News Archives: September, 2008
BlackRock, Dreyfus, Evergreen, Federated, First American, Invesco AIM, Morgan Stanley, TCW, and Legg Mason's Western Asset Management have all signed up, or are in the process of signing up, for the U.S. Treasury's new money fund insurance program, which went live yesterday. Morgan Stanley "announced [yesterday] that the Morgan Stanley Funds' Board of Directors/Trustees has approved the participation of its money market funds in the U.S. Treasury Temporary Guarantee Program. All Morgan Stanley SEC registered 2a-7 money market funds will apply to be insured under the program." Evergreen and Western also announced their participation yesterday, Federated announced its participation today, and Dreyfus has stated its intention to join. (See Treasury's FAQ on the Money Fund Guarantee Program.)
Morgan Stanley's communication says, "We understand the fundamental role that money market funds play in both the retirement and investment strategies of Americans," said Kevin Klingert, Head and Acting Chief Investment Officer of Global Fixed Income at MSIM. "While the Morgan Stanley money market funds have maintained their $1 NAV throughout the recent unprecedented turmoil and continued to meet their stated objectives of capital preservation and liquidity, we are pleased to participate in the U.S. Treasury Temporary Guarantee program to provide an added level of protection for our shareholders."
Federated's "Updated Statement on Money Market Insurance as of 9/30/2008" says, "Federated is pleased that the Treasury Department announced further details on its money market insurance program on September 29. Federated supports this program as a useful development in bringing additional stability to the credit markets where money market funds are a critical component. Federated expects that all of its money market mutual funds regulated by Rule 2a-7 will participate in the program. Federated is working with the fund's board of directors to approve the program. The Treasury's program is designed to provide coverage to shareholders for amounts held by them in all money market funds regulated by Rule 2a-7 as of the close of business on September 19, 2008."
Investment Company Institute President and Chief Executive Officer Paul Schott Stevens commented yesterday, "We welcome the Treasury Department's announcement this morning about the guarantee program for money market mutual funds, and commend Secretary Paulson for his strong leadership. This temporary program, implemented to address unprecedented market conditions, will help sustain investor confidence in money funds. These funds play a vital role in the financial markets. Throughout their history they have provided a safe haven for millions of investors. It is vitally important that they continue to do so through this tumultuous period. We pledge to work closely with Treasury and all our membership as the guarantee program is implemented in the days ahead."
The following is a list of statements from fund companies regarding their participation in, or consideration of, Treasury's Money Market Fund Guaranty Program: Alpine, BlackRock, First American, Invesco AIM, TCW, and Vanguard.
The latest "Month-End Portfolio Holdings of Taxable Money Market Funds" report issued by the Investment Company Institute shows that money market mutual funds continued to add Treasury bills and securities, certificates of deposit, and Eurodollar CDs in August, while they continued to reduce exposure to corporate notes, repurchase agreements (repo), and commercial paper (CP). These trends have been in place all year, and likely accelerated in September.
While taxable money fund holdings of CP declined by $10.6 billion, or 1.4% in August, to $738.5 billion, commercial paper remains the largest holding, representing 24.5% of assets. Over the past year, CP has declined from 29.9% a year ago, though total holdings have increased over the past year by $34.6 billion. Repo remains the second largest holding at 17.4%, or $523.5 billion, down $11.3 billion in the month and up $26.6 billion over the past year. U.S. Government Agency securities rank third in holdings with 13.6% of assets, unchanged from last month but up dramatically from 6.7% a year ago.
Certificates of deposit and Eurodollar CD holdings jumped in August. CDs, which include those issued by American branches of foreign banks, rose from 10.6% of assets to 11.2% ($339.1 billion). Eurodollar CDs, which include those issued by foreign branches of domestic banks, rose from 5.0% to 5.5% of holdings ($165.9 billion). Over the past year, CDs have increased by $124.8 billion and Eurodollar CDs have increased by $87.1 billion. Treasury bills and Other Treasury securities comprise 9.9% of taxable money fund portfolios, or $297.7 billion. Money funds' Treasury holdings have surged from $162.4 billion a year ago.
Corporate notes, which include medium-term notes (or MTNs), continued shrinking in August to $272.9 billion, or 9.0% of assets (from 9.6% a month ago). This sector has shown the sharpest decline over the past year, falling by $94.4 billion. It was the only category to decline in dollar terms over the prior 12 months, which was likely due to the implosion of the structured investment vehicle MTN segment. Bank notes represent 3.5% of money fund portfolios, down slightly from 3.6% a month ago. "Other" investments represent the remaining 5.3% of assets.
To request the full table of "Month-End Portfolio Holdings of Taxable Money Market Funds," e-mail Pete.
The U.S. Treasury Department today opened its Temporary Guarantee Program for Money Market Funds, says a press release issued this morning. It reads, "The U.S. Treasury will guarantee the share price of any publicly offered eligible money market mutual fund - both retail and institutional - that applies for and pays a fee to participate in the program. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable share price of $1, and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. Treasury first announced this program on Friday, September 19."
The release explains, "The temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as breaking the buck. The program is designed to address temporary dislocations in credit markets. The program will exist for an initial three month term, after which the Secretary of the Treasury will review the need and terms for extending the program. Following the initial three month term, the Secretary has the option to renew the program up to the close of business on September 18, 2009. The program will not automatically extend for the full year without the Secretary's approval, and funds would have to renew their participation at the extension point to maintain coverage. If the Secretary chooses not to renew the program at the end of the initial three month period, the program will terminate."
"To participate in the program, the Treasury Department will require money market funds with a net asset value per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, to pay an upfront fee of 0.01 percent, 1 basis point, based on the number of shares outstanding on that date. Funds with net asset value per share of greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008, will be required to pay an upfront fee of 0.015 percent, 1.5 basis points, based on the number of shares outstanding on that date. These fees will only cover the first three months of participation in the program. Funds with a net asset value below $0.995 as of the close of business on September 19, 2008, may not participate in the program," says Treasury.
It adds, "While the program protects the accounts of investors, each money market fund makes the decision to sign-up for the program. Investors cannot sign-up for the program individually. Funds should apply by October 8, 2008 for the program using the forms on the program webpage: http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS issued guidance that confirmed that participation in the temporary guarantee program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds."
Finally, the release says, "President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund to guarantee the payment. The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934, as amended, and has approximately $50 billion in assets. This Act authorizes the Secretary of the Treasury, with the approval of the President, 'to deal in gold, foreign exchange, and other instruments of credit and securities' consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/."
The Investment Company Institute just posted "Frequently Asked Questions About the Treasury's Guaranty Plan for Money Market Mutual Funds," which discusses the details released to date on the United States Treasury's plan to guaranty the $1.00 share prices of money market mutual funds.
ICI summarizes, "On September 19, the U.S. Department of the Treasury announced an emergency, temporary guaranty plan to protect shareholders of money market mutual funds from losses if their funds are unable to maintain a $1.00 net asset value ('break the buck'). ICI engaged in detailed discussions with the Treasury and the U.S. Securities and Exchange Commission on the plan, and on September 21 and 22, Treasury issued further clarifications. While many details remain uncertain, the following questions and answers outline the major features of the plan as they now stand:
What does the guaranty plan cover? The guaranty plan is designed to protect current shareholders of money market mutual funds if their funds cannot maintain a $1.00 net asset value (NAV). Funds must elect to enroll voluntarily in the plan and pay a fee for coverage. If a fund enrolls, its shareholders will be protected for assets they have in their accounts as of the close of business on Friday, September 19.
What funds are eligible to participate? The latest Treasury guidance says that "All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program." The guidance also clarified that tax-exempt money market funds would be eligible to participate.
Why is the guaranty limited to accounts and assets as of Friday, September 19? The decision to limit the guaranty program to the value of accounts at the close of business on September 19 arose from grave concerns that ICI raised with the Treasury over the plan's potential effects on flows among funds. Recently, large institutional shareholders, who hold almost two-thirds of assets in money market funds, have been moving money from general-purpose money market funds into funds that invest primarily in Treasury securities. The guaranty plan raised fears that this flow of funds would suddenly reverse if general-purpose funds joined the guaranty plan. By limiting the protection to account balances as of September 19, Treasury's amendments should alleviate that problem.
Why should I invest now in a money market fund if I've missed out on the guaranty plan? Money market funds have long provided investors with capital preservation along with competitive rates of return. Money market funds are strictly regulated by the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets. In 25 years, $325 trillion in assets have flowed in and out of money market funds with only two break-the-buck episodes. Those same regulations are in place for all investors, whether they are covered by the guaranty plan or not.
Does Congress have to approve this guaranty plan? No. The guaranty plan was designed by the Secretary of the Treasury and approved by the President under authority of the Exchange Stabilization Fund.
Money market funds have $3.4 trillion in assets. The plan is funded with $50 billion. Is that enough? We believe that large redemptions and other recent strains in money market funds have been caused primarily by lack of active trading in the money markets, principally in markets for asset-backed commercial paper and agency paper. The Federal Reserve took additional steps on September 19 to improve liquidity in those markets. If those steps continue to succeed in unlocking these markets, we have every hope and expectation that this insurance pool will never be drawn.
How long does the guaranty last? Treasury intends for the plan to last no more than one year.
Are retail and institutional shareholders all covered? What about foreign shareholders? The plan will cover all shareholders, retail and institutional, domestic and foreign, in the eligible funds that enroll.
What about foreign-domiciled funds? Only U.S.-registered funds that operate under Rule 2a-7 and are publicly offered are eligible for the plan.
How do money market funds enroll in the plan? That is still to be determined. Treasury has not yet opened enrollment in the plan.
What will the plan cost? Who will bear the fees? Treasury has not yet specified the fees for coverage, nor whether fees will be paid from fund assets or by fund management.
How will the coverage work? If a covered fund cannot maintain a $1.00 NAV, and the fund sponsor chooses not to provide credit support to avoid breaking the buck, the fund board would notify the guaranty program that it has determined to liquidate the fund. The fund would then close and liquidate. The Treasury guaranty plan would pay the fund the difference between a $1.00 NAV and its shareholder payout; the fund would distribute that payment to shareholders.
What should I do if I'm concerned about the safety of my money market fund? Contact the fund company for its latest available information on fund investments. Funds will decide whether to enroll in the guaranty plan after Treasury formally announces operational details, fees, and the enrollment process.
First the good news. Money market mutual fund assets rose on Thursday for the fourth day in a row, increasing $16.61 billion following gains of $1.5 billion on Monday, $26.2 billion on Tuesday, and $19.64 billion on Wednesday (according to our Money Fund Intelligence Daily, which tracks funds over $1 billion in assets). Flows have stabilized after losing approximately $200 billion, or about 6%, of assets, primarily in the two days following Sept. 16, when just the second fund in history -- The Reserve Primary Fund -- "broke the buck." Money fund assets fell $15.65 billion in the latest week (through Wednesday) to $3.398 trillion according to the ICI's more comprehensive weekly series). But fund asset totals remain up by $178 billion, or 8.1% year-to-date and still show a huge increase -- $529 billion, or 18.4% -- over the past 52 weeks.
Now the bad. This relatively minor looking dent, however, masks huge outflows from "Prime" or general purpose money funds. The shift from Prime Insitutional funds into Treasury and Government money funds has been astonishing. Through Wednesday, ICI's weekly series shows General Purpose Taxable Institutional money funds losing 10.8% of assets this past week (-$128.0 billion) and losing 16.7% (-$239.9 billion) the prior week. Government Institional funds (including Treasury funds) gained $130.0 billion this week and gained $70.9 billion last. Keep in mind, however, that the implosion of The Reserve accounts for almost 1/3 -- over $70 billion -- of the total outflows. (This money has been removed from fund assets but has yet to be released.)
Prime money fund assets have continued to decline this week, though the decreases slowed substantially following the Treasury's announcement last Friday that it would provide a $1.00 guaranty to money fund asset levels as of Sept. 19. Nonetheless, the erosion of prime assets coupled with funds moving towards safer and more liquid investments continues to place high levels of stress on the commercial paper and corporate funding markets. (See WSJ's "Debt Market Distress Spreads" and Financial Week's "Cost of Commercial Paper Spikes".)
Going forward, however, we expect money fund assets, including Prime Institutional funds, to slowly claw their way back. The marketplace should realize that nobody else has "broken the buck" and that everyone but Reserve was able to survive this unprecedented shock and run. Skepticism over the Government's guaranty program should also fade in coming days, as the realization dawns that even new money will benefit from the plan's guaranty of a "floor" for money fund assets. The current base of prime and municipal money fund assets can, at least temporarily, assuage their customers by pointing to the backing of the deepest pockets of all, Uncle Sam's. This government protection of most of their funds should easily enable advisors -- almost all now deep-pocketed -- to protect the layers of new assets that comes into funds should something else "blow up" in the funds themselves.
The first sign of light at the end of the tunnel of frozen redemptions appeared last night as Federated Investors and Putnam Investments announced that shareholders of the $12.3 billion Putnam Prime Money Market Fund Institutional will become clients of Federated Prime Obligations Fund in a "$1-per-share for $1-per-share" transaction. Putnam Institutional shareholders won't lose any money and should be able to access their cash today.
The press release states that after 5pm today, "The Putnam Prime Money Market Fund will invest its assets in the Federated Prime Obligations Fund in an in-kind purchase transaction. The action follows Putnam's Sept. 18, 2008 announcement ... to close the institutional Putnam Prime Money Market Fund ... on Sept. 17, 2008 and to liquidate the fund. Federated Prime Obligations Fund is an AAAm-rated fund with $22.1 billion in assets ... designed for use by fiduciaries and other institutional investors who have rigorous requirements for safety and daily liquidity at par."
"We believe this transaction with Federated is very beneficial to the shareholders of the Putnam Prime Money Market Fund," says Putnam President & CEO `Robert Reynolds. "First, we wanted to be fair and equitable to all shareholders, which is why we closed the fund. Second, in liquidation, we were looking for the best solution possible. The transaction with Federated accomplishes this objective," he says in a press release.
The release adds, "Federated's money market portfolio managers have thoroughly reviewed the securities in the $12.3 billion Putnam Prime Money Market Fund. Each security accepted in this in-kind transaction meets Federated's rigorous credit requirements. Federated, through its proprietary credit review process, examined each security in terms of capital structure, liquidity structure, management structure and other key factors before accepting these securities."
Deborah Cunningham, CIO of Federated's taxable money markets, says, "Federated welcomes this opportunity to provide the shareholders of the Putnam institutional money market fund with a high-quality option for their institutional cash needs. We believe that this transaction offers significant benefits for the shareholders of Federated Prime Obligations Fund.... Preserving capital, providing liquidity and competitive yields for clients has been a fundamental strength of our cash management business for more than 30 years. The transaction further reinforces our position as an industry leader."
"Putnam Prime Money Market Fund's liquidation plan will provide its shareholders with a like amount of Federated Prime Obligations Fund shares on a $1-per-share for $1-per-share basis. Shareholders of Putnam Prime Money Market Fund will be entitled to dividends through Sept. 24, 2008. The accumulated, but unpaid, dividends will be paid on Sept. 25, 2008 by Putnam. Such shareholders will be entitled to dividends from Federated Prime Obligations Fund beginning Sept. 25, 2008," says the release.
Finally, Federated adds, "With recent actions taken by the U.S. Treasury and the Federal Reserve Board designed to help stabilize the financial markets and promote liquidity, market conditions have improved for money market funds. Of note for shareholders of Federated Prime Obligations Fund on Sept. 19, 2008, the fund would expect to participate in the insurance program announced by the U.S. Treasury when it becomes available." Federated's total money market mutual fund assets as of Sept. 22 were approximately $248 billion, up from $242 billion on Sept. 15.
* News Bulletin: Money fund assets increased by $26.2 billion Tuesday, according to Money Fund Intelligence Daily. However, the increase continues to be entirely in Treasury and Government money funds. See MFI Daily for more. *
Money market mutual funds appear to have survived the selling tsunami caused by Reserve Primary Fund's "breaking of the buck" last Tuesday, but the same can't be said for the handful of funds remaining in the "enhanced cash" sector. It appears that none of the survivors will make it. Last night Moody's revealed downgrades of American Beacon Cash Plus Trust from Aaa to Ba, and of Reserve Enhanced Cash Strategies Portfolio LLC, from B/MR2 from Aaa/MR2. Reserve Yield Plus (RYPQX) has already been downgraded and "broken the buck"; this fund too is a short-term bond fund and not a money market fund. These three are practically the only remaining funds in the formerly $300 billion enhanced cash space. (See also the news of BNY Mellon securities lending fund and Dreyfus money fund support actions in Reuters' "BNY Bank of NY Mellon has big money fund bailout charge".
Moody's says, "American Beacon Cash Plus Trust ... is a non-registered private placement offering. The rating remains on review for possible further downgrade. At the same time, the Trust's MR1 market risk rating has been placed on review for downgrade. Today's actions follow American Beacon's decision to temporarily suspend the current practice of providing payments for redemptions of shares entirely in cash on the redemption date. American Beacon Advisors, Inc. stated that effective September 19, 2008, proceeds from redemption requests would be made in pro-rata payment of cash and in-kind distributions of securities held by the Trust." It adds, "The Trust's portfolio, whose net asset value was calculated on September 21st at $0.9922, owns high quality assets rated P-1, with a minimum Moody's long-term rating of A2. The portfolio assets primarily consist of bank obligations, with 50% or so of portfolio assets currently in overnight securities and the last security maturing within nine months. Moreover, the Trust does not hold impaired assets."
On Reserve Enhanced Cash Strategies Portfolio LLC, Moody's says, "Today's downgrade ... reflects RMCI's decision to suspend redemption in the Fund. The decision was taken by RMCI to preserve the net asset value of the Fund, which was $1.00 as of September 18, 2008. Moody's considers the decision to suspend cash redemptions a material deviation from the fund's stated objective to provide daily liquidity. The MR rating on review for further downgrade reflects Moody's view that Fund's NAV may suffer mark-to market deterioration during the liquidation of the portfolio. The credit and market risk ratings remain on review for further downgrade."
Moody's also downgraded a number of other Reserve funds. (Click here for all of Moody's recent ratings.) Their release says, "The rating actions were taken due to a combination of factors that affect each of the funds to varying degrees, including: (1) Depressed net asset value levels with the potential for further declines upon liquidation of portfolio securities; (2) RMCI's decision to suspend redemptions or defer redemption proceeds from various Funds; and (3) Increased operational risk at Reserve Management Corporation as they attempt to execute liquidation plans for all the Funds. Moody's also noted that RMCI's rapid growth over the last couple of years, combined with the extreme conditions that have overtaken the firm over the last week or so, are likely to have increased the operational risk at the firm." Finally, Moody's says, "Lawsuits reportedly filed by several parties, including Ameriprise Services, Inc. filed in the United States District Court for the District of Minnesota last week may further complicate the plans of the Reserve Management Company, Inc. to proceed with its plans of liquidation." (See Ameriprise's Q&A here.)
In the midst of a buck-breaking, a mini run on assets, redemption freezes and the battle over government insurance coverage, a surge in tax-exempt money market fund yields has gone almost unnoticed. But Friday, the 1-day yield on our MFI Daily Crane Tax-Exempt Money Fund Index skyrocketed to 4.10%, 175 basis points above the 1-day annualized yield on our Crane 100 Money Fund Index. The Crane Tax-Exempt Index 7-day yield rose 92 basis points Friday to 2.96% and has risen 156 bps over the past week.
Below, we list the Top 10-Yielding Tax-Exempt money market funds tracked by Money Fund Intelligence Daily as of Friday, Sept. 19. (MFI Daily tracks only the 500 largest funds, those with assets over $1 billion.) We list fund name, assets ($mils), and 7-day yield (simple, annualized in percent). They are: 1) Lehman Brothers Tax-Fr MF Re ($1,014, 4.54%); 2) JPMorgan Tax Free MM Instit ($15,847, 3.84%); 3) JPMorgan Tax Free MM Agency ($1,340, 3.78%); 4) Columbia Municipal Res Capital ($2,571, 3.68%); 5) Merrill Lynch Instit Tax Exempt ($17,281, 3.64%); 6) Northern Institutional Muni MM Sh ($4,205, 3.58%); 7) Citi Inst Tax-Free Reserves A ($2,409, 3.56%); 8) DWS Tax-Exempt Cash Instit ($1,776, 3.56%); 9) Western Asset Inst Muni MM A ($2,610, 3.56%); and, 10) Schwab Municipal MF Inst ($4,252, 3.53%).
In other news, Moody's "downgraded and left on review for further downgrade three offshore money market funds managed by Lehman Brothers Asset Management Europe Limited." The funds impacted are: Lehman Brothers Euro Liquidity Fund (from Aaa/MR1+ to B/MR1+), Lehman Brothers Sterling Liquidity Fund (from Aaa/MR1+ to B/MR1+), and Lehman Brothers US Dollar Liquidity Fund (from Aaa/MR1+ to B/MR1+).
Moody's release says, "Today's downgrade actions follow LBAM's decision Friday 19 September 2008 to suspend redemptions in the Funds. The decision was taken by the Funds' Board of directors to preserve the E1.00, GBP1.00 and $1.00 net asset value per share and provide equal treatment to all shareholders of the Funds. The decision was made in the face of significant redemptions and serious market-wide constraints on liquidity in money market instruments. Moody's considers the decision to suspend cash redemptions a material deviation from the funds' stated objectives to protect principal and provide daily liquidity."
The U.S. Treasury has released more details on its plan to insure money market mutual funds. Sunday night's statement, "Treasury Provides Further Clarity For Guaranty Program for Money Market Funds," says, "The U.S. Treasury Department is continuing to develop the specific details surrounding the temporary guaranty program for money market funds that was announced on September 19, 2008." Though the Treasury program should help funds that have halted redemptions, such as Putnam Prime MM Institutional, and now UCM Institutional Money Market Fund and American Beacon Money Market Portfolio, it may not help shareholders of The Reserve Primary Fund. (See WSJ's "Primary Fund Investors Not Allowed To Participate in Guaranty Program", though we're told by Reserve that this decision has not yet been made.)
Treasury's release says, "While these details are being finalized, Treasury is making the following clarifications: 1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. 2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds. 3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19, 2008. 4. Further details on other aspects of the temporary guaranty program and the required documentation for funds to participate will be provided in the coming days.
Published reports indicate that clarification #3 above may mean that the program will not insure new assets in money market funds, though we're unsure how they would separate old and new assets and are awaiting clarification on this point. Last week, money market mutual fund assets declined by a record $210 billion, or 6.7%, according to our Money Fund Intelligence Daily. The declines slowed, but continued Friday. Money fund assets fell $21.83 billion, or 0.7%, and the dramatic shift from Prime money funds into Treasury funds continued. However, Friday's numbers undoubtedly contained sell orders from Thursday afternoon that didn't make trade deadlines. We expect flows to reverse today as news of the Treasury's guarantee spreads.
Regarding the handful of funds that are redeeming in kind or have halted or restricted redemptions, Standard & Poor's says that "its principal stability fund ratings (PSFRs) on money market funds that elect to meet investor redemptions with payments in kind (PIK) will not be negatively affected as long as investors receive the equivalent of a $1.00 per share net asset value (NAV)." Moody's though "downgraded the ratings of the American Beacon Money Market Portfolio and its sub funds, Money Market Select, Money Market Fund, and BBH Com Set ... from Aaa to B." Last night's press release said, "Today's downgrade actions follow American Beacon's decision last night to temporarily suspend redemptions of shares of the funds entirely in cash on the redemption date. In a letter to shareholders, it was stated that effective Sept. 19 proceeds from redemption requests exceeding $250,000 would be made in pro rata payments of cash and in-kind distributions of securities held by the funds, to prevent redemptions from ... having a material adverse impact on the funds and their remaining shareholders.... American Beacon's decision has been made in the face of significant redemptions yesterday and serious constraints on liquidity in money market instruments." It adds, "The Portfolio, whose net asset value was calculated on September 19 at $1.00 per share, with a mark-to-market value of $0.9982, owns very high quality assets, with a weighted average maturity of 32 days and securities with the longest final maturity falling within 85 days.... The Portfolio holds no impaired assets."
On Friday, Moody's said it, "downgraded the rating of Utendahl Institutional Money Market Fund from Aaa to B.... Today's downgrade action follows Utendahl's decision last night to suspend redemptions in the Fund. Utendahl and the Fund's Board of Trustees at the same time made a decision to close the Fund and distribute all fund assets to shareholders. The decision was made in the face of significant redemptions yesterday and serious constraints on liquidity in money market instruments. Moody's considers the decision to discontinue cash redemptions a material deviation from the fund's stated objective to protect principal and provide daily liquidity."
What a week! Last Sunday night's bankruptcy of Lehman Brothers triggered concerns about money fund exposure and questions over The Reserve Funds' ability to protect downgraded CP and MTN holdings in its Primary Fund. While all of the five other fund advisors with Lehman protected their holdings, Reserve's too little, too late support statement failed to slow a run on the fund. On Tuesday, this triggered just the second "breaking of the buck" since Reserve Primary, the first money fund ever, was launched in 1971. (Community Bankers U.S. Government Money Market Fund, which was liquidated for $0.96 in 1994 due to soured derivative holdings, was the first to "break the buck".)
This shocking reminder that it is possible to lose money in a money market mutual fund led to a full-scale run on all Reserve funds, and heavy redemption pressures on "Prime" or general purpose money market funds. Investors moved into Treasury funds and Treasury bills, and the commercial paper and other non-Treasury money markets seized up under the selling pressure. Events quickly became dire as Putnam Prime Money Market Institutional halted redemptions, and as outflows grew to almost $200 billion, or almost 7% of money fund assets.
A handful of other funds were also pushed to the brink. Even the largest, most conservatively managed funds were beginning to worry about the dual stress of heavy redemptions and sinking valuations on their NAVs. Though no other money funds broke the buck, some others were forced to "redeem-in-kind" and erroneous reports circulated about other "money funds," which were enhanced cash or government pools, breaking-the-buck. Moody's downgraded Utendahl's UCM Institutional Money Market Fund which had halted redemptions.
Friday the U.S. Treasury stopped the run with the announcement of a plan that would insure money market funds' $1.00 NAVs. President Bush said money market mutual funds are a "key element of America's financial system," and added, "For every dollar invested in an insured fund, you will be able to take a dollar out." The insurance will cover Prime and Tax-Free money funds and will kick in when a fund drops below $1.00. At that point, the fund will be seized and investors will be repaid their full $1.00 NAV, similar to FDIC insurance. We expect the cost of the policies to be from 1 to 5 basis points (0.01%-0.05%) and expect all funds to participate.
In the nick of time, the U.S. Government has thrown a lifeline to the reeling money market mutual fund business. The press release, available at: http://www.treas.gov/press/releases/hp1147.htm, says, "The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund -- both retail and institutional -- that pays a fee to participate in the program."
It continues, "President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below. Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system."
"Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability," it says.
Treasury continues, "Maintenance of the standard $1 net asset value for money market mutual funds is important to investors. If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not 'break the buck'."
"This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program."
In the midst of an almost full-blown money fund meltown, The Wall Street Journal reports some hopeful news, saying, "Investors pulled more cash out of money-market funds, prompting a second large fund to close to investors, amid concern that these onetime safe harbors are now too risky. In an effort to stem such withdrawals, the U.S. government Thursday night was working toward taking the unprecedented step of covering money-market funds with a variation of the federal deposit insurance provided to banks."
Money markets imploded after Reserve Primary Fund "broke the buck" on Tuesday, dropping to $0.97 a share. The company has since said it is no longer offering ANY of its funds for sale, and has implemented an up to 7 day delay in redemptions on all Reserve funds. Reserve's overall assets have plummeted from $84 billion as of Aug. 31 to $22 billion as of Wednesday. Note that Reserve International Liquidity Fund and Reserve Yield Plus also "broke the buck", but we don't count these officially since the former is a non-SEC regulated "offshore" fund and the latter is an "enhanced cash" or ultra-short bond fund. Neither is a true "money market fund". (Some reports have also erroneously labeled Colorado Diversified Trust, or COLOTRUST, a money fund; it is a local government investment pool, run by MBIA, and is not regulated by the SEC.)
In other news, see the New York Times article, "Money Market Funds Enter a World of Risk", which contains a list of links at the bottom to various fund companies statements. Statements include: Blackrock, Columbia Management, Dreyfus, Evergreen Investments, Federated Investors, Franklin Templeton, Invesco, Legg Mason, Morgan Stanley, Oppenheimer Funds, Pimco, RidgeWorth, Schwab, State Street, T. Rowe Price, Vanguard.
Finally, the Investment Company Institute's weekly money fund asset series showed a record $169.03 billion decrease to $3.413 trillon in the week ended Sept. 17. (Numbers include the $60-plus billion drop in Reserve assets.) Retail money fund assets actually increased by $4.28 billion to $1.24 trillion, while Institional assets plunged $173.3 billion to $2.17 trillion. Note that we'll be updating the daily asset flows from Thursday once our Money Fund Intelligence Daily is published around 9:30 a.m. Friday. Initial indications are that outflows slowed yesterday, but check back for the official numbers.
Things have gone from from bad to extremely ugly in the money market fund world over the past two and a half days since The Reserve's Primary fund "broke the buck." Putnam just announced that it is closing its Putnam Prime Money Market Fund effective today, Moody's has put Lehman Brothers AAA-rated money funds on review for downgrade, and asset outflows, while not as bad as some suggest, were ugly through yesterday. Money fund assets declined by $78.7 billion yesterday, though the Reserve run accounted for $32.3 billion of the decline, according to our Money Fund Intelligence Daily. Watch for Pete Crane at 1:40 on Bloomberg TV for an update.
"Moody's Investors Service placed today on review for possible downgrade thirteen Aaa and Aaa/MR1+-rated money market funds and one bond fund rated Aaa that are sponsored and managed by Lehman Brothers Asset Management (LBAM), an indirect subsidiary of Lehman Brothers Holdings Inc., which filed for bankruptcy on September 15, 2008 under Chapter 11 of the U.S. Bankruptcy Code. Moody's cited three main reasons for its review: Liquidity and prospective operational concerns related to the ability of LBAM-sponsored funds to sustain increasing levels of redemptions by their shareholders during these extreme market conditions; Potential for reduced support available to the funds prospectively, given the LBHI bankruptcy; and Elevated uncertainty associated with the potential change in LBAM's ownership and structure, particularly in the context of current market instability."
Putnam's statement says, "The Board of Trustees of the Putnam Funds announced today that it has voted to close the institutional Putnam Prime Money Market Fund, effective as of 5:00 p.m. on September 17, 2008, and distribute all fund assets. Putnam Prime Money Market Fund is offered to institutional clients with a minimum initial investment of $1 million. The Trustees' action was not related to the portfolio's credit quality, but was instead a reaction to marketwide liquidity issues. The fund, like Putnam's other money market funds, has no exposure to securities of Lehman Brothers, Washington Mutual or AIG at the parent-company level. The fund's net asset value calculated on September 16, 2008 was $1.00 per share."
It continues, "On September 17, the fund experienced significant redemption pressure. Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities. In the face of these challenges, the Trustees determined to close the fund to ensure equitable treatment of all fund shareholders. Putnam and the Trustees believe that this action is in the best interests of shareholders because it ensures an orderly distribution of assets in light of the current unusual market conditions and treats all shareholders in an equitable manner."
Finally, they say, "Putnam and the Trustees are working to develop a detailed plan of distribution, with the goal of providing shareholders with the opportunity to receive distributions as expeditiously as possible, depending on market conditions. The Fund intends to provide additional information shortly regarding the plan as part of ongoing communications to shareholders. The action that the Board has taken is specific to the institutional Putnam Prime Money Market Fund in response to that fund's specific circumstances. This decision does not relate to other Putnam funds, including the retail Putnam Money Market Fund and Putnam VT Money Market Fund, or to stable value funds managed by Putnam for defined contribution clients."
Fallout continued from The Reserve Primary Funds' "breaking of the buck" yesterday, as severe dislocations and a flight-to-Treasuries engulfed the money market. However, no additional bailouts surfaced, and reporters frantically searching for the next possible money fund victim were forced to write about Reserve again. Below, we recap the barrage of articles out today, and cite some recent ratings changes and fund communiques.
Additional coverage of the "breaking the buck" story today includes: The Wall Street Journal's "Money-Market, Similar Funds Appear Solid Amid Carnage,", which asks, "Are other money funds in trouble? It's not likely, according to industry executives and analysts. Investors with money funds at large asset-management companies like Fidelity Investments and BlackRock Inc. are probably safe because the companies have the resources and the deep pockets to buy out any bad securities. Reserve Primary Fund 'appears to be an outlier,' says Peter Crane, who tracks money funds. 'People got worried that Reserve wouldn't be able to bail the fund out, so they started running.' The Reserve Fund, which had assets of around $62 billion on Friday, had dropped to about $24 billion on Tuesday." Also from WSJ, "Breaking Buck".
The Washington Post's "How Safe Is Your Money Fund?", which says, "The strains on the Reserve Primary Money Market Fund have prompted investors to ask whether their own money-market funds could be at risk. Money-market funds are not insured or guaranteed by the Federal Deposit Insurance Corp. or any government agency. But fund companies have historically covered losses. Money-market observers expect that the losses Reserve's investors took will be an isolated event."
The Washington Post also writes, "Beyond Wall St., Losses Spill Over," which is subtitled, "Long Regarded as Safe, Money-Market Funds Are Pulled Into Peril." It says, "[T]he safety of money-market funds has helped shape the decisions of federal regulators about which financial companies to save, according to people familiar with the government's thinking. The funds had relatively little exposure to Lehman, which the government allowed to file for bankruptcy. By contrast, the funds hold large quantities of debt issued by mega-insurer American International Group, a key reason that the Federal Reserve intervened Tuesday to stave off the firm's bankruptcy by taking control of it and offering it an $85 billion emergency loan.... The industry's exposure to companies facing trouble varies widely. Money-market funds have large exposure to investment banks Morgan Stanley and Goldman Sachs. But Peter Rizzo, an analyst with Standard & Poor's, said the funds rated by his company had little exposure to Washington Mutual, the Seattle thrift seeking a buyer as its losses rise."
BusinessWeek writes "Money-market fund's troubles spur industry moves", which says, "OppenheimerFunds Inc. said it would post holdings of its three money funds daily on its Web site beginning Thursday.... Daily postings of fund holdings 'will provide the transparency that shareholders want from their money market funds,' OppenheimerFunds Chief Executive John Murphy said.... The firm said its money funds 'do not have holdings of some of the companies currently in the news, nor do they have direct exposure to subprime mortgage-related securities.'" Businessweek adds, "Similarly Invesco Ltd. on Wednesday said it will post daily holdings updates, and said its U.S. money funds have no exposure to troubled financial services companies."
MarketWatch writes "Firms stress calm as investors flee to safety", which says, "Another Reserve fund, International Liquidity Fund, which is only available to offshore investors, also broke the buck. Also Tuesday, Standard & Poor's Ratings Services said that it had downgraded the Colorado Diversified Trust to Dm from AAAm due to exposure to Lehman paper. S&P said the Trust, which had about $260 million in assets, liquidated Wednesday at a net asset value of 98.2 cents. The Trust held money from local schools and governments. Its assets were transferred to the $3.5 billion Colorado Local Government Liquid Asset Trust."
See also, Bloomberg's "Money-Market Alternatives Are Limited, Advisers Say", FT's "Money markets fund sector shocked", and Reuters' "U.S. fund industry says money funds stable"
In just the second case of a money market mutual fund "breaking the buck," or dropping below the $1.00 a share level, in history, The Reserve's Primary Fund cuts its NAV to $0.97 cents on Tuesday. The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion.
Reserve said in a statement late yesterday, "The Board of Trustees of The Reserve Fund, after reviewing the unprecedented market events of the past several days and their impact on The Primary Fund, a series of The Reserve Fund and taking into account recommendations made by Reserve Management Company, Inc., the investment manager of The Primary Fund, approved the following actions with respect to The Primary Fund only:"
"The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00PM New York time today. As a result, the NAV of the Primary Fund, effective as of 4:00PM, is $0.97 per share. All redemption requests received prior to 3:00PM today will be redeemed at a net asset value of $1.00 per share."
"Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption. The seven-day redemption delay will not apply to debit card transactions, ACH transactions or checks written against the assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000. The Primary Fund will continue to accept purchase orders." It adds, "Effective tomorrow, September 17, 2008, the NAV for the Primary Fund will be calculated once a day at 5:00PM, New York time."
As we wrote Monday, several other firms have protected their investors from fallout from the Lehman Brothers bankruptcy. (The latest disclosure is from AmeriPrise's RiverSource funds, which filed an 8-K yesterday, announcing a $50 million purchase of Lehman CP.) A total of 21 money funds to date have taken action to protect shareholders, but the privately-held Reserve was unable to arrange credit supports in time to prevent a run.
Though money fund investors will undoubtedly be shocked and nervous over yesterday's events, we believe Reserve will be an anomoly. The combination of high yields, hot money and a lack of deep pockets likely will prove fatal to the first, and oldest money market mutual fund. As happened in 1994 with the liquidation of Community Bankers U.S. Government Money Market Fund at $0.96 a share, we expect money market funds to soldier on with just a single case of a fund "breaking the buck." See ICI's "Statement on Money Market Mutual Funds.
We wrote yesterday about money funds' limited exposure to Lehman Brothers and about the support actions taken by investment advisors so far. Evergreen and Russell have disclosed support agreement for their funds, while some other funds have disclosed Lehman holdings and pledged to maintain their $1.00 NAVs. The vast majority of money funds appear to have no direct exposure to Lehman, though they're now answering questions on AIG, which was downgraded to A-2 but is still P-1 (short-term ratings), and WaMu.
The latest crisis should bring Crane Data's tally of the number of advisors supporting their money funds over the past 13 months to 20. Besides Evergreen, money funds disclosing or showing holdings of Lehman in recent public filings include: Columbia Cash Reserves, which held $400 million, or 0.73% of its assets; Reserve Primary; and Russell Money Market Fund. All are expected to protect their funds from any threat to the $1.00 a share NAV should it become necessary.
Russell says in a letter, "The RIC and RTC money market funds have exposure to Lehman Brothers notes. Russell has been actively monitoring the situation and is entering into support agreements with the money market funds in which Russell and our AAA-rated parent company, Northwestern Mutual, will support the value of Lehman credit held in the funds to ensure that the funds continue to maintain a stable net asset value. The direct exposure in the RIC Money Market Fund as of Friday, September 12 was $403 million; in the Russell Trust Company Short Term Investment Fund, it was $75 million."
Last night, Dow Jones covered the story in, "Wachovia To Bolster Evergreen Funds, More Support To Come". It quotes Peter Crane, "I would expect you're going to see at least a couple of more support actions where the advisor seeks protections and purchases the Lehman or AIG (American International Group) or Washington Mutual (WM) paper from the fund."
The Dow Jones story also says, "[S]everal money funds reported holdings in Lehman paper in their most recent filings.... One example is the Primary Fund managed by New York money manager The Reserve. As of May 31, the $64.85 billion Primary Fund had some $785 million in Lehman commercial paper and medium-term notes." It adds, "The Reserve has historically protected the NAV of its money funds as needed."
Finally, Dow Jones sources Crane, saying, "Including the latest announcement from Evergreen, some 20 advisers, or almost one-third of all the major money-market fund advisors, have taken support actions to protect investors from any decline in the NAVs of money funds since August of last year.... Crane noted that historically, recovery rates for holders of commercial and medium-term notes have almost always been substantial."
A number of money market mutual funds are in the process of issuing statements either saying that they have no exposure to Lehman Brothers, which was downgraded to "Not Prime" from P-1 ("First Tier") earlier today, or saying that they are taking steps to support their funds (or that their holdings are not large enough to impact the $1.00 NAV). Evergreen Investments was the first to issue a statement today saying that they've taken action to support their money funds. Though Lehman CP and MTN holdings are not widespread in money funds, other announcements are expected to follow.
Evergreen's web posting says, "Wachovia Corporation has entered into support agreements with Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, and Evergreen Prime Cash Management Fund in which Wachovia will support the value of Lehman credit held in the Funds. These agreements are intended to ensure that the decline in the value of the Lehman debt will not result in a decrease in the net asset value of the Evergreen money market funds." The company says their direct exposure is as follows: Evergreen Institutional Money Market Fund (1.94%, $309 million), Evergreen Money Market Fund (1.66%, $110 million), and Evergreen Prime Cash Management Fund (0.97% $75 million).
The release adds, "Evergreen has no credit exposure to Lehman across the firm's municipal money market funds.... Lehman also serves as the counterparty on certain repurchase agreement transactions entered into by Evergreen Treasury Money Market Fund. These repurchase agreements are fully collateralized by US Treasury securities in the event Lehman is unable to fulfill its obligations under the agreements.
Finally, Evergreen says, "The portfolio management teams will continue to manage all Evergreen taxable money market portfolios in line with the objective of the Funds, which is to provide a high level of current income consistent with preserving capital and ensuring stability of principal while providing liquidity. Recognizing that continued liquidity challenges in the marketplace and ongoing media speculation may create concern for investors, we want to reaffirm Evergreen's commitment to carefully monitoring the situation and to providing information regarding the investment strategies of the firm's money market funds."
Companies issuing statements to shareholders saying that they have NO exposure to Lehman Brothers (some also cite no exposure to AIG and Washington Mutual) include: AIM, American Beacon, BlackRock, DB Advisors, Federated Investors, Morgan Stanley, UBS and Western Asset Management.
The bankruptcy filing of Lehman Brothers has led to a downgrade of the company's short-term debt by Moody's from P-1 to Not Prime. The impact to money market fund is likely to be contained, however, since Lehman had been a minor issuer in the commercial paper (CP) and medium-term note (MTN) marketplace</