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Reserve Throws in the Towel
Liquidates 18 Remaining Funds Soon After Applying for Treasury Guarantee
October 9, 2008
With just $6 billion in assets left, of what once totaled $83 billion, Reserve Management is liquidating its 18 remaining funds.
For all intents and purposes, Reserve Management is now out of business. Given its longtime vow to guarantee investors safety – and its spectacular failure to do that with the Sept. 16 implosion of its flagship Primary Fund – industry watchers say the company’s demise is not surprising, and also warranted.
“The first rule of investing is to allow investors to redeem,” said Peter Crane, principal of Crane Data. “If you don’t do that, investors will do it for you.”
During a meeting Wednesday night, the Reserve’s board of trustees voted to liquidate the assets of the Reserve Yield Plus Fund, as well as 17 additional municipal money market funds, Reserve announced late Thursday.
Connie Bugbee, managing director of iMoneyNet, pointed to Reserve founder Bruce Bent’s mantra of offering investors “safety” and “boredom.”
As to why the fund changed its prospectus a year ago to invest in commercial paper and began loading up on Lehman Brothers and other commercial debt – reaching 49% of assets and a big reason the fund’s 4% return was at the top of the money fund charts – Bugbee believes Bent might have been overshadowed by his two sons and chief investment officer.
But that is no excuse for the fund to have changed course so radically, Bugbee said. “If your name is at the top, that is where the buck stops. Whether Bruce Bent was CEO in effect or in name only, he bears responsibility.”
Reserve is in discussions with the Securities and Exchange Commission to pay redemptions over a period exceeding seven days, but the fund could not say when distributions to investors will be made, or how much, and did not want to sell assets at fire-sale prices, according to a statement. The market for short-term securities remains illiquid, with the exception of short-term U.S. Treasuries.
On Thursday, Reserve Management formally applied for the Treasury Department’s Temporary Money Market Fund Guarantee Program on behalf of all of its 21 funds.
If Treasury approves Reserve’s application for the guarantee, investors should be able to receive their money back in full; otherwise, their money will remain frozen until the capital markets return to normal trading. As to whether Treasury will approve the firm’s application for the money funds guarantee, industry watchers say the government might do so for the investors’ sake.
A call to the company was not returned on Thursday evening.
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