Daily Links Archives: February, 2009

NYTimes writes "Lehman Loss Just the Start for Money Fund", saying, "The Reserve Primary Fund, the giant money market fund that was pushed into a tailspin by the collapse of Lehman Brothers in September, estimated on Thursday that legal fees and damage claims stemming from that crisis would ultimately cost its investors more than Lehman did.... If the fund trustees are right, that litigation could add 5.25 cents a share to the Lehman loss -- for a final recovery for investors of 91.72 cents on the dollar." See the Reserve's release "A Statement Regarding Special Reserve Under The Plan of Liquidation" and Bloomberg's "Reserve Fund Holds Back $3.5 Billion for Legal Costs".

In case you missed it, yesterday's Wall Street Journal featured the article, "'Safe' Products May Pose Risks For Investors". It said, "As markets swing wildly, financial firms are seeking to lure skittish investors with products that tout consistent monthly payouts, set levels of return or protection of your principal. Such products may soothe investors' frayed nerves, allaying their fears of further market declines or of outliving their retirement assets. But they can also come with pitfalls, such as high fees, and their complex strategies may ultimately give investors less peace of mind than advertised." Also, see the mention of money funds in Fed Chairman Ben Bernanke's "Semiannual Monetary Policy Report to the Congress". It says, "Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs."

SmartMoney features "Your Money...Swept Away", which discusses brokerage sweep accounts. The piece says, "Across the country, millions of Americans have been sitting on cash -- not at banks, not at credit unions, but in brokerage houses. Spooked by the crash on Wall Street last fall or nervous even earlier in the year, many dumped their mutual funds and bailed out of individual stocks. Then they gave their brokers one simple order -- put it in cash -- creating what analysts say could be a record amount of parked money. Indeed, while no one knows the exact size of these accounts, rough estimates suggest they easily top $600 billion.... Today much of this money continues to sit in accounts with names like 'sweep,' 'core' and 'cash management.'"

"Money Funds Seen as 'Endangered Species'" writes Financial Planning. The article says, "[W]hile the industry certainly has reason to celebrate all that cash piling up, some mutual fund leaders warn that hoarding cash in ultra-safe investments creates its own set of risks. Others note that regulators are bound to change money funds' mandate, and that due to zero yields, many money fund companies are absorbing administration fees to prop up NAVs." It quotes ICI Chairman John Murphy, "Some institutional money market funds are very big, and there's a tremendous amount of risk in those large, institutional money market funds. The money fund represents an unconditional put at a dollar. When you've got large investors in there, that's a risky situation."

"Money-Market Funds Waive Fees to Boost Yields" writes Kiplinger's, saying, "The borrower's boon is the saver's bust: With yields on short-term Treasury bills stuck near zero percent, money-market funds that hold these securities are struggling to keep their returns positive, after fees. Some funds are investing in longer-term securities, which extends the average maturity of the fund and garners a little extra yield without compromising safety." Also, USA Today writes "S&P 500 is at risk of hitting a new low as angst persists", which says, "Investors are piling into assets viewed as havens, such as short-term Treasury bills and gold, as well as cash. In mid-February, there was nearly $4 trillion parked in money market mutual funds, vs. $3.4 trillion a year ago, according to Crane Data." "Several hundred billion is true cash seeking shelter," it quotes Peter Crane.

The New York Times writes "Not All Certificates of Deposit Are Plain Vanilla -- or Safe", which discusses the Robert Stanford case and his sale of "about $8 billion of suspiciously high-yielding C.D.'s through Stanford International Bank." The article says, "These C.D.'s were not insured by the Federal Deposit Insurance Corporation. So once again, we're faced with images of forlorn people trying and failing to extract their life savings. There's some question as to whether Stanford ought to have been using the phrase 'certificate of deposit.' Most investors who hear 'C.D.' immediately assume that it's safe. Faulty terminology or not, it's a bad time for C.D.'s to get a black eye, given that growing numbers of people are looking for secure investments as stocks approach their bear market lows." Also, see Bloomberg's "Stanford Lured Clients With 'No Worry' Promise, Rates" and WSJ's "Will Queasy Money Return?".

Money market mutual fund assets fell by $24.25 billion to $3.879 trillion in the week ended Feb. 18 said the ICI in its latest weekly release. Prime Institutional funds increased by $9.6 billion to $1.183 trillion, reclaiming their position as the largest category of money fund assets. Government Institutional funds (including Treasury funds) decreased by $26.1 billion to $1.165 trillion. Retail assets eased lower while Tax Exempt money funds continue to see outflows. Assets were likely impacted by tax-related outflows on the 15th of the month and outflows related to the long President's Day weekend. In other news, see the new "Additional Information Regarding the Reserve Primary Fund" posting.

"The Pershing Press: Bringing Cash Protection to New Levels", is a release recently put out by Bank of New York Mellon affiliate Pershing. It says, "The current changes in the financial markets have generated a renewed interest in cash and cash management products. In an effort to help investors safeguard more of their assets, the Federal Reserve Board (Fed) has increased the insurance limits of the Federal Deposit Insurance Corporation (FDIC) to $250,000 per account until December 31, 2009. Although this increase provides relief, large individual and institutional investors have few options for protecting their sizeable assets.... Introducing the Certificate of Deposit Account Registry Service (CDARS) CDARS, now available to you through Pershing, provides your clients with access to FDIC insurance for up to $50 million per depositor for deposits held in the same insurable capacity, and offers you a simple way to aggregate client assets. CDARS disperses your client's deposit among individual Certificates of Deposit (CDs) or time deposits in increments of less than $100,000 (or $250,000 depending on maturity) at member banks across the country -- analogous to purchasing CDs or time deposits at multiple local banks." Pershing also offers its brokerage clients a "FDIC Insured Deposits Program" and a "Money Fund Choice Program," which gives "access to over 130 money market mutual fund sweep options."

Yesterday's Wall Street Journal featured "Money-Fund Bailout Has Been Winner, which says, "At least one government bailout seems to be working -- and even boosting the coffers of the Treasury Department.... In the case of the money-fund bailout, the government could even make money. To insure money funds, the Treasury charged them 0.01% to 0.022% of their assets. It has collected $813 million in such fees, and the agency hasn't paid any claims yet. One reason for the success of the money-fund bailout is that the problems were relatively simple and contained. Money funds held high-quality and short-term assets, so the risk of guaranteeing them wasn't high for the government. It also helps that no other financial giants have followed Lehman into bankruptcy." In other news, see Schwab Bank Announces New High Yield Investor Savings Account, which has the subtitle, "APY of 2.00% Offers Clients a Competitive Rate and a Secure Alternative for Their Cash With no Minimums or Monthly Service Fees."

FinancialWeek's "OpEd: Volcker, Group of 30 over the top on money-market funds" is subtitled, "Group wants to take bazooka to money-market industry. It's regulatory overkill, argues Stephen Keen." The piece says, "A private, nonprofit, international body composed of very senior representatives of the private and public sectors -- including Paul Volcker, chair of President Barack Obama's Economic Recovery Advisory Board -- recently concluded that money-market funds are a $3.9 trillion mistake that deserve to be abolished. Their conclusion, however, is based on a fundamental misunderstanding of money-market funds and the problems they encountered in the wake of the Lehman bankruptcy. Although the SEC needs to supplement the already extensive regulation of these funds, there is no reason they should be outlawed." Keen adds, "The advantages of this [new banking] model are not self-evident, however. In the 30 years since the SEC granted to the first order permitting money-market funds, two funds have broken a dollar. On the other hand, the FDIC's website reports 55 bank failures in the past eight years, and the FDIC has lost hundreds of billions paying off depositors of failed banks and S&Ls. In stark contrast, the programs established to support money-market funds and the commercial-paper market are not expected to cost taxpayers a dime."

"Say goodbye to money funds" writes Robert Gordon in an editorial in Investment News. The piece says, "From the signs that are emerging, I predict that the $3-trillion-plus money market fund business will disappear in its present form and that existing funds either will come under banklike regulation or become ultrashort-term-bond funds with fluctuating net asset values." Gordon cites the possible expiration of the Treasury's money fund guarantee, the need for bank deposits, and the recent Group of 30 report as negatives. He also (erroneously) claims, "The money fund business is hurting. Money fund sponsors aren't making any money now with interest rates this low; most need to waive fees to keep the returns to investors from going negative."

ICI's weekly "Money Market Mutual Fund Assets" series shows a decrease of $3.2 billion to $3.903 trillion for the week ended Feb. 11. Retail assets fell by $6.15 billion to $1.346 trillion while Institutional assets rose by $2.95 billion to $2.557 trillion. Government funds, including Treasury funds, continued their declines, falling by $3.29 billion to $1.439 trillion, while Non-Government (or "Prime") funds rose by $4.76 billion to $1.982 trillion. Tax-Exempt funds fell by $4.67 billion to $482.0 billion. The release says, "ICI reports money market mutual fund assets to the Federal Reserve each week."

CondeNast Portfolio writes "Kanjorski and the Money Market Funds: The Facts", which discusses and dismisses the conspiracy theorists circulation of a video alleging that $550 billion flowed out of "money market accounts" in two hours on Sept. 18 and that the Fed closed down the money markets. Thankfully, writer Felix Salmon brings some sanity to this crazy story, saying, "With the Kanjorski Meme still spreading, I think I'm finally able to squash it with some hard figures: there never was a $500 billion outflow from any asset class in the space of a couple of hours or even weeks, and the Fed never shut down or froze any money-market accounts."

The London-based Institutional Money Market Funds Association recently issued a document entitled, "Statement: IMMFA Money Market Funds." It says, "A money market fund is a mutual fund which invests in high-quality short-term debt instruments. The money market funds represented by IMMFA should not be confused with other funds which are available. IMMFA represents only triple-A money market funds which value assets on an amortised basis. This allows the fund to maintain a constant net asset value of, for example, L1 or E1." The IMMFA statement continues, "There is a weekly comparison with the mark-to-market value of instruments and the fund to ensure there is no material (i.e. 50 basis points or more) variance between the two values. If there is, the fund is said to have 'broken the buck' and loses its constant net asset value. The funds must have a maximum weighted average maturity of no more than 60 days, and may invest in no instrument which has a residual maturity of more than 397 days.... Only IMMFA members' funds seek to maintain a constant net asset value through utilisation of amortised accounting, as permitted by European directive. Others funds may seek to provide capital security, but must value assets solely on a mark-to-market basis. The concept of breaking the buck is only applicable to those money market funds which maintain a constant net asset value through amortisation."

Barron's "Fund of Information: Popularity Is Painful for Treasury Money Markets" writes, "Historically low interest rates may be good for the economy, but they're murder on money-market fund profits." It says, "Vanguard recently closed to new accounts its Vanguard Admiral Treasury Money Market Fund (VUSXX), which jumped by $5.4 billion in 2008 to $26 billion last month, and Vanguard Treasury Money Market (VMPXX), which grew by $1.7 billion last year to $7.9 billion. Investors poured money into them as virtually every asset class was plummeting." Barron's also cites these funds as closed to new investors: Fidelity U.S Treasury Money Market Fund (FDLXX), Fidelity Institutional Money Market Treasury Portfolio (FISXX), Fidelity Institutional Money Market Treasury Only Portfolio (FOIXX) and Fidelity Cash Management (FDUXX), and MFS Government Money Market Fund (MMGXX).

"TD to offer alternatives to money market funds" says Investment News. The weekly publication writes, "TD Ameritrade is readying a suite of alternatives to money market funds that it says will help financial advisers and its online brokerage clients deal with rock-bottom interest rates without assuming too much risk. The most innovative, in its way, is likely to be a throwback: a savings-account-like product from an FDIC-insured bank." We're somewhat mystified by the story, however, since we've been under the impression that TD Ameritrade has been offering such a product for some time. (Our Brokerage Sweep Intelligence lists these rates from 0.05% to 0.10%.) "For clients that want capital preservation and liquidity, the FDIC-insured product is the better one and safer one," said TD Ameritrade president and chief executive `Fred Tomczyk. See also, Chuck Jaffe on MarketWatch's "Low-yielding Treasury funds should close up shop".

The Oregonian features "Skip the safe and consider an online bank savings account", saying, "Jokes aside, these savings accounts offer better yields (currently between 2 and 3.20 percent) than down-in-the-dumps money market mutual funds (about 0.75 percent, on average, according to Crane Data). They even out-earn most bank certificates of deposit, which require you to give up your money over an agreed-upon period." The paper quotes Peter Crane, president of Crane Data, a "Massachusetts firm that tracks money market accounts", warning about the top banks, "The highest yield attracts the wrong kind of crowd.... It's a crisis waiting to happen." See also, BusinessWeeks' "Volcker Financial Regulation Testimony Sketches Broad Changes".

San Francisco boutique investment banking firm Merriman Curhan Ford announced the sale of two groups, including the online money market trading portal Institutional Cash Distributors (ICD). The company's press release says, "Merriman Curhan Ford Group, Inc. today announced the sale of two service groups to focus on its core investment banking and institutional brokerage business lines. The firm has sold Panel Intelligence, LLC and Institutional Cash Distributors (ICD) to employees of those respective service groups. The expected $3.1 million in total proceeds from these two separate transactions will be used to strengthen Merriman's balance sheet for growth in a tough capital markets environment. Going forward, ICD will continue to work with Merriman as a client under various service agreements." See also, ICI's weekly money fund statistics, which show total MMMF assets rising by $2.38 billion to $3.906 trillion.

"Florida Investment Pool Fails to Attract Investors After Freeze" Says Bloomberg. The article states, "More than a year after Florida municipalities started pulling cash from a $27 billion state-run money-market fund because it held defaulted securities, towns and agencies still want little to do with the investment pool.... Other state funds also got stuck with high-yield, high-risk debt as the subprime-mortgage market collapsed in 2007. Connecticut's fund held $100 million of defaulted asset-backed notes and Montana's had $90 million, according to Fitch Ratings. High-yield, high-risk, or junk, bonds are rated below BBB- by Standard & Poor's and less than Baa3 at Moody's Investors Service."

"FDIC Proposes Interest Rate Limits to Aid Liquidity" wrote Bloomberg last week. The article says, "The FDIC recommended banks be limited in tapping higher-cost sources of funds, such as brokered deposits, and be barred from paying rates that exceed a national average plus 75 basis points. The agency also said premiums paid to insure deposits should be based on risks faced by the banks that fail to meet regulatory requirements." It quotes FDIC Chairman Sheila Bair, "The idea is to prevent these banks from acting in a way to compound losses to the FDIC. Our expectation and intent is that the additional concreteness of this proposed rule would result in lower deposit rates being paid by a number of weak banks."

"Money-Market Reform Proposals Could Directly Hit Fund Investors" says Dow Jones, writing on the Group of 30 Proposals, "Tucked into three paragraphs amid an 82-page report was a suggestion that money-market funds should either let their net asset values float freely or convert to 'special-purpose banks' -- steps that fund-industry representatives say would effectively kill money-market funds in their current form." The article quotes ICI President Paul Schott Stevens, "If the recommendations are implemented, there will be no more money-market funds, period." It also quotes Mercer Bullard, "Banks have lost billions of dollars and money-market funds have proved them to be wasteful and inefficient. One IndyMac costs us more than all the money-market fund failures in the past and future combined." See also, Financial Times' "Money market funds in lawmakers' sights".

On Friday, the Board of Governors of the Federal Reserve System announced "Final Rules pertaining to Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)." The statement says, "The Federal Reserve Board on Friday announced two final rules pertaining to the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), which extends loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds. The first rule provides a temporary limited exception from the Board's leverage and risk-based capital rules for bank holding companies and state member banks. The second rule provides a temporary limited exception from sections 23A and 23B of the Federal Reserve Act, which establish certain restrictions on and requirements for transactions between a bank and its affiliates." The rules were "originally approved as interim final rules on September 19, 2008, [and] will facilitate participation by depository institutions and bank holding companies as intermediaries between the AMLF and money market mutual funds." The "Board has also adopted a third final rule ... allowing all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market."