Daily Links Archives: June, 2008

GAMCO Investors Inc., manager of Gabelli U.S. Treasury Money Market Fund, has named Ronald Eaker Co-Portfolio Manager of the fund. According to Gabelli's website, the fund "seeks to provide high current income consistent with the preservation of principal and liquidity.... The Fund currently has in excess of $1.1 billion in assets under management," says Gabelli. (The fund currently does not report to Crane Data, so is not listed in our rankings.)

The Bond Buyer writes "SEC Votes to Remove NRSRO From 38 Rules", quoting Federated's Debbie Cunningham, "We agree completely with the SEC that attention should be paid to over-dependence on ratings." It also paraphrases the SEC's Erik Sirri, saying, "[T]he release provides investment firms with two paths -- they can either continue to rely heavily on NRSROs or they can craft their own 'mechanism' to analyze investment quality." To listen to a replay of the SEC Meeting yesterday, click here.

Greenwich Associates just released a report entitled, "In Tough Markets, Hedge Fund Managers Increase Cash, Reduce Leverage". The study, produced in conjunction with Global Custodian, found, "Hedge fund managers around the world responded to last year's difficult market conditions by lowering leverage ratios and moving a significant share of their assets into cash." It says, "With industry-wide performance on the decline, the hedge funds participating in this year's study reported holding a full 15% of their total assets under management in cash at the beginning of 2008. Cash levels were slightly higher among hedge funds in Asia (17%) and Europe (16%).... Among the world's biggest hedge funds, nearly 12% of assets were invested in cash."

MarketWatch writes "SocGen winds up $4.3 billion fund", describing Societe Generale's announcement that "[T]he board of directors of Premier Asset Collateralized Entity, or PACE, decided to sell the fund's assets -- valued at $4.3 billion at the end of November -- to the bank at a price determined by the fund's usual valuation procedures." Commercial paper and medium-term note holders will see no losses, but, "Rating agency Standard & Poor's said there were insufficient funds from the asset sale to repay holders of the lowest-rated debt." MarketWatch adds, "The decision to wind up PACE followed a deal to restructure a similar $7 billion fund formerly run by U.K. hedge-fund manager Cheyne Capital.... Under the restructuring plan, some of the fund's assets will be auctioned off to set a transparent price. Goldman Sachs will then buy the remaining assets and package them in a new fund, with the original investors getting the choice of investing in the fund or receiving some of the proceeds from the sale. It's hoped that the same process could be used to restructure several other SIVs, including those previously run by Standard Chartered and by Germany's IKB."

MarketWatch writes "Brokers threatened by run on shadow bank system". The piece is subtitled, "Regulators eye $10 trillion market that boomed outside traditional banking," citing comments by Timothy Geithner, president of the Federal Reserve Bank of New York, Henry Paulson, Secretary of the Treasury, and others on expanding regulation. MarketWatch says, "In recent decades, lots of new businesses and investment vehicles have evolved ... outside the purview of traditional banking regulation. Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again."

"Moody's assigns Aaa/MR1+ money market fund ratings to PIMCO GIS Euro Liquidity Fund". The release says, "Moody's Investors Service has today assigned Aaa/MR1+ money market fund ratings to the PIMCO GIS Euro Liquidity Fund, a fund launched in May 2008." Moody's Assistant V.P. Michael Eberhardt says, "The rating reflects the high credit quality of the Fund's investments, the Fund's objective to maintain a stable net asset value per share, the disciplined investment and credit research process and robust compliance and risk management structure of its investment adviser, PIMCO." Moody's says, "The Fund is a sub-fund of PIMCO Funds: Global Investors Series, plc, a Dublin-domiciled open-ended investment company, which operates in accordance with the UCITS III Directive. The Fund is managed by the Munich fixed income portfolio management team of PIMCO Europe Limited, a partially owned subsidiary of Allianz SE."

In the latest news of a full meltdown in the ultra-short bond fund sector, Wachovia Corp. subsidiary Evergreen Investments announced in a press release Thursday, "that the Board of Trustees of the Evergreen Funds approved a plan to liquidate Evergreen Ultra Short Opportunities Fund (EUBAX)." Shareholders of the $403 million fund will receive $7.48 a share. "Evergreen's parent company, Wachovia Corp., will provide financing for the liquidation which will occur on or about Thursday, June 26, 2008." Bloomberg wrote "Evergreen Liquidating Ultra-Short Fund After 18% Drop" and The Wall Street Journal wrote "Wachovia Liquidates Mortgage-Related Fund". See the "falling off the cliff" chart from Barchart.com.

Bloomberg.com writes "MBIA Downgrade to Below AA Poses Threat to Banks, Analysts Say", which says, "The banks would have to buy back unwanted municipal securities if bond insurers' ratings fall below AA and the debt becomes ineligible for money-market funds, according to a research note" from Bank of America.... The Securities and Exchange Commission also may take action to ease credit-rating rules for money market funds, according to the report, citing Chairman Christopher Cox's June 11 comments."

Yesterday's Wall Street Journal had two articles on interest to money market fund professionals and investors: "Money-Market Loan Facility Planned", which describes a scheme by the London-based Institutional Money Market Funds Association to "allow banks to borrow money from central banks or other commercial banks using the shares in such funds as collateral," and "Help Nears for Auction-Rate Holders", which describes yet another scheme to assist the frozen aution-rate preferred securities market.

Dow Jones' Financial News Online writes "Sigma Finance casts shadow over SIV restructurings". The decidedly negative headline masks the host of good news underneath, that the $7 billion Cheyne Finance restructuring is nearing completion. Cheyne remains one of only a handful of SIVs that have actually defaulted. To date it ranks as the largest single trouble-making holding for money market funds, causing the most bailout events. While Sigma remains a concern, the article describes its continued high ratings, its lack of "trigger" features, and its continued ability to fund in the repo markets, all positives. Yesterday, we reported that Lehman Brothers preemptively purchased its minor Sigma holdings in April, though it was not necessary to do so. It became the first, and perhaps could be the only, complex to take action on Sigma.

Cachematrix is now providing its partner websites portfolio holdings. The company's press release says, "In an effort to create more transparency and provide shareholders with up-to-date information, Cachematrix, the leading provider of institutional money market fund trading technology, announced today that it will begin displaying portfolio holdings reports for institutional money market funds." The company adds, "Portfolio holdings reports will be provided alongside the existing monthly fact sheets, prospectuses, annual and semi-annual reports, and other critical money fund information.... Portfolio holdings will only be accessible to pre-approved clients, and accessed only through encrypted login and protected password" and "will be made available to clients ... after they have been publicly released."

Should money market mutual fund providers vote Democratic? We noticed in an Associated Press "Summaries of Senate financial disclosure forms" story that Democratic presidential candidate Barack Obama lists among his major assets $1 million to $5 million in Northern Municipal Money Market Fund. (Obama also lists $500,000-$1 million in U.S. Treasury notes.) The story also notes, "Major sources of unearned income: Interest from money market fund, $15,000-$50,000." Finally, it says of Obama, "He and his wife, Michelle, bought the money market fund in May 2007, then sold off $500,000-$1 million worth on July 26." Money funds were not listed among McCain's holdings, which included $15,000-$50,000 in a "checking account".

Sunday's Wall Street Journal Online writes "Keeping Savings Safe From Inflation", which suggests some strategies for protecting cash from erosion. Advisor's claims, however, that "safe investments are risky" is a little much, though. We agree with one lone advisor's advice to "grin and bear it". The Journal says, "Still, investors can take some simple steps to improve their returns, such as shopping around for higher-yielding CDs and money funds and, in some cases, by switching to tax-exempt money funds from taxable ones. Some savers may want to buy bonds with returns linked to inflation, although the additional yield over the inflation rate is limited or none."

The Investment Company Institute's weekly "Money Market Mutual Fund Assets" series shows money funds declining by $5.51 billion to $3.515 trillion in the week ended Wednesday, June 11. Retail money fund assets declined by $4.88 billion to $1.222 trillion and institutional money fund assets declined by $630 million to $2.293 trillion. Money funds likely saw withdrawals due to summer vacation and graduation spending, while institutional inflows halted temporarily due to a sudden rise in short-term rates based on expectations of a Fed tightening.

WSJ writes "Holders of Auction-Rate Debt Have Choices, but Few Solutions", again spreads the myth that investors were unaware of the risks of auction-rate securities. ARS, which money funds could not and cannot buy, were clearly not "money market" securities. We find it unbelievable that any broker did not clearly disclose this fact. The Journal says, "For decades, individuals and companies bought auction-rate debt from municipalities, charitable organizations, student lenders and closed-end mutual funds. The securities had long-term maturities but functioned like a short-term investment, paying interest rates that were reset in weekly or monthly auctions conducted by Wall Street firms. Brokerage firms and financial advisers pitched them to investors as a safe place to stash one's cash and collect a higher yield than a money-market fund offered, often tax-free."

ICAP announced that it will launch NYFR Fixings, a new measure of 1- and 3-month unsecured bank funding costs in a press release. "The daily NYFR poll will be conducted during the New York morning when the Eurodollar market is most active. ICAP initially will collect data on 1- and 3-month rates, but other maturities may be added to the program over time depending on market interest," said the company. CEO Doug Rhoten says, "There has been much discussion about measuring the interbank rate when market conditions are volatile and we believe that a survey conducted during the most active part of the U.S. trading session will give us a concrete measure of actual funding costs. We also think the anonymity of this survey will make the survey results objective during periods of financial strain. We don't expect the NYFR to replace more transparent, established fixings as a contractual reference rate, but we believe the NYFR fixings will play a complementary role."

Federated Investors recently posted a comment on money funds investing in refinanced auction-rate preferred securities. The brief asks, "Are Federated Money Market Funds investing in the new securities resulting from the refinancing of some Adjustable Rate Preferred securities (ARPS)? It responds, "In early May, a few investment mangers announced that they had secured an alternative form of borrowing that enabled them to redeem outstanding ARPs at their par value and refinance the debt. Federated will consider these notes for investment in our prime money market funds only after employing the same thorough due diligence process that we use for all investments; this process includes a review of capital structure, liquidity structure, management structure and other key factors before investing in any issuer."

BusinessWeek writes "Stashing Cash at Higher Rates", which discusses online banking, rate chasers and HSBC's new 3.5% APY offer. The piece quotes Jim Bruene, editor of the Online Banking Report, "While online customers tend to chase higher yields, it's harder to get them to move their money when rates are around 3%. There's some psychology at play. People have in their minds putting money away at 5%. Once they go into the [3% range], there's less motivation psychologically."

MarketWatch's Chuck Jaffe writes "Low yielding, high-cost money funds are safe but unsound" in his "Stupid Investment of the Week" columb. It quotes us, "A lot of people who are in cash are more interested in return of principal than return on principal, so they don't care about the yield, and that shows," said Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter. "If you are running away from a crashing stock market or a financial crisis, having your buying power eroded by inflation isn't exactly tops on your list of imminent perils," he adds. "Investors tend to underestimate the length of time they remained parked."

Investment News writes "Cash is king at Pershing", saying, "The firms' allocations to money market funds and other cash products have soared over the past year, reaching 15% of the $948 billion assets Pershing holds in custody globally, said Brian Shea, president and chief operating officer of the Jersey City, N.J.-based firm." The weekly publication quoted Shea at a client conference, "Pershing has seen growth in the money market fund business over the past two to three years, but the pace of the shift to cash products began to accelerate rapidly last August."

We noticed some Google Ads running on our website asking whether investors had been harmed by auction rate securities, so we decided to click on it. It took us to an "Auction Rate Securities Lawsuit" page at the law firm Girard Gibbs LLP's website. The page says, "Girard Gibbs LLP is investigating alleged securities fraud in connection with the sale of auction rate securities by a number of major broker-dealers, including UBS, Citigroup/Smith Barney, Wachovia, Merrill Lynch, Wells Fargo, Morgan Stanley, J.P. Morgan Chase and TD Ameritrade, among others." It contains letters announcing the various suits.

Bank savings rate blog BankDeals daily e-mail alerted us to a new relatively high rate from HSBC Direct, which introduces a 3.5% APY for online savings accounts through August 15, 2008. While we still believe money market mutual funds offer consistently better returns than even the highest-yielding bank savings accounts, we do track the highest-yielding bank money market deposit account (MMDA) offerings, such as Countrywide Bank and Capital One Online Savings. In the past, HSBC and others have offered attractice introductory rates, but most of the high-yielding, internet-only banks have underperformed over periods of longer than one-year.

We just learned about a new "Cash and Short-Term Liquidity Management" conference being put on in New York June 16 and 17th by Marcus Evans Conferences, though it appears to be more like a banking event than a cash investment event. The website describes it as a "latest strategies for managing cash in the banking industry conference". Speakers include: David Cruikshank of The Bank of New York Mellon Treasury Services, Michael Gallagher of HSBC Bank USA, Jonathan Butterfield of CLS Bank International, David Carson of Morgan Stanley Investments, and Ties Tiessen of UBS.

Standard & Poor's Fifth Annual "Asset-Backed Commercial Paper Conference", registration is free, will feature three segments: Introduction to ABCP, July 8: "A primer for those who are new to the industry and want to learn more about Standard & Poor's methodology and rating process"; Hot Topics in ABCP, July 9: A discussion of credit trends, regulatory and accounting issues, investor perspectives, and outlooks; and, `ABCP Investor Forum, July 9: "For investors only. An intimate, roundtable-style dialogue with ABCP investors, led by Standard & Poor's credit analysts."