Money market fund falters
The credit crisis took a new and dangerous turn Tuesday, when the asset value of a large money market mutual fund dropped below the standard $1 a share because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.
The New York-based Reserve Primary fund, which had $65 billion in assets at the end of August, said it cut its share price to 97 cents after marking down the value of $785 million in Lehman debt securities after the brokerage’s filing for Bankruptcy Court protection Monday.
Money market funds, which hold a record $3.5 trillion, have long been considered relatively safe because they’re supposed to limit their investments to high-quality, short-term securities, making the loss of any principal very rare.
Although the funds don’t guarantee that they will keep their share prices steady at $1, before Tuesday only one other money fund had “broken the buck” -- and that was a small fund serving institutional investors, in 1994.
The woes of Reserve Primary fund -- the nation’s oldest money fund -- are likely to set off a public relations blitz by other mutual fund firms to forestall an investor panic.
“The whole money fund industry is going to be out there trying to assure people,” said Pete Crane, head of Crane Data, which tracks the industry.
This isn’t the first time that a money fund has run into trouble with dicey securities since the credit crunch began a year ago. Indeed, Crane said 20 money fund companies have had to contend with IOUs that could have caused their money funds to break the buck.
The difference with Reserve Primary fund is that it lacked a “deep-pocketed” parent company willing to step in and buy out the Lehman IOUs to keep shareholders whole, Crane said. That is historically how other fund firms have resolved troubles with their portfolio holdings.
On Monday, Evergreen Funds said that parent Wachovia Corp. had agreed to back up Lehman debt in three Evergreen money funds.
Ameriprise Financial made a similar announcement about Lehman debt held in some of its RiverSource-brand funds.
Geoff Bobroff, head of fund consulting firm Bobroff Consulting in East Greenwich, R.I., said it was likely that other major fund firms would continue to buy up any tainted paper in their money funds to protect shareholders from loss.
With the government’s rescue Tuesday of insurance giant American International Group, the money fund industry may have been saved from an even bigger calamity, given widespread ownership of AIG debt.
Reacting to Reserve Primary fund’s announcement, mutual fund trade group the Investment Company Institute said that it was “working closely with its members and with regulators, including the Securities and Exchange Commission and the Federal Reserve, to maintain open communications about market conditions and their impact on funds.”
Reserve Primary fund’s situation apparently has been exacerbated as big investors have withdrawn their money in the last two days, forcing the fund to sell other securities. Assets have dived by more than 60% since Sunday, Bloomberg News reported.
The fund, seeking to dissuade other investors from yanking cash while it sorts out the situation with its Lehman IOUs, said Tuesday that it would take as long as seven days to meet investors’ redemption requests. Normally, money funds redeem investors’ shares immediately on request.
Industry analysts noted the irony in Reserve Primary fund’s troubles: The fund’s founder is 71-year-old Bruce Bent, who is considered to be the father of the money fund industry, which dates to the early 1970s.
Just last week, Bent was quoted in a Wall Street Journal story saying that “the purpose of [a] money fund is to bore the investor into a sound night’s sleep.”
A call to the company’s offices in New York wasn’t returned.