as collateral for short-term investments owned by money-market investors." Money market funds cannot invest in ARS, which have seen a number of failed auctions recently, because of their lack of a hard "put". (ARS are short-term investments, not "money market" securities.) See also WSJ's "Standard Chartered's SIV Plan Collapses".

Bond Buyer writes "TOBs Under Scrutiny". The daily muni market paper says "Eleven of the market's largest tender option bond programs have approached Moody's Investors Service with plans to update the documents defining their programs so underlying ratings of insured bonds are taken into account." Firms in the process of removing their program's reliance on insurers MBIA, Ambac, etc., include BoA, Bear Stearns, BB&T, Eclipse Funding, Citi, JPMorgan, LaSalle, Lehman, Merrill, Morgan Stanley, and State Street Global Markets states The Bond Buyer.

BusinessWeek writes "'They Forgot What a Money Fund Was'". The article interviews Bruce Bent, who "created the first money market fund in 1970." It says, "[T]he prevailing attitude was that any idiot could master cash management. But that was before some of the ultraconservative funds were caught with their hands in higher-yielding short-term securities that wound up part of the subprime mess." Bent also discusses municipal insurer exposure in Reserve's tax-exempt money funds, what to look for in a money fund, and "enhanced" Reserve Yield Plus fund.

"Evergreen Investments' Mathew Kiselak Named Top Money Fund Manager" says press release. PRNewswire says, "[P]ortfolio manager Mathew Kiselak has been recognized as a 2007 Money Fund Report(TM) Top Manager Award Winner by iMoneyNet". Evergreen Inst Muni MF I (EMMXX) was the top grossing tax-exempt fund over $1 billion. Dennis Ferro, CEO of Evergreen Investments says, "The commitment to excellence demonstrated by Matt and his group -- including portfolio manager Jim Randazzo and his team of credit analysts led by Ken Anderson -- exemplifies Evergreen's vision to be a leader in the investment management industry."

CCH Wall Street writes "SEC Probes Money Market Funds". The article discusses the SEC's recent focus on money funds and SIV valuations and other issues. "The SEC wants to make sure that firms offering money market funds are prepared for future problems. Specifically, the Commission wants to look at the issue of valuation, said Barry Barbash [of] Willkie Farr & Gallagher and the former head of the SEC's investment management division."

"Corporate Auditors Focusing on Cash and Securities" says New York Times. The article discusses the recent "$275 million impairment charge taken last week by Bristol-Myers Squibb" over auction-rate securities. It says that Samuel DiPiazza Jr. of PricewaterhouseCoopers spoke recently about the "challenge facing auditors in determining the market value of financial assets for which there is no real market". He "even raised the possibility of an auditor challenging the value of a money market fund held by one of its corporate clients, saying that a statement sent out by a fund sponsor might not be enough to prove an investment was worth the stated amount. Instead, the auditor might need to look at the securities held by the fund, and judge their market value," says the Times.

Georgetown's The Hoya says "University Fails to Sell Bonds". The article identifies a couple recent issuers and dealers which experienced failed auctions on their auction-rate security (ARS) issuance. "Georgetown relied on the financial firm Lehman Brothers" to manage its debt. The failure was $100 million, but Georgetown has issued $550 million in the "variable rate auction market". "Reuters reported that Clark County, Nev., another Lehman Brothers client, also failed to auction off its bonds," said the piece. CNBC also recently discussed the ARS issue.

"Merrill Lynch Select Institutional Fund Rated AAAm" says S&P. The new Merrill Lynch Select Institutional Fund, which launched today (yielding 4.17% 1-day), is managed by BlackRock and requires a minimum of $10 million. S&P also recently downgraded volatility ratings on a number of offshore LIBOR-plus and enhanced cash funds, including: Barclays Global Investors US Dollar Enhanced LIBOR Bond Fund, Butterfield Liquid Reserve Fund Ltd., DWS ABS Fund, Lehman Brothers ABS Enhanced LIBOR Fund, and Morgan Stanley Funds PLC U.S. Dollar Enhanced Yield Fund.

"Money market investments likely are safe despite economic turmoil" in South Florida Sun-Sentinel. The article quotes our Peter Crane, "It's a big problem for advisers but the risks remain minimal for individual investors. It adds, "Crane says 10 major fund advisers have said they'll step in" to support their funds. The piece discusses basics on money funds and options for retail investors.

Auction-Rate Securities Troubles Good News for Money Funds. Bloomberg writes "Bristol-Myers, Ciena Losses Show Subprime Infection". Bristol-Myers Squibb becomes the latest victim of failed auctions in the $360 billion auction-rate securities market with a $275 million "impairment" charge related to "the company's investment in certain auction rate securities" said the company. (Crane Data and Decision Analytics have estimated that 60 auctions, worth $6 billion, have failed to date.)