Daily Links Archives: March, 2008

Legg Mason issued an update regarding support actions taken to protect its money market mutual funds in a press release. The release says, "Legg Mason, Inc. announced that the Company has entered into capital support agreements (CSAs) to provide support to a money market fund managed by a subsidiary of the Company. Neither the fund, nor its shareholders incurred a loss in this transaction. Legg Mason also provided today an update regarding the anticipated earnings impact of these actions for the quarter ended March 31, 2008 as well as an update to accruals related to previously announced money market fund support." President & CEO Mark Fetting,said, "Legg Mason is putting the CSAs in place to provide support at a time when certain segments of the marketplace continue to experience asset price fluctuations. We are confident in the overall soundness of the Company's money market funds and remain committed to providing our fund shareholders with principal stability, credit quality, and current income, although no guarantees can be given."

Crain Communications weekly Financial Week writes "T-fund trouble", which discusses fee waivers and near-zero yields on Treasury money market funds. "The rush to Treasuries has caused enormous pressure on yields, said Peter G. Crane, founder of Crane Data." FW quotes Crane, "I think the knee-jerk reaction is, 'Get me into Treasuries'.... And then people are looking at the actual yields, and they must be wincing."

The article says, "As of the end of February, Treasury institutional money market fund assets stood at $248 billion, a 243% increase over the previous year, according to Crane Data. Over the same period, prime institutional money fund assets grew just 42%, to $939 billion."

MutualFundWire.com reports that Vanguard has rotated some of its municipal money fund managers. Kathryn Allen, who manages the $8.4 billion Vanguard CA Tax Exempt MMF, the $5.2 billion Vanguard NY Tax Exempt MMF, and the $4.1 billion Vanguard PA Tax Exempt MMF, replaced Marlin Brown as manager of $3.4 billion Vanguard NJ Tax Exempt MMF. Pamela Tynan, who manages the $22 billion Vanguard Tax Exempt MMF, replaces Brown managing the $1.1 billion Vanguard OH Tax-Exempt MMF.

This morning, The Wall Street Journal writes "Hints of Improvement Are Seen In Short-Term Money Markets", saying, "Short-term funding markets have tentatively perked up Friday, with the Federal Reserve's first Treasury swap auction prompting small signs of improvement."

The Journal quotes Carl Lantz of Credit Suisse, "The take-away is, we can rule out the worst case scenario that there's real disaster in funding markets.... [B]ut we can't really say that we're out of the woods yet." It adds that `repo rates have rebounded and quarter-end pressures will soon abate.

The overblown attention on a mere $300 billion market continues with auction-rate security articles in The Wall Street Journal ("Auction Rates Clip Tech Firms' Profits"), Bloomberg ("Auction Failures Rise to 71% as Dallas-Area Airport Refinances"), and Reuters ("Citigroup sued over auction rate securities"). While lawsuits, paper losses and lamentations continue, the debt itself appears to be quietly being refinanced. We'll guess that resolution will come faster than expected, that the lawsuits will go nowhere and that investors will gain access to funds shortly.

Crane Data Founder & CEO Peter Crane is scheduled to appear this weekend on the PBS TV show WealthTrack. Host Consuelo Mack will discuss "How can individuals hedge their nest eggs against volatile market swings?" with Crane and fellow guests Mark Cortazzo of Macro Consulting Group and James Lebenthal of Lebenthal & Company. (See schedule for local listings of PBS station times.) Crane will discuss the threat to money market funds, auction-rate securities, and municipal money fund investing.

The Wall Street Journal's weekly asset and yield update says, "Investors to money-market funds contributed $54 billion in the week ended Tuesday, bringing total net assets to $3.460 trillion, according to the Money Fund Report, published by iMoneyNet Inc." See also Reuters' story.

Crane Data's separate (and less comprehensive) daily series shows assets increasing by $69 billion in the week, with yields declining by 37 bps for our Crane 100 and declining by 46 bps for our broader Crane Money Fund Average. We expect this afternoon's ICI numbers to verify that we're seeing one of the largest weekly increases ever for money funds.

Yesterday's Wall Street Journal discussed Smith Barney's plans to introduce a new tiering system for its "bankerage", brokerage sweep program which should decrease the rates earned by investors with $1 million to $10 million. The Journal says, "Under the program, besides tiers at $10 million in assets and $1 million, other tiers are $500,000 to less than $1 million; $250,000 to under $500,000; $50,000 to less than $250,000; and those with less than $50,000 in assets. Under the old system, all clients with less than $250,000 in assets were bundled together in the lowest tier." For more information on rates and tiers offered by brokerages, see Crane Data's Brokerage Sweep Intelligence. E-mail Pete to request a copy.

Like many in 2003-2004, the Financial Times confuses the remote possibility of a money fund "breaking the buck" with the potential for negative yields due to sub-one percent yields in Treasury money market funds in its article, "Money market funds face new pressure". The FT evidently doesn't realize that money market prices (like bond prices) go up when yields go down. The piece says, "With short-dated Treasury yields falling to less than 1 per cent, there is increasingly little room for managers to manoeuvre. Further pressure on the razor-thin margin of yield means funds would come perilously close to offering no return at all, or even allowing investors' money to fall below its value." However, to correct FT, fund yields and NAVs are separate issues. There is a theoretical chance of a negative yield, where a fund would charge investors instead of paying. But we're still nowhere near the lows of 2003-4 (when no fund yields went negative), and the NAV would still be $1.00. So no funds would "break the buck".

Fortune via CNNMoney.com writes, "Keeping money in 'cash' generally means putting it where it is guaranteed not to lose value and can be accessed quickly, with no fees or taxes. As some investors have learned the hard way, not all investments touted as 'cash-like' meet those requirements." It adds, "There are still safe options, but remember that safety means lower yields."

S&P says "Rated Funds May Maintain Overnight Repurchase Agreements With The Bear Stearns Cos.". We reported this earlier, but an official release has now been posted. It says, "Standard & Poor's Ratings Services today affirmed its view that overnight repo investments with The Bear Stearns Cos. Inc. (BBB/Watch Dev/A-3) are consistent with our rated fund criteria that look to the creditworthiness of the repo counterparty. The criteria for highly rated funds calls for repo providers to maintain short-term ratings of 'A-1+' or 'A-1' or equivalent credit quality. This is based on JPMorgan Chase & Co.'s (AA-/A-1+/Stable) plans to acquire Bear Stearns, and its guaranty agreement, which unconditionally guaranties the due and punctual payment of all covered liabilities of the covered Bear entities (as defined in the guaranty agreement)."

Kiplinger's writes "Are Money-Market Funds as Good as Cash?", which examines the types of money market investments, and the types of money funds in particular. It quotes us, "Peter Crane, who reads shareholder reports and prospectuses for a living, says trying to spot flaws in a money-fund portfolio is impossible. His analogy: You're flying in a 747 over the Atlantic when the ride gets unsteady. So you burst into the cockpit (try to forget 9/11) and study the instrumentation to see if the plane has a problem. Good luck."

Kiplinger's continues, "Yet Crane isn't totally blase. He figures that, in the past year, more than a dozen sponsors have had to inject their own capital into money-market funds to avoid writing down the value of the portfolios from $1 a share to 99 cents or less."

Crane Data welcomes new advertiser Oppenheimer Funds to http://www.cranedata.com, which runs the top 5-yielding Oppenheimer Inst MMF (IOEXX). Oppenheimer has launched a new institutional website area at www.oppcash.com.

In other (advertiser) news, online money market fund trading portal technology provider CacheMatrix announced that it broke $620 billion in trading volume in 2007 (see release). CEO George Hagerman says, "In total, four of the top 10 banks in the world, and six of the top 100 U.S. banks, use Cachematrix technology. Three of the world's top 10 investment banks also have incorporated our trading technology as well."

Bloomberg writes about continued woes among the ultra-short bond sector, particularly with Schwab YieldPlus Fund (SWYSX). The article says, "Schwab YieldPlus Fund tumbled 9.9 percent this month, the most among peers sold as alternatives to low-risk money-market accounts, as subprime-bond losses infected home loans to borrowers with better credit."

This Wall Street Journal article discusses the repurchase agreement market or the "$4.5 trillion securities repurchase, or 'repo' market". The Journal speculates, "As with other kinds of short-term financing recently, the money is drying up. Investors and financial institutions who lend in this market have become worried about losing money on securities used as collateral. Determined to protect themselves, they're pulling back from offering repo financing to each other." (See also today's News, which says S&P has affirmed that rolling Bear Stearns repo is now okay in AAA money funds.)

The Federal Reserve took another step to calm markets ahead of its meeting Tuesday, when it is expected to cut its Federal funds target rate. The Fed, "on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning". A release says, "First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets.... Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately." Finally, "The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.," said the Fed's website.

Sunday's New York Times joins the latest "cash is king" bandwagon with "The Cash Advantage (Even When Rates Are Low)". The article quotes David Darst of Morgan Stanley, "The biggest mistake people make is reaching for yield and putting their capital at risk.... They should think of cash as their safe harbor." It adds, "Like Mr. Darst, Mr. Schatsky recommends putting cash into either money market mutual funds or short-term C.D.'s with maturities of three to six months. As for other types of investments that the financial industry might market as being like cash, he said, 'if the interest rates are too high, then it's probably too good to be true.'"

Also, yesterday's NYT writing on `Bear Stearns in "News Analysis A Wall Street Domino Theory", said, "Money market funds also reduced their holdings of short-term debt issued by Bear, according to industry officials."

Morningstar Canada's Rudy Lukko writes about the first Canadian money market ETF in today's Toronto Star. The Claymore Premium Money Market ETF (CMR) has an expense ratio of 0.25%, likely one of the lowest among Canada's retail-oriented nascent money fund industry (see our MFI 3/08 "Canadian Money Funds: Preparing for Takeoff?").

Lukko says, "Yet money funds have been popular amid the current shaky equity markets. In January, the Investment Funds Institute of Canada reported record one-month sales of money market funds.... A disadvantage is that trading commissions are payable to buy or sell units."

The ICI's latest weekly statistics show money fund assets increasing $6.46 billion to a record $3.454 trillion, the 12th consecutive week that assets have increased. Retail assets grew by $5.55 billion to $1.246 trillion and institutional assets grew by $913 million to $2.208 trillion. Year-to-date, money fund assets have increased by $307.7 billion, or 9.8%, calculates Crane Data. Over the past 52 weeks, money fund assets have skyrocketed by $1.03 trillion, or 42.5%.

The Orange County Register discusses the status of Whistlejacket SIV, which OC invested in. County Treasurer Chriss Street told the paper, "I still think the county will get all its money back," though some outside commenters were skeptical. It also mentioned Northern Trust, saying it "pledged $229 million to ensure that investors in eight money market funds don't lose a penny on Whistlejacket."

Also, in SIV news: "Moody's may cut rating on $19 bln Dresdner vehicle" by Reuters. "Moody's raised the pressure on Wednesday for Dresdner Bank to sort out the support it has promised for its $19 billion structured investment vehicle K2, by threatening to cut K2's ratings," says the article. It adds, "Deloitte & Touche are acting as receivers for other SIVs that have hit trouble, including Cheyne Finance, Rhinebridge and Standard Chartered's Whistlejacket."

Finally, see Reuters' "Court Rules on Payout of Whistlejacket Creditors".

American Beacon Advisors issued a press release via Marketwire entitled "American Beacon U.S. Government Select Fund Ranked Top Institutional and AAA-Rated U.S. Government Money Market Fund for 2007." The advisor says the fund "won a Money Fund Report(TM) Award as the #1 institutional U.S. Government money market fund out of a universe of 231 unrestricted funds for 2007." It continues, "The Fund has also been ranked the #1 AAA-rated U.S. Government money market fund out of a universe of 266 unrestricted, AAA-rated U.S. Government money market funds. All rankings are based upon the net returns as of 12/31/07, and include only funds with at least $100 million in assets."

USA Today's John Waggoner says that two funds are already yielding below 1%, with more to follow. "Some funds now collect more money in expenses than they pay investors. That hasn't happened since 2001," he says.

Waggoner also says, "Money funds invest in short-term, high-quality IOUs and distribute the interest to investors. When the Fed reduces rates, the yields of money funds tumble, too. The Fed has cut its key federal funds rate five times, to 3%, since September."

"It's a good time to look at your expenses," says Peter Crane of Money Fund Intelligence, which tracks the funds," quotes the piece.

The Fed's statement says the central banks "have continued to work together closely and to consult regularly on liquidity pressures in funding markets". "Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures." It says the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank all announed liquidity measures. "The Federal Reserve announced today an expansion of its securities lending program. The "new Term Securities Lending Facility (TSLF) ... will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS."

As with our latest Money Fund Intelligence, the latest Financial Week features results from Treasury Strategies' latest survey of corporate liquidity. FW says of the TSI study, "Most U.S. companies escaped credit-crunch-related problems in their investment portfolios by avoiding now-troubled instruments like auction-rate securities and enhanced cash funds in the first place.... But only about 20% of the companies that had been invested in ARS as of last summer got out in time, shifting $72 billion into money-market funds, bank demand deposits and sweep accounts in the second half."

WSJ.com writes "Legg Mason Gets Letter of Credit" which details the most recent filing and press release describing support actions taken over the Citi and Western Asset funds. (We wrote about at the end of yesterday's "WSJ Writes That "Money Funds Can't Shake SIVs"".) The release is here and the filings are here.

Also in today's Journal is `Herb Greenberg's "Meet the Auction-Rate Cassandra", which cites warnings on auction-rate securities from Joe Morgan, head of portfolio management at SVB Asset Management (Silicon Valley Bank).

The Federal Reserve Board of Governors "Friday announced two initiatives to address heightened liquidity pressures in term funding markets." The Fed's release says, "First, the amounts outstanding in the Term Auction Facility (TAF) will be increased to $100 billion.... Second, beginning today, the Federal Reserve will initiate a series of term repurchase transactions that are expected to cumulate to $100 billion." Bloomberg writes "Fed Boosts Lending to Banks as Credit Rout Continues". The article quotes Joe Tully of $2 billion money fund manager Prudential Investment Management, "What the Fed's saying with the TAF changes is, 'We hear you and we want to ensure everybody has financing for good collateral,'".

The Charlotte Business Journal writes, "Bank of America Corp. has named a new head of its locally based cash-investments group, but he doesn't plan to move to Charlotte. Instead, the group's 35 employees ... may be joining their new chief in Boston. The bank's Boston-based investment-management division, Columbia Management Group, has hired Paul Quistberg from mutual-fund company Putnam Investments to lead the cash group. The unit manages nearly $200 billion but has run into problems lately, with a group of money-market funds it manages suffering losses [sic] tied to the credit crunch. Quistberg is replacing Randall Royther, who is staying until the end of the month to help with the transition," says the story.

Also, Columbia will merge its Columbia Prime Reserves into its massive Columbia Cash Reserves according to an SEC filing.

The Wall Street Journal's Brett Arends notes the attractiveness of tax exempt money market fund yields in "`Wacky Credit Gyrations Yield Some Easy Money". The piece says, "Money market funds are near-cash vehicles that often provide ordinary investors with the best short-term savings rates. Unlike CDs they don't come with a federal guarantee, but they have historically proven as secure as a guaranteed bank account and usually pay slightly higher interest." Also, see yesterday's WSJ article "Auction-Rate Securities May Get Help", which discusses attempts to convert auction-rate securities into money fund-eligible variable-rate demand notes.

Dow Jones writes "Lehman To Buy Robeco's US Municipal Bond Business". The story says, "The development concludes Robeco's exit from fixed-income management in the U.S. [including a small money fund presence via its Weiss, Peck & Greer subsidiary]. On Feb. 29, it said it was selling its $4.8 billion book of taxable U.S. fixed-income assets to ... Morgan Stanley." It adds, "Lehman currently oversees about $16 billion of municipal bond assets for institutions and wealthy investors in its asset management unit. The business is run by Robeco [Weiss, Peck & Greer] alumna Janet Fiorenza."

Municipal money fund managers are seeking outside credit analyses we hear from The Savader Group founder and former Moody's analyst Mitchell Savader and former iMoneyNet sales manager Perry Leardi. Managers are requesting assessments on "compliance with SEC Rule 2a-7 -- particularly the need to invest only in high-quality (double-A or better) securities -- the ongoing ability of obligors to meet spiking interest expenses, and the need to maintain a stable share price," Savader tells us.

American Beacon Advisors has launched a new website for investment professionals and institutional investors at www.americanbeaconfunds.com, says a press release on Marketwire. The company says, "The password-protected website features individual web pages devoted to each American Beacon Fund." The site "provides current fund data ... attribution reports, conference calls/webcasts and other valuable, informational fund material." President & CEO Doug Herring says, "We are devoted to servicing our institutional investors and investment professionals. This site is the next step in providing easy access to our portfolios' data to aid in keeping financial intermediaries well educated on our Funds."

Registration is now open for the TMANE's "23rd Annual Conference for the Finance & Treasury Professional, May 21-23 at the Boston Marriott-Copley Place. (Peter Crane will present on "Is Your Money Market Fund Safe? Examining The Crisis in Cash" and Crane Data will exhibit.) Also, note the opening today of IRR & iMoneyNet's Money Market Expo in Orlando, Florida, and the New York Cash Exchange later this spring.

Today's New York Times article discusses studies and anecdotal evidence of growing corporate cash balances. One professor says that "growing cash holdings over that period most likely reflected the simple fact that the world became a much riskier place for business". The piece says, "One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.&P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998."

The Bond Buyer's article "Lockyer's Rating Proposal Gets Mixed Response From Market" discusses a proposal by California Treasurer Bill Lockyer to "petition the three major credit agencies to harmonize their municipal rating scales with corporate ratings, or ask the Securities and Exchange Commission to amend its Rule 2a-7 on money market funds to take into account the difference scales." The article says, "Rule 2a-7, which governs the types of securities that money markets funds can hold, currently stipulates among other things that these funds can't purchase securities rated below double-A."

The Financial Times writes on the "Flight of cash into money market funds" in its Sunday edition. The article discusses the recent $1 trillion-plus buildup of money funds assets (over 52 weeks) and flight to Treasuries and cash. "There is a flight to cash and the build-up has been massive and unprecedented," said Peter Crane, publisher of the monthly Money Fund Intelligence newsletter," quotes the FT. It also quotes Crane, "When you get rate cuts stacked on each other, institutions ride the lag." The piece adds, "The extent of the move in the Treasury bill markets, where there has been so much new supply, is an indication of how large the month-end settlement date pressure is for the banks," quoting Lou Crandall of Wrightson ICAP. Plus, see WSJ's "How the Credit Mess Squeezes You".

This article discusses the approach of tax time and the potential need for cash by some auction-rate security investors. "But as investors continue to stay away from buying these securities amid concerns about bond insurers and a lack of liquidity, hundreds of auctions are continuing to fail. As a result, Wall Street is scrambling to find ways -- ahead of the April 15 tax deadline -- for clients to tap their money," says the Journal, which mentions UBS AG, Citigroup Inc., Morgan Stanley and Wachovia Securities as brokerages looking for ways to provide credit to some of their frozen customers.

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