Daily Links Archives: July, 2009

We learned from Stradley Ronon Stevens & Young LLP Counsel Joan Ohlbaum Swirsky that the Securities & Exchange Commission has issued a "no-action" letter on Straight-A Funding, an ABCP conduit set up by Citigroup and Morgan Stanley designed to package student loans under the Federal Family Education Loan Program. Swirsky says, "In the letter, the SEC staff states that money market funds may treat Student Loan Short Term Notes as Government securities for purposes of Rule 2a-7 diversification testing and for purposes of satisfying the 'names' rule for a government money market fund (which requires investment of at least 80% of assets in securities of the type suggested by the fund name). The Issuer Notes are backed by the Federal Financing Bank. The no-action letter eliminates uncertainty that would otherwise arise as to whether the obligation of the FFB qualifies the Issuer Notes as Government securities. By classifying the Issuer Notes as Government securities, the no-action relief eases diversification testing of the Issuer Notes by money market funds, and, in particular, may make the Issuer Notes a more appealing investment for a Government money market fund." In other news, see WSJ's "In Banks' Profit Push, 'Era of Low Fees Is Over'".

Reuters writes "PIMCO's Gross blasts own industry for high fees". The article mentions money funds deep inside, saying of PIMCO's bond guru Bill Gross, "He highlighted a recent Barron's article that pointed out that stock funds extract an average 99 basis points or virtually 1 percent a year in fees from an investor's portfolio, while bond managers at 75 basis points. Many money market funds manage to charge 38 basis points." It quotes Gross, "Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers. A mighty expensive potion indeed." Crane Data's Money Fund Intelligence XLS spreadsheet shows our Crane 100 Money Fund Index, the 100 largest taxable money funds, averaging 0.37% in expenses, and our broader Crane Money Fund Average charging 0.47% in expenses. We show the average gross (before expenses are deducted) 7-day annualized yield for the Crane 100 was 0.60% as of June 30, 2009, which would mean expenses of 0.37% are currently taking up 62% of gross yields. See also, Reuters' "US money mkt fund assets fall by $9 bln - iMoneyNet".

As a reminder, this Friday is the last day to receive a discounted hotel rate ($169 a night) for Crane's Money Fund Symposium, which will be held August 23-25, at the Renaissance Hotel in Providence. To register and reserve your room at the discounted rate, go to http://www.kinsleymeetings.com/crane/. You can see the updated agenda here, or e-mail us at pete@cranedata.us for a copy of the brochure. Money Fund Symposium has added an "Update on SEC's MMF Reform Proposals" to its Tuesday morning session, which will feature the SEC's Assistant Director of the Division of Investment Management Bob Plaze. We have also made a couple of final tweaks to the agenda. We hope to see many of you in Providence!

Reuters' "Call that a money market fund?" discusses the recent move by Europe to standardize money funds (see our July 9 News "Fund Associations in Europe Pushing for Money Fund Definition(s)"). The Reuters piece says, "Attempts to tidy up the European money market funds (MMFs) sector after last year's turmoil have stirred up a hornets' nest, with some providers arguing that the new definitions from trade bodies IMMFA and EFAMA don't go far enough." It continues, "But market participants such as Laurie Carroll, of BNY Mellon Cash Investment Strategies, and Chris Oulton, CEO of independent MMF specialist Prime Rate Capital, argue that the double-headed definition is confusing as short-term and regular MMFs have very different risk profiles. Oulton believes that 'regular' MMFs shouldn't be called MMFs at all. He says, "A 12-month interest rate exposure doesn't fit the expectations of the money market fund investor, which is that you should get your cash back when you want it, not a return on your cash." The article quotes Oulton, "[T]he two-pronged approach has come about because EFAMA's members need to be accomodated -- some of whom offer products with longer maturities than those that would meet the short-term MMF definition." Oulton adds, "They have defended their industry -- they are essentially tossing those running portfolios with maturities of longer than a year to the crowd to protect the providers with portfolios under a year."

"Time To Cash Out Of Money-market Funds" says columnist Chuck Jaffe on MarketWatch. He says, "[I]f you are an investor in money-market funds, heading for the exits with the masses is probably a smart idea right now, because investing in money funds is the Stupid Investment of the Week." But he says, "Clearly, money funds can serve a purpose beyond simple yield. Some investors use check-writing and debit-card features that typically make their money-fund a better-yielding alternative to an interest-bearing checking account. And many money funds are linked to equity accounts, allowing movement into the stock market on a moment's notice; an investor who pulls cash from a money fund to put in an online savings account faces an opportunity cost, in the form of the few days needed to access their cash and get it into the market." He quotes Peter Crane of Crane Data, which publishes the Money Fund Intelligence newsletter, "If you are parking money waiting for the right opportunity, money funds have you ready to go. If you move the cash to an EverBank account [for example], you will get a better return while it's there, but it will also take a few days to get it out and move it to the market if things get to that point where you feel it's right to invest more. So you have to decide what is most important to you, whether it is the return you get or the ease of moving the money or the convenience of not having to get new checks and debit cards." See also, "State's sale of short-term debt faces hurdles".

"`Total money market mutual fund assets increased by $9.00 billion to $3.656 trillion for the week ended Wednesday, July 22, the Investment Company Institute reported today. Taxable government funds decreased by $6.45 billion, taxable non-government funds increased by $19.09 billion, and tax-exempt funds decreased by $3.65 billion." In other news, Stradley Ronon Counsel Joan Ohlbaum Swirsky has published a "Fund Alert, Regulatory Analysis" entitled, "Money Market Fund Reform: SEC Proposes Rule Amendments and Seeks Comment on Fundamental Issues". It says, "On June 30, 2009, the SEC proposed amendments to Rule 2a-7, the money market fund rule under the Investment Company Act of 1940. The amendments were designed to increase the resilience of money market funds to economic stresses, reduce the risks of runs on the funds, facilitate the orderly liquidation of a money market fund that breaks the dollar and liquidates, and improve the SEC's oversight of money market funds. Among other things, the proposed amendments would: tighten quality, maturity and liquidity requirements (including imposing new requirements for repurchase agreements); require monthly Web site disclosure of portfolio holdings and additional monthly reporting to the SEC; require each money market fund Board to determine that the money market fund has the capacity to process share transactions at other than $1.00 (that is, after the fund has broken the dollar); expand permission for affiliates to 'bail out' troubled money market funds; and, allow each money market fund Board to suspend redemptions when the money market fund liquidates. The SEC's release (the release) also requests public comment on possible fundamental reform of money market funds; more specifically, whether the stable $1.00 share price should be abandoned in favor of a floating net asset value (NAV) per share and whether money market funds should be required to satisfy redemption requests in excess of a certain size through in-kind redemptions." (See Stradley's "List of Rule 2a-7 Proposals" and "Summary of Rule 2a-7 Proposals" here.)

The SEC has posted a document entitled, "Rule 2a-7 Amendments Proposed by SEC in June 2009, Marked to Show Changes from Current Rule 2a-7," which shows the changes proposed by the Commission. In other news, several changes have been made to the agenda of the upcoming Crane's Money Fund Symposium, which will be held Sunday through Tuesday, August 23-25, at the Renaissance Hotel in Providence. Bob Plaze, Assistant Director of the SEC Division of Investment Management, will join Reed Smith Partner Stephen Keen to give an "Update on the SEC's MMF Reform Proposals." Also, Kristian Lind, Portfolio Manager for Neuberger Berman will replace Dreyfus' Colleen Meehan for the "Municipal Money Fund Update." Finally, Fidelity's Michael Morin has been added to Sunday evening's "Future of Money Funds Discussion." Crane Data would like to thank the sponsors of our Money Fund Symposium -- Banc of America Securities, Federated Investors, Fidelity Investments, Cachematrix, Capital Advisors, Fitch Ratings, Invesco AIM, Standard & Poor's, Wells Fargo Advantage Funds, Matrix Financial Solutions, and Moody's Investors Service -- for their support. See you in Providence!

The Association of Financial Professionals (AFP), formerly known as the Treasury Management Association, hosts a Corporate Finance Series Webinar entitled "The Credit Crisis - That's Another Fine Mess We've Gotten Ourselves Into! today (Wednesday), July 22 at 3:30-4:30pm. The talk will be done by money market securities Brian Kalish, AFP's Director, Finance Practice Lead. The description says, "The past 24 months have been an extraordinary period of time for the global economy. Many people have been asking: How did we get here, where are we now, and where are we heading? This session will review the events of the past 2 years, describe where we are now, and offer insight to where we might be heading." Registration is $50. Note that the recently released "2009 AFP Liquidity Survey" has some content on auction-rate securities. The survey says, "The use of commercial paper, separately managed accounts, and auction-rate securities in short term portfolios declined significantly over the past year." Organizations allowing the use of ARS declined from 18% to 8%, and the current allocation of ARS fell to almost zero (0.3%) in the latest survey. See also, WSJ on TD Ameritrade's earnings, which says, "Chief Financial Officer Bill Gerber said fee waivers in the third quarter equaled 60 basis points on $18 billion in money market funds. The company currently manages $14 billion in money market funds, though it has begun to move some cash out of those funds to its own balance sheet and into money market deposit accounts."

American Funds posted "Money market fund changes and FAQ" on its website recently, describing its recent funds merger, "Shareholders of The Cash Management Trust of America and The U.S. Treasury Money Fund of America approved merging those funds into American Funds Money Market Fund. On July 10, 2009, shares of The Cash Management Trust of America and The U.S. Treasury Money Fund of America were automatically exchanged for an equal number of shares of American Funds Money Market Fund." (FYI, Crane Data has replaced the Cash Mgmt Trust of American (CTAXX) with the new American Funds MMF (AFAXX) in our Crane 100 Money Fund Index.) The statement adds, "Capital Research and Management Company (CRMC) reimbursed some expenses of The Cash Management Trust of America and The U.S. Treasury Money Fund of America with the goal of maintaining a $1.00 a share at net asset value. CRMC will continue to reimburse some expenses of American Funds Money Market Fund. Shareholders of The Tax-Exempt Money Fund of America have approved a conversion of that fund into the new American Funds Short-Term Tax-Exempt Bond Fund. Shares in the money market fund will be converted on a 10-to-1 basis into shares of the bond fund on August 7, 2009." An FAQ regarding the money market changes is also included.

A panel session entitled "Perspectives on the Future of Money Funds", which features Peter G. Crane of Crane Data LLC, Randy Merk of Charles Schwab and Paul Schott Stevens of the Investment Company Institute, has been added to the agenda for Schwab IMPACT 2009. Schwab's annual conference for independent investment advisors will be held September 13-16 at the San Diego Conference Center. The money market fund discussion will be held Tuesday, Sept. from 12:45-2:00pm (Pacific). The description says, "Discover the latest on money market mutual fund regulations and the results and recommendations from the ICI Working Group's report.... Review the SEC's proposed amendments to money fund regulation, the ICI's wide-ranging study of money market funds and recent market events. Hear from ICI working Group members and money fund experts on how industry participants and regulators intend to make money market funds more resilient. Don't miss the opportunity to listen in on a lively discussion of the strenths, weaknesses and future of money market fund regulation." Also, don't forget to register soon for Crane's Money Fund Symposium, which is being held August 23-25 at the Renaissance Hotel in Providence, Rhode Island. Registration is $500 and space is limited. In order to secure a room and the discounted hotel rate ($169), reservations must be made by July 29.

"Commercial Paper Shrinks at Record Pace" writes Bloomberg. The article says, "The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co. The market for company debt due within nine months has plunged 26 percent since April 8 to $1.1 trillion, its worst three months ever, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September's collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies' need for short-term credit to expand." It adds, "Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed." See also, ICI's weekly "Money Market Mutual Fund Assets", which show money funds falling $21.13 billion to $3.647 trillion in the week ended July 15.

DB Advisors will host a webcast entitled, "Portfolio strategies to enhance yield" today at 1pm EDT. The event will feature Joe Sarbinowski, Global Head, Institutional Liquidity Management Distribution, and Joe Benevento, Head of Portfolio Management, Liquidity Management, Americas. The company's announcement says, "Unprecedented demand for money market securities and short-term liquidity has compressed yields across the investment spectrum. Join us to explore innovative strategies aimed at enhancing yield in the short term, while positioning portfolios to take advantage of longer-term opportunities. The presentation will be followed by a Q&A session." In other news, Federated Investors announced the dates of its latest quarterly earnings release and conference call. The company will release Q2 earnings July 23 at the market close and will host a conference call Friday, July 24 at 10am EDT. BlackRock will release its earnings and host its conference call on July 21 at 9am.

Online money market trading portal Treasury Curve has added a new introductory video to its website. Managing Director Aron Chazen says, "We wanted to bring institutional money market funds from a number of different providers onto a single platform." Kurt von Emster, Managing Director of venBio, says, "Treasury Curve elevated an existing model to provide greater transparency, but more importantly, independence, from financial services that are tied to a single bank or brokerage." Chazen adds, "What's very important to our clients is that they're able to maintain the good relationships that they maintain with their banks or asset managements." The company has also been spotting advertising various keywords on Google.

The SEC's "Comments on Proposed Rule: Money Market Fund Reform" lists the feedback to-date on the `SEC's Money Market Fund Reform Proposal. The comments through July 12 are all brief and inconsequential, and include a handful of supportive, and a couple opposing, statements, as well as some nonsensical rantings from individuals. Serious commenters have yet to post (through July 12), and most of the important postings will occur just prior to the Sept. 8 deadline. To visit the SEC's page on proposed rules, go to: www.sec.gov/rules/proposed.shtml. To Submit Comments on File No. S7-11-09 Money Market Fund Reform, click here. The submission form says, "Complete this form to submit your comments.... All comments will be made available to the public. Comments sent via online form or e-mail, will be posted on our website. Comments sent via paper will be converted to PDF and then posted on our website. We do not edit personal identifying information from submissions; submit only information that you wish to make available publicly."

"Sweep Accounts: The FDIC Enhances Transparency" is a brief written by the Association of Financial Professional's Ernie Humphrey. It says, "As the financial health of banks continues to suffer corporations need to continue increased diligence in understanding the exposure they face for any financial institution to which they have any type of counterparty risk exposure. One source of this type of risk exposure is a sweep account arrangement with a financial institution. The nature of sweep arrangements and relative exposures associated with the most common types of arrangements are discussed in detail in an article authored by Anita Hill entitled 'Is your Sweep Safe?' originally published in the AFP Exchange Magazine." The AFP adds, "In response to the increasing number of financial institution failures throughout 2008, on January 27, 2009, the FDIC finalized its rule 'Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure'. This rule established practices for determining deposit and other account balances at a failed depository institution. It also defines disclosure requirements for certain sweep accounts that became effective July 1, 2009.... [Y]esterday the FDIC released a list of Frequently Asked Questions (FAQs). These FAQs are a valuable resource for corporations to utilize to accurately accessing the counterparty risk associated with existing sweep arrangements or when considering new sweep account arrangements."

Online money market fund trading portal technology provider Cachematrix has released a new whitepaper written by Founder & CEO George Hagerman entitled, "Money Market Funds: The Impact of the Financial Crisis." The paper reviews the "global financial crisis of 2007-2008" and "discusses the impact of the events of September 2008 and their aftermath on money market funds." Hagerman writes, "Money market funds and their service providers should begin to assess their readiness to comply with a significant regulatory overhaul of money market fund regulation and market demands for greater transparency. Regulatory requirements, or market-based demand for, more information on a more frequent basis may require new or enhanced compliance processes and technology solutions. Funds and their service providers should begin to assess their ability to gather, analyze and report" risks such as portfolio risk, shareholder concentration risk, active trading risk and transparency risk. In other news, ICI reports that "money market mutual fund assets increased by $4.36 billion to $3.668 trillion for the week ended Wednesday, July 8.... Taxable government funds decreased by $8.12 billion, taxable non-government funds increased by $10.66 billion, and tax-exempt funds increased by $1.83 billion."

The San Francisco Chronicle's Kathleen Pender asks "How safe are California tax-free money funds?" A reader wrote in saying, "I was wondering about the relative safety of California tax-free municipal money market funds. Has the risk become much greater than a regular taxable money market fund?" The article quotes, "Peter Crane, who runs CraneData.com, says that California money market funds are as safe as ever. His reasons: One, the managers of California money funds he has spoken to say they have not owned any California general obligation debt for months.... [M]oney funds must comply with strict rules that limit their holdings of risky or illiquid securities. As the state's budget crisis has worsened, they have been avoiding California's commercial paper, forcing the state to find other buyers at higher yields.... Two, tax-exempt money funds are owned mainly by individual investors, who are much less likely than institutional investors to demand their money back all at once.... Three, most large tax-free money market funds are guaranteed by the U.S. Treasury through Sept. 18. The guarantee only applies to balances that were in the fund on Sept. 19, 2008. The guarantee program was put in place after the Reserve Primary Fund fell below $1 per share and sparked a panic that spread far beyond the fund industry." See also the Chronicle's "State's short-term debt ratings suffer."

CFO Magazine writes "Protect Money Funds, Hurt Commercial Paper?" The article says, "Securities and Exchange Commission proposals to ease the risk of investing in money-market mutual funds could also make it harder for companies to raise capital by issuing commercial paper, some treasurers fear.... Aiming to reduce the risk of runs on the funds and increase their resilience to economic stresses, the SEC in June proposed prohibiting money-market mutual funds from investing in so-called 'second-tier' securities. That means companies that issue second-tier commercial paper would lose a key source of investment in the instruments. (Such companies include FedEx, Kraft, Kroger, and Safeway, according to the Association for Finance Professionals.) Currently, most money funds can invest up to 5% of their assets in second-tier securities." The piece adds, "According to the AFP's 2009 Liquidity Survey, which came out last week, AFP members are allocating 32% of their cash balances to money-market funds -- the highest percentage in the four years the organization has been collecting the data. Those investments are almost evenly split between pure Treasury funds (16.1%) and diversified funds (15.7%)." In other news, see Kiplinger's "Financial Reform: What to Expect", which quotes fund expert Mercer Bullard on the question, "Do money-market funds need to be made over?"

WSJ.com writes "Money-Fund Ratings Reviewed", which says, "Ratings agencies are moving to strengthen their criteria for rating money-market funds, and one says some funds may face downgrades if their credit and liquidity risks aren't addressed with regulatory action or through other measures before the various forms of government support are removed. Fitch Ratings is considering whether prime money-market funds -- those that may invest in securities, including commercial paper issued by corporations, as well as government securities -- will be able to achieve triple-A ratings over the longer term, absent fundamental changes. Removal of the various forms of government support could negatively affect ratings if the credit and liquidity issues aren't addressed, Fitch said." (WSJ didn't source any Fitch document or release.) The piece adds, "Standard & Poor's isn't concerned that money-market funds' ratings will be jeopardized as government support programs end, said Peter Rizzo, senior director in S&P's fund rating group. Many money-market funds have weaned themselves off the guaranty program, many funds are now operating in a more risk-averse mode, and the SEC's proposals would further decrease risks, he said." In ratings news, S&P rated Northern Trust Euro, Sterling, and Dollar Global Cash Funds 'AAAm' and rated Six Goldman Sachs LIBOR Tracker Funds 'AAAf/S1+'. See also, "The 'Mountain of Cash' on the Sidelines".

Friday's New York Times writes "For Banks, Wads of Cash and Loads of Trouble", which discusses the role that brokered deposits have played in numerous recent bank failures. (We learned of the article from Bank Deals.) The Times says, "Though few people have heard of it, hot money -- or brokered deposits, as it is also known in the industry -- is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing. Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down.... The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate -- often a disastrous recipe for banks." (Note that Crane Data will be featuring an article on "bankerage" or FDIC-insured brokerage sweep accounts, in our upcoming July issue of Money Fund Intelligence.)

"Cash is king for investors" writes the Associated Press. The oddly contrarian piece says, "That old saying 'cash is king' certainly rings true these days. Investors can't seem to get enough of it, which ultimately could be bad news for the stock market and the economy. In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead." The article adds, "[T]here is recent evidence from some big-name investors that argues otherwise, at least on the margins. The California Public Employees' Retirement System, also known as CalPERS, announced June 15 that it had boosted the target cash exposure of its $183 billion investment portfolio from zero to 2 percent." See also, ICI's weekly "Money Market Mutual Fund Assets", which says money fund assets fell $45.52 billion to $3.664 trillion in the latest week. Finally, see Forbes "Money Market Investors Getting Chance To Sound Off", which is the first article we've seen that that mentions a theoretical floating-rate NAV for money funds in a favorable light. It says, "Want to be able to cash in your money fund investment for precisely what it's worth? Now's the time to pipe up and tell the powers-that-be how you feel."

The New York Times writes "Bank Fees Rise as Lenders Try to Offset Losses", which discusses how banks are "keeping most fees at record highs, and are eking out slight increases on others like overdraft charges -- a step they rarely took during past recessions." The article says, "The nation's biggest banks -- those that received the biggest bailouts from taxpayers, and are once again gaining strength -- charge fees that are on average at least 20 percent higher than those at smaller lenders, according to Moebs Services, a economic research firm used by banks and federal regulators. Some of the charges are getting more creative. Several big banks -- including JPMorgan Chase, US Bancorp and Wells Fargo -- recently began billing some small-business customers for federal deposit insurance increases." See also S&P's release "Lehman Brothers Sterling Liquidity 'Am' Fund Rating Affirmed Then Withdrawn; Removed From CreditWatch Developing", which says, "The removal from CreditWatch and affirmation follows confirmation today from the Fund's investment manager Lehman Brothers Asset Management (Europe) Ltd. that the residual 3% of the fund, equivalent to L700,000, has been paid to shareholders. This follows the maturity and subsequent settlement of the final security held in the name of the fund, namely a structured investment vehicle (SIV) issued by Dorada Corp."

Monday, the Silicon Valley, San Jose Business Journal wrote "California Treasurer: We will not default on bonds", which said, "The California's state Treasurer's office on Monday refuted an analyst's recommendation last week that investors dump California municipal bonds and that the state is likely to default. Analyst Martin Weiss of Weiss Research said in a June 22 report that California's financial woes create 'a very high probability' that California will eventually miss debt service payments." The article adds, "Once downgraded, California's rating is likely to fall below the minimal level legally required for most money market funds, forcing them to dump California paper posthaste," quoting Weiss. `One manager we spoke with, however, dismisses this threat, saying that California general obligation bonds have been "second tier" for some time and that he'd be surprised if money funds hold this direct CA debt in any quantity.