More Money Funds Being Rescued

The Financial Times reports that both institutional cash funds and money market funds, which are subject to more stringent requirements, are getting cash injections from their managers to offset losses. The story points out that not all salvage operations are made public, so the total is no doubt higher than the level cited in this story, and growing.

From the Financial Times:

More than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses.

Janus, the fund manager, this week became the latest to bail out its money market funds. It put in $109m to buy troubled asset-backed securities from its funds. Half a dozen firms have made similar moves.

The bail-outs, in the form of guarantees, credit lines and the buying out of troubled securities, are intended to stop funds falling below the $1 a share promised to investors. They show how seriously the parent companies take the reputational risk of “breaking the buck”.

Not all bail-outs have been made public but more are believed to be being drawn up. The extent of losses is not yet known.

BlackRock – which has been hired to manage Florida’s troubled cash investment fund – faced further pressure this week over one of its funds. Moody’s downgraded its credit rating on BlackRock’s institutional cash strategies fund to junk status after redemptions in the fund were suspended a few weeks ago.

Two other fund managers have suspended redemptions at money market funds.

Only one money market fund in the US has broken the buck – in 1994 – but, in effect, many funds have recently. Observers question how the funds can be properly valued, given that many of the asset-backed securities they hold are not trading.

Even conservative managers have been caught by the credit crisis. It takes only a tiny loss to push a fund’s value below 99.5 cents in the dollar, the point at which boards must take action.

James McDonald, a portfolio manager for T Rowe Price, said some of his firm’s funds had invested in the short-term paper of four structured investment vehicles – instruments that sell cheap, short-term debt to invest in longer-term assets with higher yields. But Mr McDonald thought the exposure amounted to less than 1 per cent in each fund.

“We have moved those securities to our ‘illiquid’ bucket in the fund until they start trading again,” he said.

T Rowe Price, known as one of the most conservative managers, values its securities daily rather than weekly. The firm would act if the fund’s value fell three-tenths of a cent below the $1 par value, Mr McDonald said.

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One comment

  1. doc

    OT, kinda:
    NEW YORK (AP) — The bond insurance industry, battered by fears of collapse, received some validation Friday as Warren Buffet’s Berkshire Hathaway opened a business to guarantee municipal bonds.
    Though analysts said the move by Buffett provides a stamp of approval for the broader business model, which has recently come under fire, shares of Buffett’s newest competitors were hammered in Friday morning trading.

    Seems like a conflict of interest there, when someone can invest in, and own a rating agency, or an accounting firm, or an auditor. This is why we have a massive accounting meltdown now IMHO, because these firms that are betting the farm have zero accountability and the regulation of the entire financial industry is out of control, which is why we have so many money markets needing to be bailed out.

    My favorite saying is from Einstein: You cant solve a problem on the same level it was created….or something like that, the point being, the people that screwed this up, will not be the people to fix it!!

    Does anyone think they have business models that were prepared for this??

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