Daily Links Archives: May, 2008

ICI's weekly money market mutual fund statistics series shows assets declining slightly, down $4.28 billion, to $3.505 trillion in the week ended May 28. Retail money fund assets declined by $3.99 billion to $1.223 trillion and institutional money fund assets declined by $290 million to $2.282 trillion. Money fund assets are declining ahead of quarter-end, but they should rebound strongly as dividend and bond coupon payments hit next week. ICI also reported monthly mutual fund assets for April 2007.

Today's Wall Street Journal features "Study Casts Doubt on Key Rate", which alleges that banks may have reported bad data for LIBOR calculations. "That has led Libor, which is supposed to reflect the average rate at which banks lend to each other, to act as if the banking system was doing better than it was at critical junctures in the financial crisis. The reliability of Libor is crucial to consumers and businesses around the world, because the benchmark is used by lenders to set interest rates on everything from home mortgages to corporate loans," says the Journal. It adds, "Faced with suspicions by some bankers that their rivals have been low-balling their borrowing rates to avoid looking desperate for cash, the British Bankers' Association, which oversees Libor, is expected to report Friday on possible adjustments to the system."

The U.K.-based Investors Chronicle writes about money funds in "Cash on Tap". The article describes the basics of money funds, saying, "But cashing in stock market investments and putting your money in the bank is not always convenient or the best option. This is where money market funds come into their own." On recent troubles in the U.K., which doesn't have U.S.-style regulations, IC says, "However, although low-risk, money market funds are not risk-free. Standard Life and Threadneedle recently reported losses in their money market funds [sic] and had to restructure their funds in the wake of the credit crunch. At the start of May, the L450m Threadneedle UK Money Securities fund, billed as an ultra-safe alternative to cash ... was down almost 4 per cent."

Yesterday's Wall Street Journal wrote "Auction-Rate Securities Give Firms Grief", which said, "A review of first-quarter earnings reports showed that more than 400 companies, including Google Inc., Bed Bath & Beyond Inc. and Starbucks Corp., held at least $30 billion in the securities, instruments they once thought were as dependable as cash.... Some companies have had to scramble for funds in the months since the market froze up in February. The securities also are creating an accounting problem for businesses not used to pricing complicated securities. While some companies have written down the value of their auction-rate holdings, many others haven't, even though market prices have fallen substantially." Also yesterday, Bloomberg wrote "Auction Suits Face Burden of Proof Eluding Lawyers".

In another blow to the beleagured "enhanced cash" sector, Moody's on Friday downgraded the rating of Citi Institutional Enhanced Income Fund, one of the pioneers in the space. The rating was cut to A/MR4 from Aaa/MR1 (Aaa/MR1+ is the highest money fund rating) "in the wake of credit downgrades within the fund and the increased sensitivity of the fund's net asset value to changes in market conditions." The funds, which are not money market funds, currently total a mere $50 million and include hub Institutional Enhanced Portfolio, U.S. spoke Citi Institutional Enhanced Income and Cayman Islands spoke Citi Institutional Enhanced Income Fund Ltd.

We learned from anonymous blog BankDeals about MarketWatch's recent story entitled, "Bank failures to surge in coming years". The piece, which discusses the FDIC gearing up for possible bank failures, is subtitled, "IndyMac, Corus, UCBH under pressure as credit crunch slows economy." MarketWatch says, "Only three banks have failed so far in 2008. But that number is set to surge as the credit crunch slows economic growth and hammers some lenders that grew too fast during the recent real-estate boom, experts say."

Bloomberg writes "Auction-Rate Notes Leave Investors in Cash Purgatory. The article reviews the woes and pending resolution of the auction-rate securities market deep freeze. It says, "Money that had been sitting in auction-rate securities, ultra-short bond funds and enhanced cash funds is flowing to money-market funds. More than $1 trillion poured into money markets during the past 52 weeks, as investors fled more volatile markets, said Peter Crane of Crane Data LLC, a mutual-fund tracking company in Westborough, Massachusetts." It quotes Crane, "If you need money tomorrow, it's got to have 'money market' in the title." He cites both money-market funds and bank money market deposit accounts as safe.

The Chicago Tribune writes "Nuveen to restructure auction-rate debt issues". "Chicago-based Nuveen Investments Inc. said Wednesday that the firm is gaining traction in its effort to refinance billions of dollars worth of auction-rate securities that are currently frozen," says the article. It continues, "Among other things, the VRDP that Nuveen is seeking to arrange would provide holders with an unconditional 'put' option, which means that investors would have the right to demand return of their principal. That provision would make the debt attractive to money-market funds which are currently prohibited from investing in ARPS."

The Treasury Management Association of New England's 2008 Conference, which starts today at the Copley Marriott Hotel in Boston, will feature a number of sessions of interest to money market fund investors and professionals. Peter Crane will present (see today's "News") "Is Your Money Market Fund Safe? Examining The Crisis in Cash" at 9am Wednesday, and Lehman Brothers Eric Pflaum and James Fitzgerald will discuss "Short-Term Investments: Considerations, Options and Strategies" Wednesday at 3:45pm. Capital Advisors' Director of Investment Research Lance Pan, one of the few who warned against auction-rate securities years ago, will present on "Demystifying Asset-backed Commercial Paper: Diamonds in the Rough" Thursday at 10:45am, and on "A Check-up on Institutional Money Market Funds" Thursday at 3:45pm. Crane Data will also be exhibiting. We hope to see you there!

American Banker writes "Some Anticipating Exits From Money Market Field", which discusses recent money fund asset inflows and tax outflows, and the possibility of some firms exiting the business. It quotes Pete Crane, "The talk of consolidation has been going on for years in this industry, but you really haven't seen any substantial participants exit the business.... Among the largest firms, we just have not seen, and don't expect to see, anyone significant exit from the money management business.... Certainly the party isn't over for money market funds, but it is definitely slowing down and throttling back."

Bankrate.com asks "Savers: Are better yields ahead?" The article quotes Peter Crane, "It looks as though consumers will not hit that maximum level of pain, which is yields below 2 percent [yields].... I would expect that the most probable outcome is flat to slightly higher toward the end of the year." Crane also argues that inflation hasn't risen substantially, contrary to popular belief. In other news: Investment News writes "Edwards reps pan Wachovia cash sweep plan" and Bloomberg's "Auction-Rate Losses Cost Google, UPS $1.8 Billion".

We apologize to visitors on Friday that may have had trouble accessing our website at http://www.cranedata.us. Our web hosting company was having issues. However, our parallel site, at http://www.cranedata.com remained up-and-running. We just wanted visitors to be aware of the new domain. So you can try checking either the .us or the .com website in the event of a future disruption. While we hope that won't be necessary, we've been preparing for just such an outage with our dual website strategy. Alas, many were not aware of the other site, so frequent users should bookmark both www.cranedata.us and www.cranedata.com.

The Financial Industry Regulatory Authority (FINRA), the combined NASD and NYSE self-regulatory organizations, recently released a "Staff Interpretive Memo" on Sweep Fund Closings, entitled, "Use of a negative response process under NASD Rule 2510(d)(2)(D) to designate an alternative money market sweep fund when existing sweep fund closes with inadequate notice." The brief discusses the case of when "money market sweep funds ... refuse or limit additional share purchases". It addresses recent closings of "in particular 'Treasury' money market funds ... [that] have found it difficult to obtain sufficient quantities of those securities." The memo says, "FINRA staff believes ... it would be in the best interest ... to permit firms to select a new money market sweep fund for customers without having to wait for the 30-day negative consent period."

Federal Reserve Board Chairman Ben S. Bernanke spoke today at the Federal Reserve Bank of Chicago's Annual Conference on Bank Structure and Competition. His comments on "Liquidity Risk Management" include, "Another crucial lesson from recent events is that financial institutions must understand their liquidity needs at an enterprise-wide level and be prepared for the possibility that market liquidity may erode quickly and unexpectedly. Weak liquidity risk controls were a common source of the problems many firms have faced. For example, some firms' treasury functions were not given information from all business lines about either expected liquidity needs or contingency funding plans, in part because managers of individual business lines had little incentive to compile and provide this information. As is now widely recognized, many contingency funding plans did not adequately prepare for the possibility that certain off-balance-sheet exposures might have to be brought onto the firm's balance sheet."

The Institutional Money Market Funds Association has just posted details on "Money Fund Forum Europe 2008", which will be held June 24-25, 2008, in London. "The Only Conference for Both Investors & Providers of Money Market Funds & European Money Market Professionals" is produced by IBC Global Conferences in association with iMoneyNet.

The latest issue of Financial Week features "Rate rise flattens money funds", which says, "The yield advantage that money market mutual funds have enjoyed over direct investments in securities during the past nine months is likely to wane as the Federal Reserve signals it has finished cutting interest rates. But after auction-rate securities and other troublesome investments burned corporate cash managers during the credit crunch, experts are split over how swiftly corporate investors will return to direct investments." It quotes Pete Crane, "The biggest buildups [in money fund assets] ... have occurred in periods of falling rates. This latest one has been the largest buildup in the history of cash." FW adds, "`But that era may be coming to an end, he said, since the 'lag effect' reverses when rates increase."

Chuck Jaffe writes in "Broken bonds: In credit crisis, ultra-short bond funds haven't been ultra-safe", "For more than a year now, however, investors who have parked money in ultra-short duration bond funds have come away feeling like their investment vehicle has been vandalized while their cash was parked." The article continues, "Over the past 12 months, the average ultra-short bond fund is off 1.66%, according to fund-tracker Lipper Inc. So far this year the situation is uglier, with the average fund in the category losing around 2.2% of its value." Our Crane 100 Money Fund Index has returned 4.45% over the past year (through 4/30/08) and 0.97% year-to-date. Jaffe adds, "Indeed, managers of any fund that combines 'yield' and 'plus' in its name must be wondering if they are better off killing a fund than living with a track record that could now be impaired for decades. As such, nervous investors may decide it's time to run to a covered parking spot for their cash, namely a money-market mutual fund."

Russ Wiles of the Arizona Republic writes "Money funds: Another bubble deflating?" The article asks, "First stocks, then real estate. Now, money-market mutual funds?" Wiles says, "If you didn't notice, a lot of cash had been piling up in money-market mutual funds lately. In fact, global money-fund assets hit a record $5 trillion in the third quarter, with U.S. money-fund assets topping $3.5 trillion in early April. But investors are starting to pull out their cash ... reports Money Fund Intelligence newsletter, which speculates that 'the largest cash buildup in history may be at an end'". Reasons include easing fears and falling yields. "Crane Data, which publishes the Money Fund Intelligence newsletter, cites a 2.08 percent average yield on money funds at the end of April. That's down from nearly 5 percent roughly a year ago."

After falling $118.3 billion in three weeks, due to tax payments and month-end seasonal and other factors, money fund assets rebounded sharply in the latest week. ICI shows money fund assets jumping $54.0 billion to $3.472 trillion in the week ended May 7. Institutional funds surged $48.0 billion to $2.233 trillion while Retail funds increased $5.99 billion to $1.238 trillion. While inflows should slow from 2007 and early 2008's torrid 40+% pace, money funds should break back above their high water mark of $3.536 trillion in relatively short order. Tax outflows have subsided and rebate checks should already be arriving.

This Fortune story, available via CNN Money gives a brief overview of money funds in general and discusses current risks in particular. On whether money funds are safe, the piece says "The short answer is 'yes'." But it asks, "How can you protect yourself from dubious money fund holdings? The first thing to do is to make sure that you're invested in a true money market mutual fund and not some look-alike investment, such as a floating-rate bank loan fund or seven-day-paper fund." It quotes ICI Chief Economist Brian Reid, who says, "Only funds that are 2a-7 compliant have to follow provisions put in place to keep a fund from breaking the buck." The SEC's Bob Plaze tells Fortune, "There is so much less risk with money market funds relative to other funds that people view them as risk-free. But they're not insured by the government. Saying there's no chance for problems is not accurate."

Legg Mason posted a "Net Loss Primarily Driven By Non-Cash Charges to Support Money Market Funds" the company said in a release. The charges included, "previously announced support for money market funds, totaling $291.0 million after tax and compensation related adjustments." See also, Bloomberg's "Legg Mason Posts Loss on Costs to Protect Money Funds ".

In other news of interest, WSJ runs "Thin Yields Weigh on Investors", "Hedge-Fund Portfolios Stockpile Cash," and "Regulator Sues Failed Sentinel Money Manager." Also, more on Threadneedle (U.K.) in "Threadneedle fund is hurt by crunch".

MarketWatch columnist Bill Donoghue returns to his money fund advocate roots in "Cash is not king; caution is: Can your company survive a cash crash or a bank bust?". Donoghue points out the advantages of money market funds over bank deposits for corporations and investors with over the FDIC insurance limits. He says, "Over the past dozen years, the FDIC has paid an average of 72 cents on the dollar on uninsured deposits. Money fund have not taken risks that required insurance, although there have been a number of money funds where questionable assets have been replaced with cash with the full knowledge of and permission of the SEC."

Erroneous reporting on "money market funds" by the press continues as the Guardian.co.uk writes "'Ultra safe' money market fund loses millions". The article refers to losses on Threadneedle UK Money Securities, "L450m money market fund, regarded as an ultra safe alternative to cash, has lost millions of pounds". But this fund is NOT a money market mutual fund. Alas, Europe has no regulations definining the term "money market fund" and restricting the quality, maturity and diversity of investments, so funds are free to label themselves as they wish. However, the Threadneedle fund makes no mention of "money market fund". While organizations such as IMMFA and others are trying to establish a distinction between funds, it's clear Europe is in need of more stringent regulations and its reporters are in need of more education on the subject.

Next week, spring conference season kicks off as three conferences of interest to money market professionals take place. ALM/SRI hosts the "11th Annual Asset Backed Commercial Paper Summit" on May 7-8 at the Westin New York at Times Square, which should attract its share of networking job-seekers. Also, the Investment Company Institute hosts the biggest mutual funds conference in the country, ICI's annual General Membership Meeting May 7-9 at the Marriott Wardman Park Hotel in Washington. Finally, the Treasury Management Association of Chicago hosts the 22nd Annual Windy City Summit on May 7-9 at the Hyatt Regency Chicago. Crane Data won't be making it to any of these shows, but we'll be on the road speaking at the SFTMA/SVTMA/PTMA Dinner May 14 in San Francisco, Treasury Mgmt. of New England May 21-23 in Boston, and New York Cash Exchange May 28-30 in NYC later this month.

Telegraph.co.uk writes about a small U.K. money fund bailout in "Standard Life becomes latest credit crunch victim". The article says that Standard Life "will also see its interim profits reduced by L37m as it has to inject cash into its money market fund, a L1.7bn fund for institutional investors. It blamed a 'deterioration in liquidity conditions' and has restructured the fund, moving some of the asset-backed securities on to the group's balance sheet." The Telegraph added, "Mr. Nish said these are largely AAA-rated securities and there is no exposure to the US. He added that the group should get back L20m when the securities are redeemed."