Daily Links Archives: January, 2009

Bloomberg writes "JPMorgan's Staley Call Money Funds a 'Systemic Risk', saying, "James 'Jes' Staley, head of JPMorgan Chase & Co.'s investment unit, said the $4 trillion money-market fund industry is the 'greatest systemic risk' to the financial system that hasn't been adequately addressed." Bloomberg quotes him from Davos, Switzerland, "`What keeps me up at night most of anything we do at JPMorgan Asset Management is the money-market fund space. One of the things that has to come out and get a lot more attention and discussion is how do we take the systemic risk posed by money funds out of the system?" Bloomberg quotes Vanguard's David Glocke, "I'm aware there are those who want to blame the money-market industry for taking away the punch bowl. But issuers need to maintain diverse sources of funding." The article also quotes Peter Crane, "It would split the fund business, in effect: half into bank deposits and half into ultra-short bond funds." It says, "Crane predicted the industry would fight the proposal 'tooth and nail' and has the influence to win." Crane adds, "It's too big and important for such a dramatic change to be made."

See Paul McCulley's Bloomberg TV comments regarding PIMCO's new money market funds from earlier this week. McCulley told Bloomberg, "I think everybody who's a manager of a money market fund is struggling with these incredibly low yields, because, remember, money market funds have a weighted average maturity of 60 days or less. We've had a Prime money market fund ... for over 20 years. What we're doing is we're filling out our suite of money market fund offerings.... We've discovered that there's some investors who want the absolute assurance of being in a government-only or Treasury-only fund, so we're meeting the market demand." See also, USA Today's "Money funds relatively safe for savings, but yields are low".

FDIC to Tighten and Clarify Interest Rate Restrictions on Institutions That are Less Than Well-Capitalized we learned from banking information website BankDeals. The FDIC's Board of Directors "proposed for comment a regulatory change in the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than Well Capitalized. Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates. The proposed regulation would define nationally prevailing deposit rates as a direct calculation of those national averages.... Reliance on the Treasury yields in the regulation would be discontinued." FDIC Chairman Sheila Bair says, "This proposed regulation would bring much needed concreteness to the administration of these statutory interest rate restrictions. Our expectation is that this additional concreteness would result in lower deposit rates being paid by a number of banks that are less than Well Capitalized and closer adherence to the statute."

"Legg Mason Reports Results for Third Quarter of Fiscal Year 2009" states a press release issued by the Baltimore mutual fund company, which manages the Western Asset and Citi money market mutual funds. The firm reported a $1.5 billion loss, saying, "Due to the Company's continued efforts to reduce its Structured Investment Vehicle (SIV) exposure, it incurred a loss of $842.1 million, representing $512.4 million net of operating expense reductions and income taxes, or $3.63 per diluted share, as a result of the previously announced sale of the Axon Financial SIV securities in December 2008. The sale reduced the total exposure of the Company and its money market funds to all SIVs by 43%. Total exposure to SIVs remaining in the money market funds has declined from approximately $10 billion in October 2007 to $1.4 billion, through systematic reduction of positions." The company hosted a conference call at 8:30 a.m. Wednesday.

The Wall Street Journal writes "Fed Program That Calmed Debt Market Faces a Test", which discusses the Federal Reserve's Commercial Paper Funding Facility. WSJ says, "This week brings one of the first tests of success for a key Federal Reserve program that has calmed the short-term credit markets. About $230 billion of three-month debt that the Fed owns, in the form of commercial paper, is set to mature by Friday." It adds, "Money-market funds have been buying higher-yielding assets rather than just the safest short-term Treasury bills, which yielded them 0% for several weeks. Investors have moved into 'prime' money-market funds, which buy higher-yielding assets. Money-fund managers no longer fear the possibility of 'breaking the buck,' or having the value of each share fall below $1, given the myriad government programs that ensure liquidity to meet any surge in redemptions."

Reuters writes "J.P. Morgan sees US Treasury fund assets shrinking", saying, "The Federal Reserve's near zero percent interest rate policy has resulted in a massive withdrawal from money market funds that invest only in safe but low-yielding U.S. government securities, J.P. Morgan Securities said on Monday." The article adds, "J.P. Morgan analysts predicted assets in Treasury-only money market funds could shrink 50 percent by the end of 2009 from its peak of about $760 billion in December." Crane Data's Money Fund Intelligence Daily shows Treasury money funds declining $86.3 billion since their peak of $695 billion on Dec. 8, 2008. Government funds increased by $93.5 billion and Prime funds increased by $108.7 billion over this 6 week period. Also, see Investment News' "Schwab waives fees on Treasury fund".

"Ameritrade waives fees on funds" says Crain Communication's Investment News. The article states, "TD Ameritrade Holding Corp. last week said it began waiving fees on at least one of its funds in December and will likely reduce or eliminate fees for the vast majority of its other money market funds over the next few months to avoid a zero or negative return for investors." The piece quotes Peter Crane, "You will see more waivers because the money markets are still bottoming.... If the revenue pressure becomes acute, I assume they would begin those investments [FDIC-backed and government agency debt] as a last resort.... If rates stay low for another year, it may cost a couple of hundred million dollars [out of a Crane estimate $15 billion in annualized revenue]. That's certainly not welcome in this environment, but it's not going to send fund firms or investors running and screaming out of the Treasury sector." Also, see MarketWatch's "Federated stock up 8% after positive results".

"Cachematrix Asset Growth and Trade Volume Increase Over 175% in 2008" says a press release from the money fund portal technology provider. The statement says that "record growth propels software provider to its best year ever" and that "assets invested through its licensed software portals and customized cash trading systems grew by over 175% in 2008." Cachematrix CEO George Hagerman says, "2008 was a good year for Cachematrix, as we now power trading systems for twelve different Global Banks and Financial Institutions. We remain the only Software as a Service (SaaS), or Cloud Computing, firm in the nearly $4 trillion dollar money fund space that builds, deploys and maintains these systems for many of the world's largest financial institutions." The company cites: "$2 Trillion in Trade Volume Processed Through Cachematrix Software, 7,900 Total Institutional End Users, and More Than a Dozen New Software Feature Upgrades" as its 2008 highlights. See also, ICI Reports Money Market Mutual Fund Assets, which shows total money fund assets decreased by $28.95 billion to $3.893 trillion in the latest week.

Bloomberg writes "Pimco to Expand Money-Market Funds After Missing 2008 Surge", saying "Pimco, based in Newport Beach, California, filed Jan. 16 with the U.S. Securities and Exchange Commission to sell shares in the new Treasury Money Market and Government Money Market funds. The funds will cater to institutional investors and will be run by Paul McCulley.... The company, with $790 billion in assets under management, has one prime money fund, a category that invests in corporate debt. Pimco missed out on the investor rush into funds that focus on government securities after the $62.6 billion Reserve Primary Fund suffered losses from the September bankruptcy of Lehman Brothers Holdings Inc." It quotes Peter Crane, "Money-market funds have had a number of problems. But they were still the single best performing segment of the mutual-fund business as far as asset growth goes."

"Matrix Expands Money Market Portal Services", says a company press release. Matrix Settlement & Clearance Services, LLC (Matrix), a "Matrix Financial Solutions affiliate" has partnered with "provider of money-market mutual fund information and analysis" iMoneyNet in an "expansion of its Money Market Portal product, Money Fund Monitor, according to Matrix. "The money fund marketplace has changed and it is more important than ever before to have access to information when selecting money funds. Not only are institutions facing increasing pressure to find the best yields, but the need to understand the management and composition of a money fund portfolio and perform some level of due-diligence is increasingly important," says Michael Rice, program manager for the Matrix Money Market Portal. See also, WSJ's "Assets in Money-Market Funds Fall" and Reuters' "US commercial paper resilient after State St loss".

Goldman Sachs Sterling Government Liquid Reserves Fund Assigned 'AAAm' says a release by Standard & Poor's. The ratings agency says, "Goldman Sachs Asset Management International, manager of the new subfund, has established this very conservative vehicle to further enhance its offshore money market fund range with a British pound sterling-denominated government money market fund. The Goldman Sachs Sterling Government Liquid Reserves Fund, which will be offered to institutional, corporate, and private clients, aims to provide its investors with a high level of current income and daily liquidity, as is consistent with the preservation of capital. The rating reflects the subfund's extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and/or liquidity risks." In other news, see Reuters "Dec. quarter may be worst-ever for asset managers" and Dow Jones' "Ameritrade CFO: Waiving Fees On Some Money-Market Funds".

The Minneapolis Star-Tribune writes "Savings options: Lower returns are OK", which is subtitled, "Finally fluffing up that cash cushion? Focus on safety, not return." It says, "If you're one of the many Americans realizing that having a cash cushion is critical, your rate of return should not be your top priority. With short-term cash, it's about 'return of principal, not return on principal." Columnist Kara McGuire cites our Peter Crane and adds, "No matter what short-term cash vehicle you're considering, think about convenience in addition to yield, said Crane. Is it worth going across town or putting up with another username and password for a few basis points? I also like Crane's so-called wildebeest strategy -- 'stay in the middle of the pack' when it comes to yields." Also, see Morningstar's "Seven Questions with Mercer Bullard", which says, "Similarly, the worst mutual fund scandal arising out of the current crisis is the failure of the Reserve Funds, again costing investors only a few pennies on the dollar."

"ICI, SIFMA petition SEC for hearing on Reserve" writes Investment News, saying, "Two trade groups that represent the investment management industry want the Securities and Exchange Commission to hold a public hearing on the liquidation plan for a money market fund that collapsed in September." It quotes Peter Crane, "I assume they are feeling pressure from individual investors and some of the aggrieved parties.... I can't prove it yet, but I predict investors in [the Primary Fund] will end up with positive returns in 2008." The article says, "But public hearings into a liquidation plan that's almost run its course seem like overkill, citing Bill Donoghue.

Columnist Chuck Jaffe writes on The San Francisco Chronicle's SFGate.com, "Comparing money market funds, online savings". He says, "With Treasury yields at ultra-low levels, many money market fund investors are wondering whether they need to move up the risk scale, moving their cash into prime money market funds or other investment vehicles to squeak out just a bit more yield. For savers or investors hoarding cash, the real question should not be whether to invest in a higher-yielding money fund; it should be whether to leave funds altogether for the better returns available in ordinary savings accounts, particularly high-yield online bank accounts." Jaffe finishes, "After yield and protection concerns, the decision boils down to convenience, habits and account rules."

WSJ's "Ahead of the Tape" mentions Schwab Treasury Money Fund, saying, "But investors will be listening for a concern that could emerge down the road regarding its roughly $34 billion Treasury Money Fund in this low-interest-rate environment. With short-term Treasurys yielding near 0%, the fund currently yields about 0.02% after Schwab deducts operating expenses of 0.6%. As analyst Richard Repetto at Sandler O'Neill Partners notes, the fund's Treasurys have an average duration of about 55 days, meaning the full effects of December's drastic interest-rate reduction hasn't yet filtered through." In other news, the Charlotte Business Journal writes "Columbia Management logs $459M loss" because of "continued capital support of money-market funds."

ICI Says Money Funds at $3.922 Trillion. The weekly survey by the Investment Company Institute continues to show record levels of assets in money market mutual funds. The "Money Market Mutual Fund Assets" release says, "Total money market mutual fund assets increased by $27.13 billion to $3.922 trillion for the week ended Wednesday, January 14.... Assets of retail money market funds decreased by $4.07 billion to $1.364 trillion.... Assets of institutional money market funds increased by $31.20 billion to $2.558 trillion." ICI "reports money market fund assets to the Federal Reserve each week.... Additional statistical releases are available at the ICI's web site (www.ici.org/stats/latest/index.html).

The Boston Globe writes on "Money market funds vs. money market accounts", asking "What is the difference between a money market mutual fund and a money market deposit account?" The answer: "Good question! As investors continue to move money into more conservative holdings such as cash and cash equivalent investments, it is important to understand the difference between a money market mutual fund (sometimes known as a money market fund or a money fund) and a money market deposit account. Money market funds and money market deposit accounts are similar in that they both usually invest in short-term, fixed income investments such as U.S. Treasuries. [This is incorrect; money funds do, but MMDAs are a promise to pay by the bank. -Crane] By definition, short-term, fixed income investments are those with maturities of less than one year.... Both types of investments offer a high level of flexibility and liquidity as you can often write checks against these accounts and make ATM withdrawals from them."

"Money Funds Begin Trending Down" says February Money magazine. (Note that Money hasn't posted this magazine story on the website yet.) It its monthly "Savings and Credit" column, Money writes, "With the Federal Reserve having lowered its key interest rate to 0.25% in late December, money-market mutual funds will be feeling the pinch. The article (incorrectly, we believe) speculates that by the end of January "the funds will have a difficult time generating a return after expenses," citing Greg McBride of Bankrate.com. Pete Crane predicts to Money that as rates ease down, "The majority will yield between 0.5% and 1%.... But funds investing primarily in Treasuries could hit 0%."

"Massachusetts Accuses Reserve of Fraud" writes WSJ.com, saying, "Massachusetts today accused `Reserve Management Co. of fraud for allegedly making false statements about its plans to support the Reserve Primary Fund's net-asset value around the time it 'broke the buck' in September." See also Massachusetts' "Secretary Galvin Charges Reserve Management With Fraud", which includes the 43-page Complaint and 55 pages of Exhibits.

A recent Reserve press release explains the slight delay in a final distribution of Reserve Government Fund, which was supposed to have been paid last week. Reserve's U.S. Government Fund Distribution Update provides "notice of its intention to consummate the sale of its remaining portfolio securities to the Treasury through the Exchange Stabilization Fund on January 15, 2009.... [I]t is anticipated that the Fund will commence distribution of the proceeds from this sale, along with the Fund's remaining assets, on January 16, 2009." In other news, the SEC has posted a new no-action letter related to money funds on its website at www.sec.gov/divisions/investment/im-noaction.shtml#money. The letter involves Mount Vernon Securities Lending Trust, U.S. Bancorp, and FAF Advisors,, asking for an extension of permission for an advisor to purchase securities with a market value "that is equal to or less than their amortized cost value" at amortized cost "to the extent necessary to allow the Fund to pay redemption proceeds".

"Treasury money funds are turning down new cash from investors" says Investment News. In yet another article on "soft closings" of Treasury money market funds, IN writes, "Among the companies that have recently stopped accepting money from new investors into their Treasury funds are Charles Schwab & Co. Inc. of San Francisco, Fidelity Investments of Boston, The Goldman Sachs Group Inc. of New York, and The Vanguard Group Inc. of Malvern, Pa." The piece adds, "Not everyone is so pessimistic." It quotes `Peter Crane, president of Crane Data LLC of Westborough, Mass. "A mutual fund company would be out of its mind to liquidate the only class that has gained money in the past year, even if they are losing money on it." Also, see Financial Week "Cash keeps pouring into money funds".

"A long downturn could take a toll on mutual funds" writes LA Times. The market downturn could cause "higher fees, fewer funds to choose from and possibly the downsizing of the [fund] companies' investment research departments," says The Times, adding, "As rates have tumbled, some firms have been forced to reduce fees to prevent money-fund returns from turning negative. Other companies have limited new investments in Treasury money funds. For the companies, fee cuts have thus far been offset by the tide of money rushing into money funds from investors fleeing riskier holdings, said Peter Crane, chief executive of research firm Crane Data. But if rates stay low for a long time, fund managers could introduce monthly account fees similar to those at banks or charges for ancillary services such as wire transfers." It quotes Crane, "After a while they're either going to give you your money back or they're going to charge you for it."

ICI Reports Money Market Mutual Fund Assets at $3.9 Trillion. Money fund assets continued their tear in the latest week, rising $54.7 billion to a record $3.895 trillion. Retail money fund assets grew $13.2 billion to $1.368 trillion, while Institutional assets grew $41.5 billion to $2.527 trillion. General Purpose (Prime) Institutional funds led the surge, rising $23.0 billion to $1.128 trillion. Government Inst assets rose $12.5 billion to $1.205 trillion and Tax Exempt Inst assets rose $6.0 billion to $194.2 billion. Prime Retail jumped $7.6 billion to $800.3 billion; Govt Retail fell $694 million to $260.5 billion; and Tax Exempt Retail jumped $6.3 billion to $307.2 billion. Also, see Reuters UK's "Credit crunch takes shine off money market funds".

USA Today's "Fundline: What was the worst fund news to hit in 2008?" asks, "Who was 'swimming naked' last year?" It answers, "The Reserve fund. The nation's oldest money market mutual fund collapsed Sept. 16, allowing its share price to fall below $1 -- 'breaking a buck,' as it's known in the industry. It was a staggering blow to the money market industry, which has long held itself out as a bastion of safety. Bruce Bent ... was an outspoken critic of other money funds, often arguing that they took too much risk." "A lot of money funds lost their way," he told the paper. "Just follow the rules. Don't get clever." The article also discusses problems in "Ultrashort income funds." In other news, see FT Alphaville's "Slow road to recovery", which includes a Crane Data table showing the recovery in Prime money fund assets.

The Financial Times writes in "Short View: Money market mystery" that, "The most recent figures from the Federal Reserve show that in November, the amount of money held in US money market funds exceeded the amount in equity funds, for the first time in 15 years." FT continues, "The assets of equity funds had almost halved from $6,900bn in late 2007 to $3,600bn. Meanwhile, money market funds' assets rose to $3,700bn, double their level of three years earlier. According to Citigroup, retail money funds now account for more than 14 per cent of the total market capitalisation of the US stock market, far above the long-term average of 8 per cent." See also, S&P's release "Ratings Withdrawn On Eight Reserve Management Funds."

Time Gives "Money Market Fund Insurance" an 'A' Grade in its most recent issue. The brief says, "The Plan: After a well-known fund lost money in mid-September, assets in money-market funds dropped by $400 billion in two weeks. Money funds help provide loans for the day-to-day operations of large companies. So with investors fleeing these funds, many companies would have had to pay more for short-term loans or not gotten them at all. The government agreed to insure the $3.5 trillion that investors had in money funds in mid-September against losses. The Result: The move quickly reversed the run on money funds. What's more, it hasn't cost the government a penny. In fact, it has actually made money for the government. Nearly every money-market-fund provider signed up for the insurance, which has generated some $750 million in premiums paid to the government since the program started." "It could be seen as the most successful government program to date," Time quotes Peter Crane, who tracks the money-market industry.

Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco gave a speech yesterday citing "Improved Liquidity in the Money Markets". Yellen says, "To preview my answers, I will argue that the suite of programs that the Fed has already announced or put in place are an appropriate and creative response to alleviate strains from the ongoing credit crunch. The evidence suggests to me that they have improved liquidity in the money markets and lowered the cost of private credit. Going forward, asset purchases and lending programs could be expanded and extended to additional sectors impacted by the credit crunch." See also Bloomberg's "Fed Must Have 'Exit Strategy' for Loan Programs, Yellen Says".

Oppenheimer Files to Launch Institutional Treasury Money Market Fund. The new fund will have three share classes -- E, L, and P -- which will charge 0.19%, 0.19%, and 0.24% in expenses. The SEC filing says, "Oppenheimer Institutional Treasury Money Market Fund is a money market mutual fund. Its objective is to seek current income with liquidity and stability of principal. The Fund invests exclusively in U.S. Treasury bills, bonds and notes, and other obligations issued or guaranteed by the U.S. Treasury and repurchase agreements fully collateralized by such obligations." No date has been set yet for launch. See also, Bloomberg's "Lehman Bankruptcy Triggers Loss in Retirement Fund" and MarketWatch's "Tomorrow's headlines".