Daily Links Archives: September, 2008

U.S. News reprints Treasury's "Money Market Guarantee Program FAQ". Additional stories include: Bloomberg's "Reserve Primary Fund to Liquidate, Begin Investor Distributions" (see Reserve's release here, AP's "Money-market funds: safer bets but not risk-free, Reuters' "Treasury opens money market guarantee program", "Reserve Fund Investors Wonder When They Will Get Access to Cash", WSJ's "A Safety Net for Investors in Money Funds", and Pensions & Investments' "Northern Trust bolsters money-market funds".

The SEC's Division of Investment Management has posted "Responses to Frequently Asked Questions about The Reserve Fund and Money Market Funds. The document says, "In September 2008, The Reserve Fund announced that The Primary Fund, a series of a money market fund registered with the Commission as an investment company under the Investment Company Act of 1940, calculated its net assets at 97 cents per share, and would suspend payment of redemption proceeds to Fund investors, for up to seven days after the redemption, with certain exceptions. Many investors have asked questions about their investments in the Fund and in other money market funds. The following questions and answers have been prepared by and represent the views of the Staff of the Division of Investment Management to assist investors in understanding recent events. They are not rules, regulations, or statements of the Commission. Further, the Commission has neither approved nor disapproved these answers and is not bound by them." Click HERE for the full Q&A. The SEC says it has issued an order permitting the suspension of redemptions at Reserve, and suggests monitoring The Reserve's website, or contacting intermediaries, for information. Finally, the SEC's FAQ says, "The SEC and its staff have been working on a variety of matters concerning money market funds, including staff guidance in connection with financial support for money market funds, compliance inspections and examinations, and possible rule amendments. The SEC also has enforcement powers that can be used in the case of securities law violations."

Saturday's Wall Street Journal writes "Muni Money-Fund Yields Surge", which says, "Municipal money-market yields are soaring as investors flee tax-exempt debt in a rush to safety across the credit markets. Many of these tax-free funds are now topping 5% in seven-day yields. The $3.4 billion USAA Tax Exempt Money Market Fund is yielding 5.26%, up from 1.89% at the end of August, according to Crane Data LLC. The $24 billion Fidelity Municipal [Money] Market Fund is yielding 5.21%, up from 1.62% in August." Also, see yesterday's video of Federated's Deborah Cunningham on Bloomberg TV. Cunningham talks "about investor sentiment on money-market funds, the integration of Putnam Investments LLC's Putnam Prime Money Market Fund into Federated, and fund investment strategy." Finally, see Bloomberg's "Jittery Money-Market Investors Await Treasury Guarantee Details".

"Money-Market Funds: Now a Safer Haven" writes Kiplinger.com and featured on WashingtonPost.com. The piece says, "Money-fund shareholders, mainly institutions, became concerned about potential losses and withdrew slightly more than $133 billion from Reserve Primary and other funds between September 16 and September 19. Regulators worried that this could turn into a Depression-style run on the funds. That might have led to a 'full-scale meltdown,' says Peter Crane, president of Crane Data, which tracks money funds. To prevent a run ... the Treasury Department announced it would create a temporary insurance system for money funds.... The insurance, which covers assets in money funds as of September 19, will last for a year and will be available to both taxable and tax-free money-market funds that pay the required fee. The fee hasn't been set yet, but it will be based on a fund's assets." See also, "Boston Fed leads loan plan to ease money market fund woes."

Suze Orman clarifies her comment on money market funds from the Oprah Winfrey Show, saying, "I want to keep you all up with the latest action in Washington regarding protecting your savings. I taped a recent appearance on the Oprah Winfrey Show on the morning of Thursday Sept. 18, right in the midst of much market turmoil. On the show I told you all that money market funds you buy through brokerages and mutual fund companies are not insured the same as money market accounts that you buy at an FDIC-insured bank. The show did not air until Tuesday Sept. 23. And between when I taped the show and it aired, the U.S. Treasury department announced a plan to set up a guaranty fund for money market mutual funds (MMMFs)." In other money fund news: Reuters' writes "RBC to help cover clients hurt by Reserve fund".

"Pick Money Funds That Don't Need Insuring" says Bloomberg's Jane Bryant Quinn in her latest column. "Most of the large money funds that cater to individuals already insure you against loss, using their own resources. Now they'll have to decide whether they want to pay for a layer of government protection, too. If they do, they could either absorb that extra cost or pass it along to investors in the form of slightly reduced returns." Sh adds, "What saved these funds is that they're sponsored by large, diversified financial services companies, says Peter Crane, publisher of Money Fund Intelligence, which covers the industry. The sponsors bought the bad paper out of their funds, making investors whole. Maintaining their money funds at $1 a share isn't optional." In other news, see "Ameriprise Financial Supports Clients Holding Investments in The Reserve's Primary Fund."

Bloomberg writes "Tax-Free Money Fund Yields Top Taxables by Record", which cites Crane Data's MFI Daily statistics showing tax-exempt money funds yielding twice taxables. (Yesterday, the Crane Tax-Exempt Money Fund Index's 1-day yield was 4.19% vs. 1.93% for our taxable Crane Money Fund Average. The article quotes Pete Crane, "I'll eat my hat if that's not a record." Bloomberg says, "Yields on variable-rate demand notes, state and local government debt favored by money funds, rose as high as 10 percent as banks that set the interest daily or weekly seek to avoid being overwhelmed by inventories of unsold securities.... It wasn't until Sept. 21 that the Treasury Department clarified in a statement that tax-exempt money funds would be eligible for the program. The lag in clarification may have led some investors to avoid the tax-exempt funds in favor of taxable ones, Crane said." See also Forbes' "Bank of NY Mellon to take charge on fund rescue".

Associated Press writes, "Investors return -- cautiously -- to money funds", which says, "Investors are cautiously returning to battered money-market mutual funds after the government intervened to stem a massive pullout by professional money managers. The run on the funds had threatened to expose individual investors to losses that, while just pennies on the dollar, would have been unprecedented for the normally safe investments." It quotes Peter Crane, "The moves by Treasury Department and Federal Reserve have eased the pressure on the funds tremendously, and raised the odds that we won't see another fund 'break the buck'." See also Reuters' story "Money-market fund assets up $1.5 bln Monday - Crane", Reuters' "Panic subsides in money-market funds", Bloomberg's "Money-Market Funds Still Good for Liquidity, Risk, Advisers Say", and WSJ's "Fund That Broke the Buck Didn't Follow Its Own Advice".

"U.S. Scales Back Money-Fund Plan as Withdrawals Slow" wrote Bloomberg yesterday. The article said, "The Treasury, seeking to prevent a broader run, announced Sept. 19 that it will reimburse investors for losses for a year. Officials scaled back the plan yesterday, saying it will only cover investments in money-market funds at the end of that day, meaning future deposits will not be insured. The change came after banks warned they would lose depositors."

A release on the Federal Reserve's "Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) says, "The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets. See also the Fed's "Statement Regarding Planned Purchases of Agency Debt."

Another day, another 100 stories on money market mutual funds. Some of the highlights: WSJ's "Help for Money Funds", "Money Flows Back to Commercial Paper," "Treasury Unveils Program To Bolster Money-Market Sector," Chuck Jaffe writes "Fund 'collapse' was greatly exaggerated," "U.S. offers to insure money market mutual funds," and "Ameriprise sues managers of troubled money fund." See also our Statements from Fund Companies: Blackrock, Columbia Management, Dreyfus, Evergreen Investments, Federated Investors, Franklin Templeton, Invesco, Legg Mason, Morgan Stanley, Oppenheimer Funds, Pimco, Reserve, RidgeWorth, Schwab, State Street, T. Rowe Price, Vanguard.

"Money Funds Show Holdings, Pledge Caution After Lehman Losses" writes Bloomberg's Chris Condon. Other Bloomberg coverage includes: "State Street, Federated Fall After Money-Fund Loss", which says, "The stocks dropped after BNY Mellon said a $22 billion institutional fund suffered losses on debt issued by bankrupt Lehman Brothers Holdings Inc. While not a money-market fund, BNY Mellon's $22 billion Institutional Cash Reserves was designed to work like one." (See also "BNY Mellon, Reserve Primary Rattle Fund Investors," and "U.S. Commercial Paper Market Falls Most This Year, and "Putnam Closes Money-Market Fund After Withdrawals"." Bloomberg's "BNY Mellon Cash Fund Hit by Losses From Lehman Debt" says, "BNY Mellon also entered into agreements with four of its Dreyfus money-market funds, including the $16.9 billion Cash Management Plus, saying it will support their net asset values."

Bloomberg TV "Crane Says Reserve Primary Fund Loss an 'Isolated Case'". Last night, Bloomberg TV's Bernard Lo talked with Peter Crane, founder of Crane Data LLC, on "losses sustained by the Reserve Primary Fund and the impact of the losses on demand for money-market funds." Bloomberg says, "The Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc., sapping confidence in assets once considered among the safest. The oldest U.S. money-market fund suspended redemptions and its net asset value fell below $1 a share."

Reserve Primary Fund's "breaking the buck" is all over the news today. The first to break was Bloomberg's "Reserve Money Fund Falls Below $1 a Share". Other coverage includes: USA Today's "Reserve Primary money market fund breaks a buck", NY Times' "Money Market Fund Says Customers Could Lose Money", WSJ's "Money Fund, Hurt by Debt Tied to Lehman, Breaks the Buck", LA Times' "Money market fund 'breaks the buck' on Lehman IOUs", Dow Jones' "Reserve's Primary Fund To Be Valued Below $1/Share", Barron's "Not Even Money Funds are Safe", Crain's NY Business' "Big money market fund freezes withdrawals", and MarketWatch's "Money market breaks the buck, freezes redemptions". See also ICI's "Statement on Money Market Mutual Funds".

Below, we excerpt pieces of BlackRock's "Letter to Institutional Money Market Fund Shareholders" (Sept. 2008), which was posted yesterday and which nicely summarizes the points that most firms have been making about what they're NOT invested in. "We continue to receive questions from investors about [credit and liquidity concern] headlines and, therefore, `wish to provide an update on money market funds managed by BlackRock.... While we generally do not comment on portfolio holdings outside of the normally published schedule of investments, the extraordinary events surrounding Lehman Brothers prompt us to confirm that we do not have any holdings of Lehman Brothers paper, nor is Lehman a counterparty to any repurchase agreements in our 2a-7 registered money market funds." They add, "Current market events have not necessitated a reevaluation of our methods for managing this important asset class; rather, it has reinforced our commitment to the approach we have taken for more than thirty years."

"Money-market funds keep growing as investors wait" writes The Arizona Republic's Russ Wiles. He discusses a "whole lot of cash sloshing around the world right now and quotes our MFI story "SIV Threat Recedes." The piece says, "It is perhaps notable that money funds, despite their low yields, now look more secure than they did many months ago, during the worst of the credit crunch. Back then, many money-market funds had stakes in shaky instruments known as structured-investment vehicles, but that danger has largely passed, said Peter Crane, president and publisher of the Money Fund Intelligence newsletter in Westboro, Mass." He adds, "No investors in money funds have lost even a penny over the past 13 months, during a period when 13 banks failed. But the main reason investors have piled into money funds and other ultraconservative investments doesn't have anything to do with SIVs and everything to do with heightened stock and bond volatility."

Bloomberg.com's article "Lehman No Bear Stearns as Money Markets Show No Panic" discusses TED spreads and LIBOR, but has no direct mentions of money market funds. Lehman continues to be rated "First Tier" (A-1/P-1), though it is on review. Managers Crane Data has spoken to believe Lehman's CP, MTNs and repo remain "money good," and that the company's access to the Fed's Primary Dealer Credit Facility and Term Securities Lending Facility make a default scenario very unlikely. They're of course also hoping that their concerns will be put to rest this weekend with a merger.

The Investment Company Institute says money market mutual fund assets declined by $4.08 billion to $3.582 trillion in the week ended Sept. 10. ICI's money fund series shows retail money funds increased $1.54 billion to $1.236 trillion while institutional money funds decreased by $5.62 billion to $2.346 trillion. ICI also just posted "Frequently Asked Questions About U.S. Takeover of Fannie Mae and Freddie Mac," which asks and answers, "How will the government's takeover of Fannie Mae and Freddie Mac affect mutual fund shareholders? Shareholders in money market funds and bond funds may benefit, because the Treasury Department's action will make funds' investments in the mortgage giants' bonds and other debt securities more secure." It also Q&A's, "Will the debt of Fannie and Freddie remain qualified for money market fund investments? Yes, so long as the companies' credit ratings are not reduced. That's not likely. Even before the takeover, Fannie's and Freddie's paper was rated highly enough to qualify as investments for money market funds."

Hear a recording of yesterday's presentation by Federated's CEO Christopher Donahue at Lehman Brothers' Global Financial Services Conference. Donahue said Federated's money fund business has "been a stalwart in these hard times." He said, "We support the 2a-7 rules. They have worked very well when they're followed." He also noted `Federated's recent deal to purchase Fifth Third's $1 billion in municipal money fund assets (see Sept. MFI), and added in the Q&A, "We are Sigma free, and they paid off on-time and in full." See also Federated's "Statement on the Debt of Fannie Mae and Freddie Mac", which was posted yesterday. It says, "Federated continues to believe that agency paper constitutes an eligible security for money market funds.... [I]t is our view that Fannie Mae and Freddie Mac continue to represent minimal credit risk."

Today's New York Times features "Where to Keep Cash When No Investment Seems Safe", saying, "CASH used to be the most boring of assets. But not this year. Nervous depositors rushed to withdraw money from IndyMac Bank.... Investors holding supposedly liquid auction-rate securities were stunned to discover they could not sell them after the markets seized up in the spring. Others watched as a string of money market mutual funds had to be bailed out. And still others suffered losses in ultrashort bond funds, once considered pillars of stability."

It quotes Crane Data's Peter Crane, "Normally, bad news for the economy is good news for cash investors. But because of the flight from the subprime mortgage contagion, this time is different." Crane adds, "Don't be greedy." With money funds, he tells NYT, don't be "`in the No. 1 yielding anything. You want to be a B student."

Kiplinger's "Is My Money Really Safe?" discusses money market deposit account safety and FDIC insurance. The Q&A clarifies various insurance limit questions and says, "If your funds total more than $100,000, move the excess to another bank." In other news, the Chicago Tribune discusses travails in ultra-short bond funds in "'Safe' bets turn perilous as bonds fall." It quotes a recent Morningstar report by Karen Dolan, "Ultrashort-Term Bond Funds Suffer Massive Blow," which says "Unexpected blowup threatens this category's existence.

The SEC's "Comments on References to Ratings of Nationally Recognized Statistical Rating Organizations" shows a flood of last-minute comments on the proposal to remove ratings minimums from Rule 2a-7. Letters from Federated, Schwab, Dreyfus, USAA, Invesco AIM, ASF, IMMFA, and more were posted today, and all were decidedly anti-proposal.

ICI's weekly MMMF asset series hit a record in the latest week, showing funds rising $13.16 billion to $3.585 trillion in the week ended Sept. 3. Retail assets rose $528 million to $1.234 trillion, while Institutional assets jumped $12.64 billion to $2.351 trillion. Tax-exempt funds were the strongest sector on the week, with institutional funds rising 1.79%, or $3.65 billion, to $207.3 billion, following two weeks of declines. Year-to-date, money fund assets have increased $441 billion, or 14.0%, with institutional assets contributing $368.2 billion (up 18.6%) and retail assets up $72.8 billion (up 6.3%). Over 52 weeks funds have increased by $778 billion, or 27.7%, with institional assets contributing $628 billion (up 36.4%) and retail up $151 billion (up 13.9%).

"Frozen Credit Is Starting To Thaw Out" writes today's Wall Street Journal, citing a recent increase in the amount of commercial paper outstanding. The article quotes Bianco Research analyst Howard Simons, "With banks pretty much useless now as a source of loans, credit-worthy companies can find funding in the commercial-paper market, and they're able to do it at a saner yield." Alas, it's primarily the Fed's seasonally adjusted CP series that's showing a rebound, but we'll take what we can get. New weekly numbers come out later this morning. In other news, Canada's Investment Executive writes "Money market funds dominate sales in August: IFIC" and The Toronto Globe and Mail writes "Give me one good reason you should stay in money market funds" on the sharp growth of Canadian money market funds (46% over 12 mos.).

Federated's most recent "The Month in Cash" commentary predicts continued flatness in rates. Debbie Cunningham writes, "If anything, the Fed's more dovish tone from its August 5 Federal Open Market Committee meeting reinforced our projection that policy rates would stay at 2% for an extended period." Also, note that Federated CEO Christopher Donahue will speak at Lehman Brothers Global Financial Services Conference at 10:30 a.m. next Wednesday, Sept. 10.

Comments on References to Ratings of Nationally Recognized Statistical Rating Organizations continue to arrive, almost all of them vehemently opposed to removing mandated NRSRO ratings. Friday, letters were posted by William L. Armstrong, Chairman of the Board, Denver-based Board of Trustees of the Oppenheimer Funds, Scott C. Goebel, Senior Vice President and General Counsel, Fidelity Management and Research Company, and Robert W. Uek, Chair, Governing Council, Independent Directors Council. Fidelity's comment says, "Fidelity agrees that investment advisers to money market funds should not place undue reliance on credit ratings -- but Rule 2a-7 in its current form already prohibits such conduct. Under Rule 2a-7, money market funds must limit purchases to securities that have eligible ratings (or are of comparable quality) from the Requisite NRSROs (as defined in Rule 2a-7) and are determined by the fund's board, or its delegate, to represent minimal credit risk."

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