Reserve Money Fund Falls Below $1, Delays Withdrawals (Update1)
By Christopher Condon
Sept. 17 (Bloomberg) -- Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
Shareholders pulled more than 60 percent of the fund's $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days.
Assets in money-market funds, considered the safest investments after cash and bank deposits, rose to a record $3.59 trillion this month as stock and commodity markets fell. Investor confidence has been shaken by the subprime-mortgage collapse, the demise of Lehman and Bear Stearns Cos., and the failure of 11 U.S. commercial banks. The first money-market fund to break the buck was the Community Bankers Mutual Fund in Denver, which had $82.2 million when it was liquidated in 1994 because of losses on interest-rate derivatives.
``This is going to unsettle investors and probably create further runs on other money funds,'' Geoff Bobroff, a mutual- fund consultant in East Greenwich, Rhode Island, said in an interview.
Widespread withdrawals from money-market funds would aggravate the global credit crunch because they are major buyers of short-term debt issued by corporations and financial companies. Today, the cost of borrowing in dollars for three months jumped the most since September 1999 as banks hoarded cash. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said. A basis point is one-hundredth of 1 percent.
`Massive Withdrawals'
``We could see massive withdrawals from the money-market fund industry with the money going to bank deposits and T- bills,'' Michael Cloherty, a New York-based analyst with Bank of America Corp., wrote in a research note yesterday.
Standard & Poor's lowered its principal stability fund rating on Reserve Primary and the company's International Liquidity Fund Ltd. to Dm, the lowest, from the top AAAm, citing their Lehman debt holdings. Nine other Reserve funds were put on CreditWatch for possible downgrade, New York-based S&P said yesterday in a statement.
The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman's debt, according to the S&P statement. The fund pools investments for state and local governments and schools, according to its Web site. All assets, excluding Lehman commercial paper, are set to be transferred today to the Colorado Local Government Liquid Asset Trust, S&P said.
Limited Impact
The ratings firm said none of the other 525 money funds it tracks will be affected by Lehman's bankruptcy. Those funds oversee $2 trillion.
Reserve Primary held $785 million in Lehman commercial paper and medium-term notes. The fund's board decided yesterday that the debt was worthless. That pushed the fund's net asset value to 97 cents a share, the company said in the statement. Investors who requested redemptions by 3 p.m. New York time yesterday will get all their money back.
Ming Lee Hatch, a spokeswoman for Reserve Management, said she couldn't immediately comment on whether the company planned to secure credit to support the fund or wind it down.
Reserve Management probably was unable to prop up the fund before temporarily halting redemptions because it lacked the backing of a large institutional owner, said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds.
``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Evergreen Supports Funds
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' held $494 million of Lehman debt.
Money managers including Legg Mason Inc. and Bank of America, propped up money funds in the past year because of losses on debt issued by structured investment vehicles. Baltimore-based Legg Mason lined up $2.15 billion in financing to prevent money funds from breaking the buck.
Bruce Bent, chairman of Reserve Management, is credited with inventing the money-market fund with his opening of Reserve Primary in 1970. He often said the best money-market funds should be ``boring.'' He derided other funds that invested in securities linked to subprime mortgages and other risky debt.
High Yields
The fund's institutional share class ranked second among top-yielding institutional money funds as of Sept. 15 with a yield of 2.82 percent. Touchstone Institutional MMF was first at 3.10 percent. Reserve Management's assets rose 95 percent in the year ended June 30 to $125 billion. Banks and other institutions accounted for 65 percent of assets.
Other fixed-income funds that ran into trouble earlier this year included enhanced cash funds and ultra-short bond funds. Both invest in short-term debt, usually less than one year, and aim to provide a higher return than money-market funds by taking more risk. Neither category of funds aims to maintain a $1 a share net asset value.
Evergreen liquidated the $403 million Ultra-Short Opportunities Fund in June after it fell 20 percent this year. San Francisco-based Charles Schwab Corp. is being sued by investors over losses in its Yield-Plus Fund, which is down 30 percent.
SEC Oversight
Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve the $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.
``The company and its counsel apprised staff of the fund's situation earlier today and discussions between staff and the company and its counsel are continuing,'' Andrew J. Donohue, director of the SEC's investment management division, said in a statement. ``SEC examiners are on-site at the fund to monitor activities.''
U.S. money-market mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion set a week earlier, according to the Investment Company Institute, a Washington-based trade group.
Sound Structure
By Christopher Condon
Sept. 17 (Bloomberg) -- Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
Shareholders pulled more than 60 percent of the fund's $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days.
Assets in money-market funds, considered the safest investments after cash and bank deposits, rose to a record $3.59 trillion this month as stock and commodity markets fell. Investor confidence has been shaken by the subprime-mortgage collapse, the demise of Lehman and Bear Stearns Cos., and the failure of 11 U.S. commercial banks. The first money-market fund to break the buck was the Community Bankers Mutual Fund in Denver, which had $82.2 million when it was liquidated in 1994 because of losses on interest-rate derivatives.
``This is going to unsettle investors and probably create further runs on other money funds,'' Geoff Bobroff, a mutual- fund consultant in East Greenwich, Rhode Island, said in an interview.
Widespread withdrawals from money-market funds would aggravate the global credit crunch because they are major buyers of short-term debt issued by corporations and financial companies. Today, the cost of borrowing in dollars for three months jumped the most since September 1999 as banks hoarded cash. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said. A basis point is one-hundredth of 1 percent.
`Massive Withdrawals'
``We could see massive withdrawals from the money-market fund industry with the money going to bank deposits and T- bills,'' Michael Cloherty, a New York-based analyst with Bank of America Corp., wrote in a research note yesterday.
Standard & Poor's lowered its principal stability fund rating on Reserve Primary and the company's International Liquidity Fund Ltd. to Dm, the lowest, from the top AAAm, citing their Lehman debt holdings. Nine other Reserve funds were put on CreditWatch for possible downgrade, New York-based S&P said yesterday in a statement.
The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman's debt, according to the S&P statement. The fund pools investments for state and local governments and schools, according to its Web site. All assets, excluding Lehman commercial paper, are set to be transferred today to the Colorado Local Government Liquid Asset Trust, S&P said.
Limited Impact
The ratings firm said none of the other 525 money funds it tracks will be affected by Lehman's bankruptcy. Those funds oversee $2 trillion.
Reserve Primary held $785 million in Lehman commercial paper and medium-term notes. The fund's board decided yesterday that the debt was worthless. That pushed the fund's net asset value to 97 cents a share, the company said in the statement. Investors who requested redemptions by 3 p.m. New York time yesterday will get all their money back.
Ming Lee Hatch, a spokeswoman for Reserve Management, said she couldn't immediately comment on whether the company planned to secure credit to support the fund or wind it down.
Reserve Management probably was unable to prop up the fund before temporarily halting redemptions because it lacked the backing of a large institutional owner, said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds.
``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Evergreen Supports Funds
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' held $494 million of Lehman debt.
Money managers including Legg Mason Inc. and Bank of America, propped up money funds in the past year because of losses on debt issued by structured investment vehicles. Baltimore-based Legg Mason lined up $2.15 billion in financing to prevent money funds from breaking the buck.
Bruce Bent, chairman of Reserve Management, is credited with inventing the money-market fund with his opening of Reserve Primary in 1970. He often said the best money-market funds should be ``boring.'' He derided other funds that invested in securities linked to subprime mortgages and other risky debt.
High Yields
The fund's institutional share class ranked second among top-yielding institutional money funds as of Sept. 15 with a yield of 2.82 percent. Touchstone Institutional MMF was first at 3.10 percent. Reserve Management's assets rose 95 percent in the year ended June 30 to $125 billion. Banks and other institutions accounted for 65 percent of assets.
Other fixed-income funds that ran into trouble earlier this year included enhanced cash funds and ultra-short bond funds. Both invest in short-term debt, usually less than one year, and aim to provide a higher return than money-market funds by taking more risk. Neither category of funds aims to maintain a $1 a share net asset value.
Evergreen liquidated the $403 million Ultra-Short Opportunities Fund in June after it fell 20 percent this year. San Francisco-based Charles Schwab Corp. is being sued by investors over losses in its Yield-Plus Fund, which is down 30 percent.
SEC Oversight
Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve the $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.
``The company and its counsel apprised staff of the fund's situation earlier today and discussions between staff and the company and its counsel are continuing,'' Andrew J. Donohue, director of the SEC's investment management division, said in a statement. ``SEC examiners are on-site at the fund to monitor activities.''
U.S. money-market mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion set a week earlier, according to the Investment Company Institute, a Washington-based trade group.
Sound Structure
