Daily Links Archives: August, 2008

Today's Wall Street Journal writes "Money-Fund Chorus: We're Not Raters", which discusses the strong opposition to removing the ratings requirements from 2a-7. See our previous coverage on the topic: "SEC to Propose Removing Ratings Agency Requirements of Rule 2a-7 (6/24/08)," "SEC Proposes 'Alternate Path' to Reduce Ratings Reliance in Rule 2a-7 (6/25/08)," "Vanguard Strongly Opposes Eliminating Credit Ratings From Rule 2a-7 (8/18/08)," and "Fund Boards Against SEC Proposal to Remove NRSROs From Rule 2a-7."

"Money market funds get last laugh" says The Contra Costa Times. "Money market funds are nothing more than mutual funds that invest in short-term corporate debt or notes. Assuming that you have a true money market fund, there is essentially no risk. Shares always sell for $1.00 each and the rule in the industry is to never 'break the buck.' In a few unlikely cases where some securities actually lost value within a few months, the issuing investment company ponied up the difference to protect its reputation. There IS a risk for anyone who let themselves be talked into something that was represented as a money market fund, but that turned out to be something else -- like the auction-rate securities investments that have triggered lawsuits," says the article. See also, "Maine treasurer outlines Merrill Lynch agreement," which discusses Mainsail II.

Recently, the Securities & Exchange Commission announced plans for a successor to its EDGAR database. The new Interactive Data Electronic Applications (IDEA) will "give investors faster and easier access to key financial information about public companies and mutual funds," said `SEC Chairman Christopher Cox at a recent press conference (see video here). "The SEC has formally proposed requiring U.S. companies to provide financial information using interactive data beginning as early as next year, and separately has proposed requiring mutual funds to submit their public filings using interactive data," says the release.

Bloomberg writes "Fannie Sells $2 Billion in Debt at Higher Yields", which quotes Crane Data's President Peter Crane, "The rising spreads clearly show some buyers are backing away from the market.... But in general I think money funds continue to buy and hold Fannie and Freddie debt: They assume the short-term money-market debt will be safe and covered." Crane adds, "There's no other place to go, now that money funds are out of SIVs. A lot of people are looking at the rise in spreads as a godsend."

The Treasury Management Association of Canada hosts its 26th annual Conference & Trade Show Sept. 21-23 in St. John's Newfoundland. Money fund-related speakers include: Lynn Evans from BlackRock, David Mason from Legg Mason Canada, and Mike Gallanis from Treasury Strategies. While the institutional money market industry in Canada is still small, there has been a tremendous amount of interest of late.

"Corporations Are Disadvantaged by Auction-Rate Securities Settlements" said Treasury Strategies' Tony Carfang recently. He told Fox News, "The recent settlements between regulators and securities dealers to buy back auction-rate securities (ARS) are actually hurting corporates and institutions.... The $330 billion ARS market failed in early 2008. The markets were actually well on the way toward healing themselves.... Now, the market's self-guided healing process came to an abrupt halt and regulators have left us with settlements of only $50 billion spread out over as long as three years."

MarketWatch writes "The appeal of retail for i-banks in times of need: Deposits from brokerage accounts provide stability as funding costs rise. The article says, "Incorporated in Utah, the retail banks of Merrill Lynch and Morgan Stanley have been hauling in deposits in the form of so-called 'sweep' accounts.... Merrill Lynch Bank USA had grown its total deposits to $56.8 billion as of March 31 this year, from $52.5 billion.... Morgan Stanley Bank, its closest rival in this space, has grown its total deposits to $29.9 billion from $20 billion over the same period." J.P. Morgan analyst Ken Worthington says, "What we've been seeing is a migration from money market funds where brokers were generating a management fee, to bank deposits where they can potentially earn a wider spread. I think the pursuit of higher returns and higher income prompted this transition, in an environment where some of their investments may not have turned out the way they've expected."

Today's Wall Street Journal writes "Vanguard Slams SEC's Rating Proposals", which discusses opposition to the SEC's July 1 proposal to remove ratings from Rule 2a-7, the regulations governing money market funds. (See our August 18 article, "Vanguard Strongly Opposes Eliminating Credit Ratings From Rule 2a-7".) WSJ says, "The most significant portion of the proposals would make it possible for U.S. money-market funds to invest in short-term debt without regard to ratings put on those securities by firms such as Moody's Investors Service, Standard & Poor's and Fitch Ratings."

ICI's Weekly Money Fund Asset Series shows assets flat in the latest week. As of August 20, money fund assets declined $1.45 billion to $3.573 trillion, slightly below last week's record level of $3.575 trillion. Retail assets fell $1.35 billion to $1.239 trillion, while institutional assets fell $98 million to $2.334 trillion. In other news, Bloomberg writes "Cuomo Snubs Treasurers in Auction-Rate Debt Rescue", which discusses how corporations are being left out of ARS settlement talks. It says, "Some finance managers are moving their cash to the trading desks of commercial banks as others shift to money-market funds or bank accounts," sourcing Treasury Strategies' Anthony Carfang.

We wrote last Friday in our daily Crane Data News, "Money Funds Receive Final Sigma Payments, Celebrate SIV-Free Status," that Federated Investors would be receiving their final Sigma SIV payment Monday. The company now confirms it, writing on their website "As of August 19, 2008, the Federated prime money market funds have 0% exposure to Sigma Finance. Sigma has met all payment obligations as agreed." See also Sigma Finance Corporation Update.

PBS's Nightly Business Report did a piece entitled, "Money Market Mutual Funds May Have To Manage More Scrutiny" last night, which rehashes some old news on money fund bailouts and which speculates that money funds mace face more regulatory scrutiny. The Reserve's Bruce Bent, DB Advisors Kevin Bannerton, and fund gadfly Mercer Bullard briefly comment in the segment. "During the past year, at least 17 money market management firms have quietly unwound their riskier investments to prevent what's known as breaking the buck," says NBR. (We argue, though, that this is incorrect. Most would not have "broken the buck" even without support actions.) Click here for video.

USA Today writes "Money market mutual funds are safe, but not perfect" in reader Q&A. The question was: "Can you verify that no one in the U.S. has ever lost money in a money market mutual fund?" Columnist Matt Krantz responds, "Money market mutual funds are extremely safe places to park cash. Next to putting your money in an FDIC-insured bank account, a money market fund run by a respected financial firm is one of the safest things you can do with your cash." He adds, "Just one money market fund allowed its shares to fall below $1, and that was Community Bankers US Government Fund in 1994." In other news, Reserve issued a press release yesterday afternoon entitled, "The Reserve Mourns and Remembers Former Partner, Henry "Harry" B.R. Brown."

Last Friday, Fund Action wrote "Smaller Money Funds Throw in the Towel", which said, "As new regulation looms and firms assess damage from the credit crunch, the money market fund industry is consolidating." We disagree with this contention, however, as Fund Action is only able to cite a handful on marginal players leaving the space, such as Pax World Funds and Capital One (moving to Fidelity). There hasn't been a substantial departure from the money fund space since Alliance sold its fund management to Federated many years ago.

Henry "Harry" Brown, who co-invented the money market mutual fund with Bruce Bent at The Reserve in 1971, has died at 82, reports The Washington Post. The Post quotes former ICI president Matthew Fink from his pending book "The Rise of Mutual Funds: An Insider's View," "Money market funds were clearly the most important product innovation in the history of the mutual fund industry."

ICI's weekly "Money Market Mutual Fund" data series shows assets rising $14.14 billion the week ended August 13 to a record $3.575 trillion. Retail assets declined by $3.61 billion to $1.240 trillion while institutional assets increased by $17.75 billion to $2.335 trillion. Money funds assets, which surged by over $580 billion in the second half of 2007 and by another $385 billion in the first quarter of 2008, stalled in the second quarter of '08, falling $42 billion. It appears the inflows may be back in Q3, though, as assets have risen by $95 billion over the past month-and-a-half.

"Money fund assets top $3.5 trillion as investors stash cash" writes the LA Times. "'Better safe than sorry' has been the motto of many an investor over the last year. And one of the biggest beneficiaries of that cautious mind-set has been the money market mutual fund industry," says the Tom Petruno article. The Times explains, "Assets in money funds just crossed the $3.5-trillion mark this week for the first time, according to Money Fund Report in Westborough, Mass. Investors added a net $22.4 billion to the funds in the seven days ended Tuesday, lifting total assets to a record $3.52 trillion." (Note that this article references iMoneyNet's asset series; ICI's totals surpassed $3.5 trillion mark in April of this year and Crane Data's have yet to reach this level.)

The Reserve has posted the recording of their recent conference call "What Happened to Safety, Security, and a Good Night's Sleep??" on their website. Reserve Chairman and Founder Bruce Bent says, "We are seeing an unnecessary crisis of confidence in today's marketplace. It's important for investors to be aware of what and with whom they are investing, but at the same time they need to have confidence in the soundness of money market funds.... The purpose of the money market fund is to provide safety of principal, liquidity and a reasonable rate of return all the while boring investors into a sound sleep." The call was moderated by and includes an introduction by Crane Data Founder Peter Crane.

Nuveen will host a conference call on ARPS this morning at 10:30 a.m. The company issued a release "Nuveen Investments Making Steady Progress with ARPS Refinancing." In other news, Northern Institutional Funds issued an updated "no-action" letter to extend its previously disclosed capital support agreements.

The press release "Deutsche Bank's Institutional Asset Management Business Launches Initiative to Enhance Transparency of Money Market Funds Reporting" was released yesterday afternoon, announcing DB Advisors and Clearwater Analytics launch of Money Fund Transparency. It quotes, "Long gone are the days when a money market funds' quarterly holdings read like a "Who's Who" of corporate America. The subprime liquidity crisis has driven investors to demand more detailed information on their money market fund investments, and there is a clear need for analytics and metrics to assist them in interpreting this information. The time is ripe for transparency and simplicity," says `Peter Crane, president of Crane Data and publisher of industry newsletter Money Fund Intelligence.

Bloomberg wrote Friday, "Bank Failures Have Customers Seeking FDIC Protection". The article says, "As U.S. regulators brace for more bank failures, consumers are wondering for the first time since the savings-and-loan crisis of the 1980s about the safety of their money." It adds, "For those seeking insurance over the normal FDIC limits, banks in the Promontory Interfinancial Network LLC will split up a large CD among several banks to stay under the cap. The Arlington, Virginia-based company has been offering this service, known as a certificate of deposit account registry service, or CDARS, since 2003."

The London-based Institutional Money Market Funds Association (IMMFA) put out a press release yesterday entitled, "Money Market Funds Increase in Popularity During Credit Crunch". The brief from the European trade group for AAA-rated "money funds" quotes Chairman Donald Aiken, "This last year has been testing, not least for the managers of money market funds. However, funds ... have grown to record levels of over E425 billion (euros), which is an increase of 27% since the onset of the credit crunch.... No investor has to date ever lost money in an IMMFA money market fund, and we aim to maintain this enviable record.... The absence of any recognised definition of a money market fund has generated increased attention and investor nervousness.... [W]e will continue to work towards an accepted definition to differentiate us from other short-term and enhanced cash funds."

The Federal Open Market Committee "decided today to keep its target for the federal funds rate at 2 percent." The Fed statement says, "Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.... Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee."

Arriving a little late to the party, USA Today writes "Money funds quietly get help to maintain share price". The article reviews the past news about money funds taking support actions to protect investors, saying, "Several companies that run money market mutual funds have been quietly stepping in and replacing some of their troubled assets to keep shareholders from losing money."

Qatar's Gulf Times features a Reuters-written article, "Credit crunch crushes money market fund myth", which once again confuses "enhaced cash" and "money market" funds. The article quotes Isabelle Demoliere of Fortis Investments UK, "The enhanced money market funds industry has experienced huge outflows. There have been dramatic shifts in terms of liquidity." The piece adds, "But liquidity did vanish rapidly. As a result, in Europe, at least a dozen enhanced money market funds were suspended or liquidated after their net asset value fell up to 20% in some cases, according to Fitch Ratings. It also quotes Fitch's Abisodun Soetan "Enhanced yield funds (are) probably the worst casualty.... The reason they struggled so much since the crisis is there was a mismatch between investor and fund objectives.... Investors could've asked the question on how and where these yields have been enhanced."

ICI's weekly "Money Market Mutual Fund Assets" reports says, "Total money market mutual fund assets decreased by $5.08 billion to $3.502 trillion for the week ended Wednesday, July 30." Retail money funds decreased by $5.15 billion to $1.226 trillion and institutional assets increased by $74 million to $2.276 trillion. Assets have increased by about $47 billion in July and by $357.5 billion year-to-date. In enhanced cash news, U.K.-based "Investment Week" writes, "Henderson plans to rename its Enhanced Sterling Liquidity offering [Henderson Cash fund] to reflect its investment strategy more accurately."