Money market fund 'breaks the buck' on Lehman IOUs

The credit crisis has taken a new and dangerous turn: Shares of a large money market mutual fund have "broken the buck" -- fallen below the standard $1 a share -- because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.

The Reserve Primary Fund in New York, 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, following the brokerage’s filing for bankruptcy court protection on Monday. Read the fund's statement here.

The Reserve Primary Fund’s situation apparently was exacerbated as big investors have fled 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, apparently seeking to dissuade other investors from leaving while it sorts out the situation with its Lehman IOUs, today said it would take up to seven days to meet investors’ redemption requests. Normally, money funds redeem investors’ shares immediately on request.

The fund also said it had valued the Lehman IOUs at zero for the moment. That, too, could be a move to discourage redemptions, because it’s conceivable the securities have some value.

The woes of Reserve Primary Fund -- the nation's oldest money fund -- are sure to set off a public relations blitz by other mutual fund companies 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.

Crane said the Reserve Primary Fund lacked a "deep-pocketed" parent company that could step in and buy out the Lehman IOUs. A number of other money funds have been caught with dicey debt over the last year as the credit crisis has deepened, but their parent firms have chosen to purchase the securities to keep shareholders whole.

Crane noted that the Evergreen Funds said on Monday that parent Wachovia Corp. agreed to back up Lehman debt in three Evergreen money funds. See the announcement here.

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. The funds don’t guarantee that they can keep their share prices steady at $1, but before today only one other fund has broken the buck -- and that was a small institutional fund, in 1994.

Money funds overall have taken in $400 billion in fresh cash this year alone as nervous investors have sold stocks, bonds and other assets and sought a haven where they believed their principal was protected.

Reacting to the Reserve Primary Fund's bomb, the Investment Company Institute, the trade group for mutual funds, 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."

There’s high irony in the 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 back 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.

Comments

[Andrew Cassel]

Turns out the FOMC meeting was just a diversionary tactic. The important Fed action Tuesday was all in New York, where the central bank agreed—this still sounds almost unbelievable—to take an 80% stake in AIG in return for an $85 billion loan.

And while we were fussing over how the markets would react to the FOMC decision to hold rates at 2%, the financial crisis was taking a new and dangerous turn. A money-market fund broke the buck—declaring its net asset value to be less than $1. If this spreads, it would the modern equivalent of the millions of ordinary savers who lost their money during commercial bank runs in the early 1930s. Deposit insurance was the government's cure for that sort of thing happening again. But there's no FDIC for money-market funds.

I bet this is what Hank Paulson was talking about this evening on Capitol Hill to an all-star lineup of Congressional heavyweights from both parties. A nation of middle-class people taking haircuts on their safe-as-cash money-market funds is a prospect that, like a hanging, will focus the mind of any legislative incumbent.

[H.%20Craig%20Bradley]

CRASH!

[Roger Ramjet]

With our financial system slowly crumbling and the U.S. dollar circling the drain, I'm amazed at many people just don't get it!

[Mike]

The feds could have saved the american tax payers $65 Billion if they would have bailed them out on friday. That's $65 Billion waisted by the feds that's going to be needed for all the other Banks that are going to going under. Bernie should be shot!

[martscan]

Mike:

Though I am opposed to capital punishment, if anyone should be shot it is Alan Greenspan...followed closely by Phil Gramm. Actually, Bernanke and Paulson can hardly be faulted for their actions..what are their alternatives?

[Sherry]

Our country is going to hell in a handbasket. The high cost of fuel has driven up the production and shipping cost of everything. Consumers have nothing left over after filling the tank and paying more for the necessities of life to spend on extras, save or invest. We need to get ourselves out from under our dpendency on foriegn oil.Just as gas prices start to fall slightly and we felt like there might be hope along comes Ike and causes them to spike to an all time high. Families everywhere are wondering where else they can cut back to cover the cost of fueling up the family vehicle to get back and forth to work and take care of the necessities of life. There is no money left for relaxation and family fun. The stress level continues to rise. Most areas of the country have seen a sharp rise in their electric bill as power companies pass their increased production costs on to consumers. The price of a gallon of milk is almost as precious as a gallon of gas. The cost of every consumer product has risen sharply. Americans are stretched to the limit. Jobs are being lost, foreclosures are increasing at an alarming rate. Seems even the family pets are suffering the high cost of fuel as almost daily a sad new story is on TV about shelters being forced to euthanize record number of surrendered pets from those forced out of their homes due to foreclosure or they simply can't afford to feed them anymore. The energy crisis in our country is far reaching and needs immediate attention. Our economy is in a sorry state of affairs directly related to the high cost of fuel. We have become so dependant on foreign oil that we have neglected to fully utilize such natural sources of energy such wind power & solar power. Along with modern technology such as plug in cars, hybrid cars, v2g technology ,and regenerative braking, technology we still seem to be floundering as a nation as to devising the best plan utilize all that is available to us and lift ourselves out of this mess we are in. We need to take our closest look at which candidates put our economy and energy crisis at the forefront of their agenda. The Manhattan Project of 2009 by Jeff Wilson

[Herbert Greenbaum]

Get your cash out of the bank NOW!!!!!!!!!!! Have floor safes installed and hide it NOW!!!!!!!!!!!!!!

[Andy]

I made the move today because I wanted to fully protect my cash funds I decided to move them from my Vanguard prime money market account to my online ING Direct savings account. This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil.