Daily Links Archives: July, 2008

Today's Wall Street Journal (C11) writes "For Redemptions, 'In-Kind'-ness Counts", which discusses troubles with ultra-short bond funds, specifically the decision to redeem shares 'in-kind' by the $1.4 billion AMF Ultra Short Mortgage Fund. The Asset Management Funds are run by Shay Assets Management. WSJ says, "Ultrashort bond funds generally invest in fixed-income securities with extremely short maturities, but tend to have higher risks than money-market funds and certificates of deposit. The past year has been bad for the ultrashort-bond category."

We learned from Fund Action that Pax World Money Market Fund has filed to "dissolve, liquidate and terminate the legal existence of the Fund." The filing says the $137 million fund will cease new sales Aug. 29. It adds, "The Board has directed that the Fund's sub-adviser manage the Fund conservatively in anticipation of liquidation and with the goal of returning $1.00 per share to each investor in the Fund. Accordingly, the Fund's yield and performance may be reduced prior to liquidation. There can be no assurance that the Fund's value on liquidation will be $1.00 per share." It appears that Pax is shifting to a money market account from the money fund.

Moody's Investors Service assigned Aaa money market fund credit ratings to the Deutsche Cash Reserve Prime Series and the Deutsche Cash Reserve Prime Institutional Series -- Prime Portfolios managed by Deutsche Investment Management Americas, Inc (DIMA). Moody's says, "The Aaa ratings reflect the high credit quality of the two funds' investments and the diversification of the portfolios as well as the manager's disciplined investment strategy, well established team approach and its strong risk management capabilities." Also, S&P assigned UBS (Irland) Fund PLC - Select Reserves USD Investor Shares Rated 'AAAm'. S&P says, "The investor shares in Select Reserves USD will be offered only to investors meeting certain criteria through selected dealers as defined in the prospectus."

Fortune writes "Funds For Quick Cash". The article briefly compares money funds and MMDAs and says, "At first glance, money market accounts may seem like the safer bet, because cash in the account is FDIC insured like any bank savings account. This means the government will cover up to $100,000 if your bank is ever in a situation where it couldn't pay you back. Money funds, on the other hand, are mutual funds that invest in short-term, high-quality securities such as U.S. Treasury securities, federal agency notes, certificates of deposit and commercial paper. It seems they would carry higher risk than money market accounts since they're not backed by the FDIC, but historically, they've been quite steady."

Federated Investors Announced 2nd Quarter Earnings Last Night and hosts its conference call at 9am this morning. The company release says, "Money market assets in both funds and separate accounts were $271.1 billion at June 30, 2008, up $77.7 billion or 40 percent from $193.4 billion at June 30, 2007 and down $6.4 billion or 2 percent from $277.5 billion at March 31, 2008." The company "derived 58% of its revenue from money market assets" and took a $1.8 million expense for the "cost of modifying certain money market fund prospectuses in order to broaden the scope of allowable investments."

Website IndexUniverse writes "ETFs 'Poaching' the Market", which discusses the possibility of a "money market ETF". It cites the recent filing of SSgA's SPDR S&P Commercial Paper ETF and the recent launch of WisdomTree's U.S. Current Income Fund (USY), but says, "None of these funds, however, will be able to call themselves actual money markets just yet." It quotes our Peter Crane, "Right now, ETFs are beginning to hover around the edges of money market mutual funds. But they're not the same thing as money market mutual funds. The seeming simplicity of maintaining a stable value is actually a formidable obstacle for the ETF industry." Also, see Crane Data's July 17 story, "SSgA Files to Launch SPDR SnP Commercial Paper, First Cash ETF", and see IndexFunds' other new article, "Money Market ETFs In Europe".

Investors' Business Daily writes "Parent Firms Bucking Up The Buck", which says about 17 advisors to date "bolstering" their money market funds, "So far the strategy has worked. No fund has broken the buck." IBD quotes Peter Crane, "Money market funds, though they've had painful bailouts, benefited from this.... High yield is good when it comes from certain things. Low expenses are good. A big, diversified (portfolio) is good. Also, a big asset base gives you protection." Also, see ignites.com's "Money Funds Act to Address Investor Concerns", which summarizes recent communications efforts by money funds. (The article was derived in part from Crane Data's "Money Funds Step Up Communications With Conference Calls E-mails").

European Treasury publication GTNews just posted a "Guide to Money Market Funds - Part I: The Current Landscape", which "considers the advantages of money market funds and key investment issues that corporate treasurers should keep at the forefront of their minds." BlackRock's Mark Rimmer compares bank deposits vs. money funds (in the U.K. and "offshore" market), discusses key steps for investing and lists key questions treasurers should ask their money fund providers.

Tracs Financial's Institute of Public Investment Management hosts its annual Summer Investment Symposium in Park City, Utah August 3-6, 2008. The company, run by government pool watcher Jeff Flynn, brings together government "cash" investors. (The company has no website, but e-mail PCSeminar@tracsfinancial.com or Pete for the full program. Speakers include: Peter Rizzo of S&P, Tom Jordan of MBIA, Deanne Woodring of Davidson, Paige Wilhelm of Federated, and Peter Crane of Crane Data.

MarketWatch Columnist Chuck Jaffe writes "Fannie and Freddie's woes no big threat to money market funds" in today's San Francisco Chronicle. The veteran fund writer responds to a radio show listener's concerns about his money fund holding Fannie Mae and Freddie Mac debt, saying, "While the Fannie Mae and Freddie Mac situation threatened the credit market, it's not actually a big worry for investors in money market funds.... Since the subprime crisis took hold, money funds have been more talkative about what they do; several big firms have sent notes to shareholders about the Fannie and Freddie concerns -- which most experts believe have been resolved for a minimum of six months, thanks to Treasury support -- because they don't want guys like Edward to bail out."

Today's Wall Street Journal writes "FDIC Issues New Deposit Rules for Big Banks", which says, "The agency said it will consider whether to make automated sweep transactions at banks of all sizes ineligible for deposit insurance. These refer to transactions that move money back and forth among different accounts to capture higher yields." It continues, "Swept funds that are transferred from insured deposit accounts to nondeposit investment vehicles or accounts may not qualify for deposit insurance, the FDIC said, though the agency said it would defer implementing that change until July 1, 2009. The agency is expected to finalize the sweep-account rules after receiving comments from the industry." (See FDIC's Financial Institution Letter here.) In other news, WSJ also writes, "Auction Prices Cheyne".

The Investment Company Institute reported its latest money market mutual fund asset totals last night, showing a decline of $6.91 billion to $3.498 trillion in the week ended July 16. Institutional assets decreased by $16.89 billion to $2.270 trillion, likely impacted by the July 15 quarterly corporate tax date. Retail money fund assets increased by $9.98 billion to $1.228 trillion. Institutional funds saw declines in every category, though government funds fared surprisingly well considering (unfounded) concerns over Fannie Mae and Freddie Mac. Govt Inst funds decreased just $1.49 billion.

Aron Chazen, a principal in online money fund trading portal TreasuryCurve, wrote an article for a recent issue of AFP Risk! entitled "Assessing Market Risk". Chazen says, "When I began my career in institutional cash in 1991, clients typically rolled repo or kept their money in traditional bank accounts earning little or no interest. Today, I have seen treasurers invest in securities they don't understand, don't know how to price nor have the resources to do either. Regardless of the impressions that may exist, institutional treasurers are not typically greedy. Their compensation is not based on earning an extra basis point on their investments. To the contrary, treasurers know their jobs are on the line if their portfolios are not safe and liquid."

Bloomberg writes "Money Funds Stick With Fannie, Freddie Debt on Rescue". It says, "Vanguard Group, Federated Investors Inc. and The Reserve, investment firms that manage more than $520 billion in money-market funds, said they will continue to buy Fannie Mae and Freddie Mac debt because the U.S. Treasury's rescue plan has bolstered confidence." It quotes Reserve CIO Patrick Ledford, "The auction today was oversubscribed.... On the equities side, it's a totally different story, but from a credit perspective, we're very comfortable with Freddie and Fannie exposure."

The Arizona Republic's Russ Wiles writes "Despite the economic worries, there are a few pieces of good news", which says, "But not everything has unraveled on the economic front. Here are a few examples of reasonably good news: Money-market funds: When the credit crunch hit last year, many experts worried about money-market mutual funds. Dozens of funds held exotic IOUs carrying credit risks. The fear was that defaults would cause funds to incur losses so that their prices would 'break the buck' or drop below the standard $1 a share, triggering panic.... But those fears have largely abated. The funds stopped buying shaky instruments, and most problem holdings have since matured, said Peter Crane, publisher of the Money Fund Intelligence newsletter. He said 16 fund-management firms voluntarily absorbed losses on bad holdings, while investors continued to add money to the funds, diluting problems with new cash." It quotes Crane, "The saving grace has been a large cash inflow. Investors haven't blinked."

The Associated Press writes "Government shuts down mortgage lender IndyMac", which says, "IndyMac Bank's assets were seized by federal regulators on Friday." AP says it is the second largest bank failure in history. The FDIC's letter may be seen here. FDIC's press release says, "IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator.... IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008." AP adds, "Some 10,000 depositors had funds in excess of the insured limit, for a total of $1 billion in potentially uninsured funds, the FDIC said." See also Monday's WSJ article, which says, "[T]he percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter."

ICI's weekly asset series shows money market funds breaking back above $3.5 trillion. Assets surged $50.82 billion to $3.506 trillion, though they remain $30 billion below their April 9 record. Institutional funds jumped $42.64 billion to $2.287 trillion and retail funds rose $8.19 billion to $1.218 trillion. YTD, money fund assets have increased by $361.2 billion, or 11.5%. Over 52 weeks they've increased by $926 billion, or 35.9%.

Investment News writes "Nuveen offers new breed of ARS", which says the Nuveen Insured New York Dividend Advantage Municipal Fund will offer "$50 million of what it calls Variable Rate Demand Preferred shares." IN says, "It is hoped the sale -- the first of its kind -- will finally allow investors stuck in auction rate preferred securities previously issued by the fund to cash out at par value. VRDP shares will be offered only to qualified institutional buyers, such as money market funds."

Mutual fund news source ignites.com features two stories involving money market mutual funds today. The first, "Auction Rate Replacements Give Closed-Enders Hope", discusses "closed-end [fund] players' efforts at thawing out the frozen auction rate securities market". It quotes Peter Crane, "I think these things are going to go over like a lead zeppelin. The danger of headline risk is just too great." The ignites website also features, "Merrill and BlackRock Make Money Fund Changes." This story discusses "housekeeping" regulatory filings by Merrill Lynch and BlackRock funds, saying, "Merrill's recent filing adds to the list of parties privy to the select portfolio holdings.... `Such expanded reach represents the increased attention investors are paying to money funds and increased demands for disclosure, says Crane." Ignites adds, "Another change to perhaps assuage skittish investors is tighter language around what would happen if the Merrill Lynch funds were to 'break the buck', or slip below a net asset value of $1 per share. Previously, the Merrill prospectus stated that the funds' trustees had 'established procedures designed to stabilize, to the extent reasonably possible,' the $1-per-share net asset value. 'Deviation of more than an insignificant amount,' it read, 'will be reported to the trustees by the manager.'"

The Board of Goverernors of the Federal Reserve System's "News and Events" page features "Speeches and Testimony" from the Chairman and Governors of the Federal Reserve System. Fed Chairman Ben Bernanke said at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households in Arlington, Virginia, "This run was surprising, however, in that Bear Stearns's borrowings were largely secured -- that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Hence, they refused to renew their loans and demanded repayment." As is being reported, the Fed also said, "We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets."

Bloomberg writes "Blackrock, Nuveen Sell New Preferred Haunted by Failed Auctions", saying, "Nuveen Investments Inc., BlackRock Inc. and Eaton Vance Corp., the biggest U.S. closed-end fund companies, plan to sell a new form of preferred share that can be bought by money-market funds." It quotes Peter Crane, "I think the funds are going to be gun-shy.... The last thing they want is to be in a story that they're buying auction-rate securities." The piece also quotes Reserve's Bruce Bent, "There are certain advantages to being a pioneer, but not a pioneer with an arrow in his back."

Following last Wednesday's open meeting, the SEC has now posted its "`References to Ratings of Nationally Recognized Statistical Rating Organizations" on the "Proposed Rules" page of its website. As we discussed in June 24 and June 25 Crane Data News articles ("SEC Proposes 'Alternate Path' to Reduce Ratings Reliance in Rule 2a-7" and "SEC to Propose Removing Ratings Agency Requirements of Rule 2a-7"), the SEC, "propose[s] to eliminate references to ratings by amending rule 2a-7 in four principal ways. In combination, these proposed amendments are designed to offer similar protections to the current rule's reliance on NRSRO ratings. The proposal summarizes 2a-7 and says, "Under the proposed amendments, we would rely on money market fund boards of directors to determine that each portfolio instrument presents minimal credit risks, and whether the security is a 'First Tier Security' or a 'Second Tier Security' for purposes of the rule. We believe that money market fund boards of directors would still be able to use quality determinations prepared by outside sources, including NRSRO ratings that they conclude are credible, in making credit risk determinations."

Moody's "Portfolio Management Activities of Large Prime Institutional Money Market Funds", updated with portfolios through Dec. 31, 2007, was quietly posted several weeks ago. The report, which tracks holdings of the 15 largest institutional funds (representing over half of all "prime" assets) says, "An extreme liquidity-turned-credit crunch in the asset-backed commercial paper market made for very difficult trading in an unsettled market.... Against this backdrop, money fund assets swelled to new all-time highs as investors sought out the safety of money funds while funds reduced their exposure to structured securities, which declined to around 32% of portfolio net assets. At the same time, money market funds elevated and then continued to maintain above average levels of liquidity to meet unexpected redemptions."

Legg Mason Monday disclosed additional "capital support agreements (CSAs) to support three money market funds." The company release says, "Neither the funds nor their shareholders incurred a loss in these transactions.... Under the CSAs, the Company will make up to an aggregate of $240 million in capital contributions to the funds if any of the funds realize a loss on the sale of or certain other events relating to certain Asset Backed Commercial Paper (ABCP) securities in the portfolios." Mark Fetting, president and CEO, says, "Legg Mason is putting the CSAs in place to support the same securities we have previously supported in other funds. The support provides the funds with flexibility to work through difficult markets as we seek to reduce the exposure in the funds. 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." See also WSJ and Bloomberg coverage.

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