Daily Links Archives: January, 2010

The Securities & Exchange Commission posted a notice Friday entitled, "Reserve Primary Fund Distributes Assets to Investors." It says, "The Reserve Primary Fund today completed distribution of $3.4 billion in assets to investors who held shares of the fund when its net asset value fell below $1 per share in September 2008. This distribution, which follows earlier distributions, represents the bulk of the fund's remaining assets. U.S. District Court Judge Paul Gardephe in Manhattan ordered the pro rata distribution last November at the request of the Securities and Exchange Commission." SEC Chairman Mary Schapiro says, "Today's distribution is the product of significant efforts by the SEC to get money back to investors as quickly and fairly as possible. The SEC will continue to seek the return of even more assets for investors in the coming months." The release continues, "With today's distribution, investors will have recovered more than 98 cents on the dollar.... On Sept. 15, 2008, the Reserve Primary Fund, which held $785 million in Lehman-issued securities, became illiquid when the fund was unable to meet investor requests for redemptions. The following day, the Reserve Fund declared it had 'broken the buck' because its net asset value had fallen below $1 per share. On May 5, 2009, the SEC filed fraud charges against entities and individuals who operate the Reserve Fund for failing to provide key material facts to, and affirmatively misleading, investors and trustees about the impact on the fund of the bankruptcy of Lehman Brothers Holdings, Inc. More significantly, in bringing the enforcement action, the SEC sought to expedite the distribution of the fund's remaining assets to investors by proposing a plan of liquidation.... Investors can find additional information relating to the Commission's action and the Court's orders on the Commission's Web site at http://www.sec.gov/spotlight/reserve_primary_fund_investors.htm. Investors also can find additional information on the Reserve's Web site at http://ther.com."

Federated Investors Reported Q4 Earnings last night and hosted a conference call at 9:00 a.m. this morning. The third-largest money fund manager's earnings release says, "Money market assets in both funds and separate accounts were $313.3 billion at Dec. 31, 2009, down $42.4 billion or 12 percent from $355.7 billion at Dec. 31, 2008 and down $4.8 billion or 2 percent from $318.1 billion at Sept. 30, 2009. Money market mutual fund assets were $281.6 billion at Dec. 31, 2009, down $45.7 billion or 14 percent from $327.3 billion at Dec. 31, 2008 and down $6.0 billion or 2 percent from $287.6 billion at Sept. 30, 2009." It continues, "The decrease in revenue primarily reflects a $54.1 million increase in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields. This increase in fee waivers was largely offset by a related decrease in marketing and distribution expenses of $40.7 million such that the net impact on operating income was a decrease of $13.4 million. In addition, revenue decreased due to lower average money market managed assets.... In Q4 2009, Federated derived 56 percent of its revenue from money market assets." In other news, see Investment News' "Danger on the money market horizon: Rising rates could sink funds", which says, "In the past, when the Federal Reserve hiked rates, these institutions would pull their money out of money funds and go into overnight repurchase agreements and short-term commercial paper. That allowed them to pick up additional yield, because those instruments would more quickly reflect the higher rates."

The Wall Street Journal writes "SEC: More Changes for Money-Market Funds". It says, "Money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier. With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently. The trade-off: These safeguards also will put pressure on yields that are already near zero. The changes likely will reduce yields by about 0.10 percentage point, said Pete Crane, president of research firm Crane Data LLC. This isn't good news for money-fund sponsors already suffering from redemptions because of their low rates. Investors pulled about $540 billion out of money-market mutual funds last year, bringing assets to $3.3 trillion, according to Crane." The Journal adds, "For the most part, the rules resemble many of the SEC's original proposals last year. Notably, they didn't include a controversial idea that the agency proposed be considered -- scrapping the $1-per-share standard for money funds in favor of a floating standard -- which is an idea that was strongly opposed by the industry. Instead, the rules will require a fund to disclose its actual 'mark-to-market' net asset value, known as 'shadow NAV,' on a 60-day lag." Also, Investment News' writes "Money funds forced to disclose floating net asset values". It says, "Money market funds will have to disclose on a delayed basis their fluctuating 'shadow' net asset values rather than their $1-per-share value, thanks to new rules adopted today by the Securities and Exchange Commission.... But Peter Crane, president of Crane Data LLC, which tracks money market fund performance, says that requiring money market funds to disclose a shadow net asset value on a delayed basis is 'a baby step towards more transparency in the actual NAV.' The concern is either a floating rate or a shadow price would be interpreted the wrong way by investors, Mr. Crane said." Investment News quotes Crane, "If [investors] see $0.999 [per share] they're going to say, 'Oh my God, my fund broke the buck,' when these are just normal fluctuations that happen all the time."

"Reserve Primary Fund to Distribute $3.4 Billion" says a press release posted last night. It states, "The Reserve is pleased to announce that it will begin its sixth distribution to Primary Fund shareholders on or about January 29, 2010. The distribution, in the amount of approximately $3.4 billion, represents approximately 95% of the Fund's remaining asset value of $3.56 billion as of the close of business on January 21, 2010. Including this sixth distribution, $50.5 billion, or approximately 99% of Fund assets as of the close of business on September 15, 2008, will have been returned to investors. This sixth distribution, which has been ordered by and is subject to the supervision and oversight of the United States District Court for the Southern District of New York, is being paid to all investors remaining in the Fund, including those who submitted redemption orders that had not been funded and those who have not submitted redemption orders, according to the terms of the Court's Order. The Fund's net asset value fell below $1.00 per share on September 16, 2008. Approximately $160 million, exclusive of the value of the Lehman Brothers Holdings Inc. securities, which are carried at zero, will remain in the Fund to cover certain claims for indemnification expenses, management fees and other costs, to the extent such amounts are approved by the Court." Bruce R. Bent, Chairman of The Reserve Fund says, "We are very happy to move forward with this very significant step in returning money to our shareholders. We have been working as quickly as possible to finalize the liquidation of the Fund in compliance with the Court's Order. Thank you for your patience." In other news, see BlackRock's latest earnings report and listen to their conference call at 9:00 a.m.

GTNews.com features "Money Market Fund Ratings and Surveillance: Tools for Corporate Treasurers". The article, written by Fitch Ratings' Aymeric Poizot and Roger Merritt, says, "The financial crisis severely challenged the US$6 trillion money market fund (MMF) industry. While positive regulatory changes in the US and Europe are under way, highly rated funds operate with additional conservatism and transparency." It explains, "Many institutional investors, including corporate treasurers, use ratings as a key selection criterion when investing short-term liquidity in MMFs. These play a central role in the short-term markets, acting as buyers of short-term debt as well as a liquid place to invest. Of the more than US$6 trillion of funds invested in them globally, more than US$3.4 trillion were invested in the US and US$1.9 trillion in Europe (as of the end of Q3 09). According to a recent survey that Fitch conducted of corporate treasurers, 40% of corporate treasurers typically invest some of their liquidity in MMFs. In many cases, such short-term investors look for 'AAA' ratings to determine whether or not to invest. As defined by Fitch, a 'AAAmmf' MMF rating indicates 'an extremely strong capacity to achieve fund's investment objective of preserving principal and providing shareholder liquidity through limiting credit, market, and liquidity risk'." See also, "Moody's withdraws the rating of the Russell Money Market Fund."

Morningstar writes "Cash Is Not Trash". It says, "We hold money market funds for a variety of reasons. They can be an emergency backup should we lose our job or have uninsured damage to our house (or to ourselves). They can be a spot to park your money while you wait for a new opportunity to present itself.... But today, many money market funds are yielding just 0.01%, and some investors are rushing to short-term-bond funds and ultrashort-bond funds in order to get some income. Many fund companies have been forced to eat some or all of their expense ratios in order to keep yields from going to zero. It's not a fund-company conspiracy -- Treasury bills just have incredibly low yields. We're still wary of ultrashort funds.... But for other uses, such as emergencies or upcoming big-ticket expenditures, I'd stay with money market funds. Think about what will happen when interest rates start to rise."

The Financial Times writes "Proposed US tax would hit repo industry". The article says, "The proposal to subject some bank liabilities to a financial crisis responsibility fee highlights the unintended consequences of regulating an industry that depends on an obscure but crucial funding model. The $3,800bn US repurchase or repo market, in which securities are used as collateral for short-term loans, is reeling from the proposed FCR [financial crisis responsibility] fee." The piece speculates that the fee would apply to repo, quoting Scott Skyrm, senior vice-president at repo broker Newedge, "A 15bp tax on bank assets above $50bn will have a devastating effect on the repo market." The FT also quotes Joe Abate, money-market strategist at Barclays Capital, "We expect significant changes to the proposal as the current version could potentially create significant distortions in money markets. Indeed, one way banks can reduce their FCR [fee] liability is to cut back on lending, which is clearly not the administration's intent." Also, see FDIC's "Final Rule Amending the Risk-Based Capital Rules to Reflect the Issuance of FAS 166 and FAS 167".

Its weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $46.03 billion to $3.240 trillion for the week ended Wednesday, January 20, the Investment Company Institute reported today. Taxable government funds decreased by $29.02 billion, taxable non-government funds decreased by $11.48 billion, and tax-exempt funds decreased by $5.53 billion." It continues, "Assets of retail money market funds decreased by $4.88 billion to $1.055 trillion. Taxable government money market fund assets in the retail category decreased by $180 million to $161.81 billion, taxable non-government money market fund assets decreased by $2.99 billion to $660.14 billion, and tax-exempt fund assets decreased by $1.71 billion to $233.11 billion.... Assets of institutional money market funds decreased by $41.15 billion to $2.185 trillion. Among institutional funds, taxable government money market fund assets decreased by $28.84 billion to $843.55 billion, taxable non-government money market fund assets decreased by $8.49 billion to $1.184 trillion, and tax-exempt fund assets decreased by $3.82 billion to $156.73 billion." The report adds, "ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical weekly money market data back to January 2008 are available on the ICI website."

Wells Fargo's December Portfolio Manager Commentary says, "With proposed amendments to Rule 2a-7 mandating that money funds keep certain amounts in overnight investments, we would not be surprised if this supply problem were more acute next year should the Rule be amended as proposed.... Because statements released after the last several Federal Open Market Committee meetings indicate that money market rates will remain low for 'an extended period,' we would expect this rate environment to persist into 2010. The question is how long into 2010? Other central banks are already beginning to raise their rates and the U.S. economy shows some promise of recovery. Looking at the federal funds futures market as one indicator, activity in that market would indicate a better-than-ever chance that the federal funds rate will be hiked to 50 bps by mid-year, and to 1.00% by the end of 2010. Some economists are predicting an even more aggressive pattern of tightening by the Fed. Clearly, the risks of rising rates outweigh the near impossibility of further declines, since we are at or near zero already. Since the timing of changes in the direction of interest rates is always quite unpredictable, the prudent course is to plan for that event now."

Charles Schwab Corporation briefly discusses money market funds, bank deposit products and fee waivers in its latest quarterly earnings report. CFO Joe Martinetto says, "The company's average balance of interest-bearing assets, which are primarily funded by client cash inflows, rose by $14.8 billion, or 34%, to $58.6 billion between 2008 and 2009. Over the near term, however, the net interest revenue generated by this growing asset base has been severely impacted by continued declines in the short-term interest rate environment, even as the overnight Fed Funds rate has been at essentially zero since late 2008. As we've been discussing for some time, with declining investment yields and essentially no room left to reduce liability costs, the resulting drop in our net interest spread has outweighed balance sheet growth, and net interest revenue declined by 28% in 2009." He continues, "`Money market fund fee waivers caused by declining rates rose to $110 million in the fourth quarter, bringing the full-year total to $224 million, which caused asset management fees to decline by 20%.... With no sign of higher short-term rates on the horizon, we implemented a series of expense reduction measures in 2009 that enabled us to lower costs by 7%, which in turn helped the company achieve a 30.4% pre-tax profit margin and a 17% return on equity, right in line with our expectations for the year given the environment." See also, WSJ's "Rates Cut Both Ways at Schwab".

The banking blog BankDeals has moved its' postings and info to DepositAccounts.com, a new website covering savings accounts and other bank offerings. The excellent, though anonomously written, blog says, "I'm happy to report that the transition of BankDeals blog to DepositAccounts has been completed. All of my past blog posts and comments are now at DepositAccounts, and all future posts will be done here. Those who have email subscriptions of my daily blog postings should continue to receive emails. You can also subscribe to my notice postings. Just click on the RSS image on top of the notice page.... Here's a review of some of these new features: Home Page -- There's a new layout which allows you to quickly view the latest blogs posts, notices, and articles.... Open Discussion Thread -- This is where to comment if you've found a good banking deal or an interesting bank-related news story.... Membership -- You can now register at DepositAccounts, which is free, of course.... Rate Tables -- Those of you who use the reward checking tables are already familiar with these, but one of the biggest new features to complement the blog posts are rate tables.... Bank Hub Pages -- Each bank listed has its own hub page now with pertinent information about the bank."

Last night's "ICI Reports Money Market Mutual Fund Assets release shows assets declining for the first week in three. It says, "Total money market mutual fund assets decreased by $21.67 billion to $3.286 trillion for the week ended Wednesday, January 13, the Investment Company Institute reported today. Taxable government funds decreased by $9.47 billion, taxable non-government funds decreased by $3.14 billion, and tax-exempt funds decreased by $9.06 billion." ICI's weekly series shows money fund assets declining by $537 billion, or 14.0%, in 2009. ICI adds, "Assets of retail money market funds decreased by $12.58 billion to $1.058 trillion.... Assets of institutional money market funds decreased by $9.09 billion to $2.228 trillion. Among institutional funds, taxable government money market fund assets decreased by $7.05 billion to $872.12 billion, taxable non-government money market fund assets increased by $3.77 billion to $1.196 trillion, and tax-exempt fund assets decreased by $5.82 billion to $160.22 billion."

We received an e-mail solicitation from Institutional Investors for a "Money Market Funds Reform - Issues and Implications" Webinar, which will be held on Wednesday, February 10, 2010, from 1-2pm. The e-mail is subtitled, "Re-Establishing The Economic Purpose And Investor Benefits Of Money Market Funds," and says, "After the Primary Reserve Fund 'broke the buck' last year, the SEC proposed new regulation on money market funds that called for greater liquidity requirements, an increase in reporting, and restrictions on securities investing -- dramatic changes that could alter the purpose and role of these funds in investors' portfolios. Join Joe Keenan, Managing Director, Head of Relationship Management at BNY Mellon Asset Servicing, as he moderates a panel of money market fund experts in a discussion on the changing role of this asset class." Panelists include: ICI's Jane Heinrichs, BNY Mellon's Matt Bromberg, and Stradley Ronon's Joan Swirsky. Also, as a reminder, S&P says it will host a teleconference today, Jan. 14, 2010, at 11:00 a.m. EST. The dial-in number is 1-210-795-1098; for the U.K. it is 44-20-7108-6248. The conference ID is 2850908, and the passcode is "SANDP."

DB Advisors' will host a "Liquidity management in 2010 Webcast: Emerging trends and strategies on Thursday, January 21, 2010, at 1pm. The Webcast will feature Joe Benevento, Head of Portfolio Management, Liquidity Management, Americas, and Nagesh Gopal, Product Specialist, Institutional Liquidity Management. The description says, "In the coming year, several forces promise to shape the evolution of liquidity management strategies and new product offerings. Early in the year, the SEC is expected to comment on new money market regulations. Also, the Federal Reserve is likely to rein in the unprecedented amount of liquidity that has been injected into the economy, a move which could drive short-term interest rates higher. Please join us for a timely discussion about how these trends will influence how companies can most effectively manage their liquidity needs in 2010." See also, New York Times Blog, "Why the Best Deposit Rates Are Decreasing".

Bank of Ireland Joins "2010 Eligible Liabilities Guarantee (ELG) Scheme". A press release entitled, "The Governor and Company of the Bank of Ireland - Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009," says, "Bank of Ireland, which includes its branches in Ireland, the United Kingdom, France, Germany and the United States, along with its subsidiaries Bank of Ireland Mortgage Bank, ICS Building Society and Bank of Ireland (IOM) Limited, have on 11 January 2010 become participating institutions for the purposes of the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009. Further information on the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 is available at www.finance.gov.ie and www.ntma.ie. Participating Institution Certificates for Bank of Ireland will be available at http://www.ntma.ie/ELGScheme/CreditInstitutionsELGScheme.php. Bank of Ireland welcomes the opportunity afforded by the new ELG Scheme to issue guaranteed debt securities with a maturity of up to five years as the Group continues to focus on maintaining a prudent maturity profile of wholesale funding. The Group also welcomes the flexibility that the ELG Scheme provides with regard to issuing un-guaranteed debt securities depending on market conditions and investor appetite."

The Sunday LA Times writes "Look, Ma, nearly no yield", which is subtitled, "Assets pour out of money market funds, Vanguard comes out ahead and other highlights of 2009." The Tom Petruno article says, "The plug got pulled on money market mutual funds in 2009. Total assets of money funds plummeted by nearly $500 billion, to about $3.26 trillion at the end of the year, a drop of 13% from the end of 2008, according to IMoneyNet Inc. The cash poured out because the Federal Reserve's policy of near-zero short-term interest rates also reduced money fund payouts to nearly zero.... What's more, investors know that money fund yields have little chance of moving higher until the Fed begins to lift its benchmark interest rate -- an event unlikely to happen until the second half of the year.... But the surprise may be how much cash has stayed in money funds. About 70% of money fund assets belong to institutional investors, and for many of them there may be no decent alternative to the immediate liquidity that money funds provide, even if interest earnings are zilch, said Pete Crane, head of money fund research firm Crane Data. Many risk-averse small investors, too, may be opting to wait out the rate drought in the funds, Crane figures, given paltry yields on other short-term accounts." Crane says, "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother." See also, The Boston Herald's Chuck Jaffe Q&A, "Money fund yields so low that banks are better idea".

ICI's "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets increased by $14.24 billion to $3.307 trillion for the week ended Wednesday, January 6." This follows last week's $21.7 billion gain and marks the first time since March 2009 that money market funds have increased assets for two consecutive weeks. For 2009, money fund assets decreased by approximately $545 billion, or 14.0%, the largest calendar decrease on record (by far). ICI's weekly report says, "Taxable government funds decreased by $5.92 billion, taxable non-government funds increased by $12.20 billion, and tax-exempt funds increased by $7.95 billion. Assets of retail money market funds increased by $2.42 billion to $1.070 trillion.... Assets of institutional money market funds increased by $11.82 billion to $2.237 trillion."

We noticed that ICI's annual Mutual Funds & Investment Mgmt Conference, which will be held on March 14-17, 2010, in Phoenix, Arizona, at the JW Marriott Desert Ridge, will feature a panel on March 16 entitled, "Impact of Government and Regulatory Policies on the Money Market and Money Market Funds." The event is subtitled, "ICI and FBA Examine Current Issues Impacting Investment Companies," and its description says, "At a time when the landscape of the financial services industry is being reshaped, it is critical for those in the mutual fund industry to keep abreast of the latest legislative, regulatory, and business developments affecting funds and their shareholders. Don't miss the 2010 Mutual Funds and Investment Management Conference, sponsored by the Investment Company Institute and the Federal Bar Association." In other mutual fund conference news, note too that NICSA, the National Investment Company Service Association, will host its 28th Annual Conference & Expo in Miami, Fla. Feb. 14-17.

In a press release sent out this morning, BlackRock, Inc. "today announced that it will report results for the fourth quarter and full year 2009 prior to the opening of the New York Stock Exchange on Wednesday, January 27, 2010. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m. EST. BlackRock's fourth quarter earnings release will be available in the investor relations section of the Company's website, www.blackrock.com, before the teleconference call begins." The release adds, "Members of the public who are interested in participating in the teleconference should dial, from the United States, (800) 374-0176, or from outside the United States, (706) 679-4634, shortly before 9:00 a.m. and reference the BlackRock Conference Call (ID Number 49409856). A live, listen-only webcast will also be available via the investor relations section of www.blackrock.com."

The Preliminary Agenda has been posted for Crane's Money Fund Symposium, a conference for money fund and money market professionals and investors. MFS2010 will be held July 26-28, 2010, at The InterContinental Boston. A sample of this year's agenda includes the sessions: Washington & The New Regulatory Regime with ICI's Paul Schott Stevens, "The New Normal in the Money Markets" with Federated's Debbie Cunningham and "Industry Mergers, Consolidation & Outlook with S&P's Peter Rizzo and Wells Fargo's Dave Sylvester. Other sessions include: "Discussing Parental Backing & Bailouts and "Government Support Review: AMLF, CPFF, TMMFG." (See the Agenda here or e-mail Pete for the PDF.) Registration (which is now live) for Crane's Money Fund Symposium 2010 will be $750. Exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.55K, and $10K. (Contact Crane for more info.) Our mission is (again) to deliver a better and less expensive conference alternative to money market fund professionals and investors.

MarketWatch's Chuck Jaffe writes "New year's retributions: Bad news ahead for mutual fund investors", which mentions money funds in two of his dire (and silly) predictions. He speculates about, "Money-market funds closing: If interest rates don't go up soon, a flood of fund firms will shut down their money-fund business because there's currently no profit in it. Industry watchers say that fee waivers to keep money funds profitable are costing Charles Schwab Corp. some $100 million in earnings per quarter, for example. Corporate boards aren't willing to allow that forever. Already several money funds have shut down or stopped accepting new money, but if rates don't rise soon, that will become a bigger trend. When rates do rise, the financial firms will reduce their waivers and keep virtually all of the increase for themselves, at least initially." He also writes on, "Money-market funds failing: It may seem odd that rates could rise and a money fund could fail, because rising rates will obviously help their backers make a profit. But consider institutional money funds. Corporate treasurers and big power players could decide to capture the rate hike immediately by dumping the fund and moving directly to commercial paper. They leave the fund, which is holding paper that is now less attractive, while trying to get the new rate. If a rate hike is big enough, some institutional fund will bite the big one." In other news, see The Wall Street Journal's "Firms Fight Banks Over Billions in Frozen Notes" about auction-rate securities.

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