Cash trashed: Money fund blows up
Posted
Sep 16 2008, 08:46 PM
by
Jon Markman
Rating:
Extraordinary events are piling up on Wall Street so fast, it's hard to know where to focus. Forgetting the prospective bailout of AIG for a moment, since every media outlet is on that one, the most shocking development of the day for me is news that a $60 billion money market fund "broke the buck" on Monday due to losses in Lehman Brothers paper that it held. So much for the safety of "cash".
The Reserve Primary Money Fund (RPFXX) has become the first money-market fund in more than a decade to lose money because its board was forced to write down $785 million worth of LEH debt to zero. The fund reportedly has seen assets plunge by 60% to $23 billion in the past two days after holders got wind of the fact that it would have to cut its net asset value to less than its usual $1 per share.
Reserve Primary, which is one of the oldest money market funds in the country, is now trading at 97 cents, although it is showing up on the MSN Money site at $1. Its founder is considered the father of the money market fund, and he was one of the last holdouts against buying higher-yielding commercial paper rather than super-safe Treasuries. The company said in its that it would suspend redemptions for seven days while it tries to straighten things out. To review its most recent list of holdings, see its quarterly SEC filing here.
While the loss of 3 cents doesn't sound like much, you need to keep in mind that money market funds are where people put money when they don't want to lose anything. They are supposed to be the safest of the safe. Most pay interest of around 1% to 2.5%, depending on the type of paper that they hold.
Money market funds were the center of attention a year ago when it turned out that they were heavy buyers of a special type of paper from "structured investment vehicles" set up by banks like Citigroup. Those SIVs were issuing high-yield paper because they held CDOs loaded with subprime paper. As the subprime paper began to fail, the CDOs collapsed, leaving money market funds in danger. But their finances were shored up by their parent companies, and all was well until this week.
For more on the troubles with money market funds last winter, see my Dec. 31, 2007 column, "Your 'safe' money isn't so safe."
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