Archive for the ‘Breaking the Buck’ Category

Treasury’s Money Fund Guarantee Program Ending

Friday, September 18th, 2009

This seems to be the week everyone is observing as the anniversary of the putative near-meltdown of the financial system, so it seems appropriate to remind folks that the Treasury’s Temporary Guarantee Program (TGP) for money market mutual funds expires, as expected, at the close of business tomorrow, September 18, 2009. The TGP was established by the Treasury as a temporary measure in September 2008 to promote stability in money market funds.

At the time, the Reserve Primary Fund had just “broken the buck” due to the decline in value of its holdings of Lehman Brothers paper in the immediate aftermath of that firm’s bankruptcy filing. Treasury acted to stanch a run on money market funds which, by some reports, was already in progress.

Federated Investors, manager of the main money market funds used by KMS/Pershing brokerage clients, notes that “over the past year the U.S. Treasury Department and the Federal Reserve (the Fed) have made extraordinary efforts designed to stabilize the economy and restore investor confidence. As conditions in the markets have improved, investors have continued to look to money market mutual funds as an important product for cash management purposes.”

The Securities and Exchange Commission has proposed a series of recommended changes to the regulations that govern money market fund management. And the Fed has extended its AMLF (Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility) and CPFF (Commercial Paper Funding Facility) programs through February 1, 2010. Federated’s money market products have operated normally throughout the past year, focusing on credit analysis to control risk and maintain daily liquidity at par while seeking to hold a stable net asset value (NAV) of $1.00.

Posted in Breaking the Buck, Cash, Certainty vs Safety, FDIC, Investor Fear, Lehman Brothers, Meltdown, Money Market Funds | No Comments »

Useful Article | SEC Proposes Rules to Prevent Losses at Money-Market Funds

Wednesday, June 24th, 2009

Interestingly enough, my second posting on this blog of December 29,2007 was titled, Breaking the Buck. My concern for money market funds breaking the proverbial ‘buck’ $1.00 was expressed back then. It wouldn’t be until October 2008 that such damage would occur. Oddly enough, by the fund that created the money market fund concept in the 1970’s which I referenced in the December 2007 article.

After reading the proposal below, you may ask, what does this mean to me? Probably lower rates on money-market funds as maturities will be required to be shortened.

“Today the SEC announce proposed regulation to minimize another event like the Reserve Fund breaking the buck causing a ‘run on the bank’ within the money market fund industry last fall.

The proposed regulations are highlighted in a Bloomberg news article below:

SEC Proposes Rules to Prevent Losses at Money-Market Funds

June 24 (Bloomberg) — The U.S. Securities and Exchange Commission proposed rules aimed at preventing losses for money- market fund investors after last year’s collapse of the Reserve Primary Fund triggered a run on the $3.8 trillion industry.

The SEC has been considering new rules for money-market funds since the $62.5 billion Reserve Primary was forced to liquidate because of losses on debt issued by Lehman Brothers Holdings Inc., the investment bank that failed in September. The agency is trying to reduce the chances of funds’ values falling below $1 a share and make them a more stable source of financing for U.S. companies.

Asset Sales

The SEC proposal would require funds whose investors include public pension funds and companies to make sure at least 10 percent of their assets could be sold in one day and at least 30 percent could be divested within a week.

Cash would have to make up 5 percent of assets for funds with individual investors and 15 percent of the portfolio would have to be in holdings that could be sold within a week.

The SEC proposed that the maximum weighted-average maturity of all holdings for money-market funds drop to 60 days from 90. Money funds would also be prohibited from investing in securities that don’t receive top rankings from ratings companies. Currently, the SEC permits 5 percent of a fund’s assets to be lower-rated securities.

To prevent losses during runs, the SEC proposal would authorize a fund’s board of directors to bar investors from selling their shares when the net asset value falls below $1.

Net-Asset Value

The funds aren’t required to value their holdings at current market prices, except to reflect a permanent markdown. That lets them maintain a constant net-asset value, or NAV, and sell and redeem shares at $1 apiece. Funds drop below $1 a share when permanent losses exceed 0.5 percent of net assets, forcing the NAV to be rounded down to 99 cents. “

Posted in Breaking the Buck, Cash, Money Market Funds, SEC, Useful Articles | No Comments »

Breaking the Buck

Saturday, December 29th, 2007

In the world of finance, this phrase gives pause to something that should not be! Money market funds were created in 1971 by Mr. Bruce R. Bent. The goal then, and still the goal today, is to never let the net asset value (NAV) of the fund go below one dollar, $1.00. Hence the phrase, breaking the buck.

Back in August when all the mortgage mayhem was starting, I was receiving invitations to attend telephone conference calls from various money market fund providers. I thought to myself back in August, this is curious, what does a money market fund, something short term, typically safe, in nature have to do with the mortgage mess if at all?

Well simply put, many money market funds have been reaching for yield in past years, and have invested in a type of asset that is a part of the mortgage problem. How a part of the current mortgage securities market (Structured Investment Vehicles, SIV’s) works is that SIV’s go to the market and issue of form of well known corporate debt called commercial paper. These funds are then used to purchase longer term SIV assets. This is essentially where the problem emanated.

As I followed this developing ‘problem’ over the late summer, I began to feel uncomfortable with what could happen. What if money market funds did break the buck? Can’t happen was sort of the feel I got back in August… Non-the-less I moved client money market fund positions at Pershing LLC into government only money market funds in November. Government money market funds, by prospectus, cannot invest in the short term corporate debt such as commercial paper. Clients will now take a bit less yield with the comfort that the $1.00 NAV should not be at jeopardy since these government only money market funds cannot invest in commercial paper.

As of this writing, it is now reported that over $3 billion US dollars has been spent by many fund managers to keep from breaking the buck according to the Financial Times. The above linked article also states that there are probably more investment houses that have yet to ‘come clean’ with their problems. We shall see.

Mr. Bruce Bent has several recent articles discussing these issues; “What’s Going On With Money Market Funds” and “Money market funds abused, claims founder“.

If you are not a client of mine, David Gratke Investment Advisors, LLC, what have you learned from your wealth manager on this troublesome development within the money market arena?

Be well…

dcg

Posted in Breaking the Buck, Money Market Funds | 1 Comment »