The money market fund industry shudders when a fund's net asset value, or NAV, drops below $1 per share, and that has happened for only the second time since the Community Bankers U.S. Government Money Market Fund liquidated in 1994.
Reserve Primary Fund cut its NAV to $0.97 Sept. 16 after taking a hit on its Lehman Brothers holdings. Lehman Brothers, a victim of the ongoing financial crisis, filed for bankruptcy this week but has found a buyer, Barclays, for some of its clean assets.
Peter Crane, publisher of Money Fund Intelligence, said Reserve Primary Fund had approximately $62 billion in assets until panicked investors withdrew more than $27 billion Monday and Tuesday. The fund's Lehman Brothers holdings amounted to $785 million.
"Lehman Brothers commercial paper going from P1 -- the highest short-term rating -- to 'not rated' overnight was shock enough, but the fact that Reserve didn't take aggressive steps to reassure investors and instead let the run develop was quite unexpected. It shouldn't have happened," Crane says.
Mainly institutional money
Crane says there are some retail investors in Reserve Primary Fund, but it's mainly institutional money. However, other funds with exposure to Lehman Brothers commercial paper or medium-term notes have announced that they have either bought it out of the fund or protected the fund in some way. They are the Russell Money Market Fund, Columbia Cash Reserves, Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, Evergreen Prime Cash Management Fund and AmeriPrise RiverSource.
Columbia Management is the primary investment division of Bank of America and Evergreen Investments is the asset management division of Wachovia.
Some companies, such as Fidelity, are disclosing on their Web sites how much Lehman Brothers and AIG commercial paper their money market funds hold. If you're concerned about a money market fund that you invested in through your bank or brokerage, call the institution and ask about the level of exposure.
An industry anomaly
Crane says he expects Reserve Primary Fund's failure to maintain the $1 NAV will be an anomaly.
"Certainly, none of the big retail funds have had any bailout events. The ones with large financial parent companies have the wherewithal to fill the little hole before it becomes a gaping one. There have been 20 of these occurrences to date where advisers have protected a troubled security and that puts investors at ease -- they know it's not Lehman Brothers anymore, it's Barclays Bank or Bank of America protecting the holding."
Crane says the Reserve Primary Fund's NAV will probably go lower due to the momentum of liquidations by investors, but the NAV may climb higher in the days ahead because the Lehman commercial paper was valued at zero when it's almost certainly worth more than that because of the Barclays purchase.
Reserve Primary Fund has issued restrictions on redemptions. Investors who want to cash out will find there's a seven-day delay in receiving their funds. The seven-day delay does not apply to debit card transactions, ACH (Automated Clearing House) transactions or checks, but those transactions will be limited to $10,000.