32 Cents on the Dollar Scant Reprieve for Primary Fund Investors
October 6, 2008
Investors in the now-defunct Primary Fund got their first indication of when they can expect redemptions last Monday, when Reserve Management announced it would return 32% of the fund's assets as of Sept. 15, or $20 billion, on Oct. 13.
As the advisor succeeds in selling asset-backed commercial paper, certificates of deposit and other assets, and as debt instruments mature, Reserve will announce when and how much of the outstanding $22 billion will be repaid. So far, only $10 billion has been cashed out.
Access to only a third of their money, frozen for the past month, is far too little, too late for many angry Primary Fund investors, whose assets may be further tied up until the lawsuits piling up against Reserve are settled and liquidity is restored to the commercial paper market.
Take Duane Davis, who runs a small construction company in Vancouver, Wash., and who had all of Datex Construction's $340,000 in cash invested in Primary Fund through a commercial checking sweep account with Riverview Community Bank.
"It is a hell of a mess," Davis said.
The bank failed to inform Davis on Sept. 16 that his money was locked up. He wrote $111,000 worth of checks and now must find a way to repay the $87,000 credit line at 5% interest the bank gave him to honor those checks.
"You can imagine my nervousness and anxiety," Davis bemoaned. "No money to pay vendors, no money to pay an additional $18,000 in routine state sales taxes now due. So now I am in a penalty and interest situation with the state."
Other Primary Fund investors deride the government's plan to insure money market fund assets as of the close of business on Sept. 19, leaving their Sept. 16 3% deficit in the fund, let alone any subsequent losses, uncovered. Robert Bodeman wrote on one financial message board: "It would be a grave injustice for Treasury to not make The Reserve Primary Fund investors whole, yet insure every other money market fund in America 100%."
And, increasingly, like Davis, many Reserve investors are siding with Ameriprise Financial's lawsuit against the advisor charging that the run on the Primary Fund was caused by insiders tipping off institutional investors first.
Running for Cover
Shocked by Primary Fund's breaking the buck and frightened over the fragile state of the economy, money market fund investors continue to stampede out of money market funds specializing in prime debt, moving instead into government funds, albeit at a slower pace, according to iMoneyNet. In the week ended Sept. 29, investors withdrew $54.7 billion from prime institutional money market funds, leaving a balance of $899.36 trillion, having withdrawn $200 billion and $95 billion in the two weeks prior.
Government institutional money market funds grew to $954.28 trillion in the week ended Sept. 29, expanding by $88.58 billion and, in the two weeks prior, by $180.07 billion and $36.7 billion.
The bottom line is that in the last three weeks, retail and institutional investors' assets in money funds have fallen by about $100 billion to $3.33 trillion, with prime funds losing $400 billion and government funds gaining $300 billion.
So the run on prime money market funds-and the problems that causes for the credit markets-is not over.
However, Connie Bugbee, managing editor of iMoneyNet, is "hopeful" that the federal government's $50 billion insurance program for money market funds "will start to slow the outflows" and prompt investors and money market portfolio managers alike to return to the long-term commercial paper market. "Right now, only commercial paper with two to three days' maturity is selling," Bugbee said.
Standard & Poor's Analyst Peter Rizzo believes the $50 billion money fund guarantee program, combined with the Federal Reserve Board's creation of the $300 billion Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund Liquidity Facility (AMLF) "will help improve liquidity and pricing for ABCP held in money market funds."
As to the looming question of whether another fund might break the buck, industry experts are hoping that won't happen.
Rizzo conceded that "some funds are currently under market pressure," but added that only a dozen funds have been put on credit watch, and they're all from Reserve, and that currently, "all other rated money market funds are within AAAm [extremely strong capacity to maintain principal stability] parameters."
Sponsors that had exposure to bad loans "swiftly implemented support agreements or purchased defaulted securities from their funds to maintain stable NAVs," Rizzo said.