Press Releases Archives: January, 2009

Bloomberg writes "JPMorgan's Staley Call Money Funds a 'Systemic Risk', saying, "James 'Jes' Staley, head of JPMorgan Chase & Co.'s investment unit, said the $4 trillion money-market fund industry is the 'greatest systemic risk' to the financial system that hasn't been adequately addressed." Bloomberg quotes him from Davos, Switzerland, "`What keeps me up at night most of anything we do at JPMorgan Asset Management is the money-market fund space. One of the things that has to come out and get a lot more attention and discussion is how do we take the systemic risk posed by money funds out of the system?" Bloomberg quotes Vanguard's David Glocke, "I'm aware there are those who want to blame the money-market industry for taking away the punch bowl. But issuers need to maintain diverse sources of funding." The article also quotes Peter Crane, "It would split the fund business, in effect: half into bank deposits and half into ultra-short bond funds." It says, "Crane predicted the industry would fight the proposal 'tooth and nail' and has the influence to win." Crane adds, "It's too big and important for such a dramatic change to be made."

"Ameritrade waives fees on funds" says Crain Communication's Investment News. The article states, "TD Ameritrade Holding Corp. last week said it began waiving fees on at least one of its funds in December and will likely reduce or eliminate fees for the vast majority of its other money market funds over the next few months to avoid a zero or negative return for investors." The piece quotes Peter Crane, "You will see more waivers because the money markets are still bottoming.... If the revenue pressure becomes acute, I assume they would begin those investments [FDIC-backed and government agency debt] as a last resort.... If rates stay low for another year, it may cost a couple of hundred million dollars [out of a Crane estimate $15 billion in annualized revenue]. That's certainly not welcome in this environment, but it's not going to send fund firms or investors running and screaming out of the Treasury sector." Also, see MarketWatch's "Federated stock up 8% after positive results".

Bloomberg writes "Pimco to Expand Money-Market Funds After Missing 2008 Surge", saying "Pimco, based in Newport Beach, California, filed Jan. 16 with the U.S. Securities and Exchange Commission to sell shares in the new Treasury Money Market and Government Money Market funds. The funds will cater to institutional investors and will be run by Paul McCulley.... The company, with $790 billion in assets under management, has one prime money fund, a category that invests in corporate debt. Pimco missed out on the investor rush into funds that focus on government securities after the $62.6 billion Reserve Primary Fund suffered losses from the September bankruptcy of Lehman Brothers Holdings Inc." It quotes Peter Crane, "Money-market funds have had a number of problems. But they were still the single best performing segment of the mutual-fund business as far as asset growth goes."

The Minneapolis Star-Tribune writes "Savings options: Lower returns are OK", which is subtitled, "Finally fluffing up that cash cushion? Focus on safety, not return." It says, "If you're one of the many Americans realizing that having a cash cushion is critical, your rate of return should not be your top priority. With short-term cash, it's about 'return of principal, not return on principal." Columnist Kara McGuire cites our Peter Crane and adds, "No matter what short-term cash vehicle you're considering, think about convenience in addition to yield, said Crane. Is it worth going across town or putting up with another username and password for a few basis points? I also like Crane's so-called wildebeest strategy -- 'stay in the middle of the pack' when it comes to yields." Also, see Morningstar's "Seven Questions with Mercer Bullard", which says, "Similarly, the worst mutual fund scandal arising out of the current crisis is the failure of the Reserve Funds, again costing investors only a few pennies on the dollar."

"ICI, SIFMA petition SEC for hearing on Reserve" writes Investment News, saying, "Two trade groups that represent the investment management industry want the Securities and Exchange Commission to hold a public hearing on the liquidation plan for a money market fund that collapsed in September." It quotes Peter Crane, "I assume they are feeling pressure from individual investors and some of the aggrieved parties.... I can't prove it yet, but I predict investors in [the Primary Fund] will end up with positive returns in 2008." The article says, "But public hearings into a liquidation plan that's almost run its course seem like overkill, citing Bill Donoghue.

"Money Funds Begin Trending Down" says February Money magazine. (Note that Money hasn't posted this magazine story on the website yet.) It its monthly "Savings and Credit" column, Money writes, "With the Federal Reserve having lowered its key interest rate to 0.25% in late December, money-market mutual funds will be feeling the pinch. The article (incorrectly, we believe) speculates that by the end of January "the funds will have a difficult time generating a return after expenses," citing Greg McBride of Pete Crane predicts to Money that as rates ease down, "The majority will yield between 0.5% and 1%.... But funds investing primarily in Treasuries could hit 0%."

"Treasury money funds are turning down new cash from investors" says Investment News. In yet another article on "soft closings" of Treasury money market funds, IN writes, "Among the companies that have recently stopped accepting money from new investors into their Treasury funds are Charles Schwab & Co. Inc. of San Francisco, Fidelity Investments of Boston, The Goldman Sachs Group Inc. of New York, and The Vanguard Group Inc. of Malvern, Pa." The piece adds, "Not everyone is so pessimistic." It quotes `Peter Crane, president of Crane Data LLC of Westborough, Mass. "A mutual fund company would be out of its mind to liquidate the only class that has gained money in the past year, even if they are losing money on it." Also, see Financial Week "Cash keeps pouring into money funds".

Sunday's New York Times features an article written by Diana Henriques entitled, "Money Market Funds Are a Refuge, Right?," which discusses the dramatic growth, unprecedented turmoil and rapidly shifting landscape in the money market mutual fund industry. The Times says, "The amount of cash held in money market funds at the start of 2009 exceeded the money in stock mutual funds for the first time in more than a decade.... Yet 2008 may go down in history as the year that cast doubt on everything American investors thought they knew about money market funds."

It cites The Reserve Primary Fund's "breaking of the buck," delays in redemptions, and myriad lawsuits, saying, "The Reserve Fund battle already involves regulatory investigators, a giant Chinese fund caught in the mess and a federal judge in Minneapolis. The Treasury had to cobble together an ad hoc insurance program to keep the Reserve Fund panic from spreading."

The Times quotes Matthew P. Fink, former chairman of the ICI, "If the Treasury is going to insure these funds, bank-style, we are likely to end up with bank-style regulations." The article adds, "And the money fund industry will be one target of the broader regulatory reform effort that has been promised by the incoming Obama administration. `Regulators may consider requiring greater portfolio diversification and minimum levels of cash as a buffer against a panic, according to Mr. Fink."

Finally, the NYT piece says, "And yet, as the economic storm worsens, money funds still seem the refuge of choice." It says, "Those billions could have flowed into F.D.I.C.-insured bank accounts," and quotes `Peter Crane, "But for decades, people have had the choice between higher yield and absolute safety, and they've chosen yield." But adds the Tiems, "That doesn't mean the money fund industry will not be changed by the fallout from the money fund crisis of 2008."

Today's Investors Business Daily features the story "Money Funds Are Facing Rate Pressure", which discusses in depth the issue of near-zero rates on Treasury bills and their impact on Treasury money market funds.

IBD says, "The walls are closing in on Treasury money market funds. With rates near zero on the new short-term Treasury securities they must invest in, it is becoming increasingly hard for these money funds to remain profitable and still have positive yield. At worst, some such funds could be forced to merge or fold. More likely, funds will raise or impose fees. Others have closed to at least some new money."

"This situation may pose a survival threat to a handful of the highest-expense Treasury funds," IBD quotes Peter Crane, president of Crane Data, which tracks money market funds. "But Treasury funds overall are still yielding on average just under 0.20% (as of Jan. 5), an all-time low. And that's net -- with fees taken into account."

IBD continues, "And what happens if the Federal Reserve keeps short-term rates low for a long time or pushes them down more, and a fund does not cut its expenses while raising add-on fees? Some funds' NAV could fall below $1, a catastrophe for money funds. But it would happen slowly." The paper quotes Crane, "Instead of 'breaking the buck,' it's more a slow erosion. If you had negative yields - for example, if Treasuries paid zero percent and funds average a 0.5% expense ratio - it would still take a year to erode their NAV to, say, 99 cents. That's because at the outset some of their holdings would be older securities, paying more."

Finally, the article says, "The decline in short-term interest rates is a potential threat to Treasury money funds, but not so much for other categories of money funds. That's because Treasury money funds invest mostly in short-term Treasury securities."

To see a ranking of Treasury funds by their latest yields, request a copy of our Money Fund Intelligence Daily or Money Fund Intelligence XLS.

Time Gives "Money Market Fund Insurance" an 'A' Grade in its most recent issue. The brief says, "The Plan: After a well-known fund lost money in mid-September, assets in money-market funds dropped by $400 billion in two weeks. Money funds help provide loans for the day-to-day operations of large companies. So with investors fleeing these funds, many companies would have had to pay more for short-term loans or not gotten them at all. The government agreed to insure the $3.5 trillion that investors had in money funds in mid-September against losses. The Result: The move quickly reversed the run on money funds. What's more, it hasn't cost the government a penny. In fact, it has actually made money for the government. Nearly every money-market-fund provider signed up for the insurance, which has generated some $750 million in premiums paid to the government since the program started." "It could be seen as the most successful government program to date," Time quotes Peter Crane, who tracks the money-market industry.