Lehman Collateral Damage: Reserve Money Market Fund Drops Below $1 NAV

Readers probably know that money market funds seek to maintain a net asset value of $1 a share. The choice of words is precise. There is no guarantee to maintain the $1 value, but industry participants consider it to be so important to the reputation of money market funds that parent companies have upon occasion contributed funds to make up a shortfall,

So for the Reserve Primary Fund to “break the buck” is a big deal indeed. And not only that, the fund is large ($23 billion in assets, and that after two days of withdrawals trimmed its size considerably) and the fall in value is considerable by money fund standards (3%). And redemptions have been halted too, so the final tally could be worse.

From Bloomberg:

Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days….The only other money-market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.

“This is uncharted territory,” said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. “That’s certainly a stunner.”

Reserve Primary, run by closely held Reserve Management Corp. in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund’s board revalued the Lehman holdings as worthless effective 4 p.m. New York time,….

Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund’s failure “exacerbates some of the flight-to-quality into Treasuries.”

Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner.

“Reserve just didn’t have the deep pockets to buy troubled securities out,” he said.

Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds’ Lehman holdings totaled $494 million..

Print Friendly, PDF & Email


  1. doc holiday

    So, like how much is the service fee for letting them manage your money at this casino? This is retarded yah know, it’s like going into a casino in Vegas and paying a cover charge to lose your cash, and then not get free drinks or a chance to pat some waitress on the ass … truly interesting and illogical at best, perhaps on the verge of being ironic, or like being on the inside of a black hole and wondering how to get on the other side.

    I can’t keep up with this anymore and Yves, your doing a fantastic job of providing cutting edge information, so thanks for putting up with stupid comments like this! I just figure, if people are confused, no one will see this in a few minutes!

  2. Abbott_Of_Iona

    When the State (Party, Religion, Family) in its self (the selfish nature of itself) desires to steal from the people (from itself) it will do so. That is the nature of Self.

    Is “Government” a different thing?

    I think it is.

    What is the difference between the China Government and the USA Government?

    There is no difference. Both are thieves. The thieves have no concern for Party, Religion or Family.

    Both know what they have done. Both provide drugs, guns and lawyers just to keep you occupied.

    Both are Kleptocrats. Both are beyond Family, Religion, or Party. Both are thieves.

    Watch out for the pickpockets.

  3. Founding Father

    Why are people shocked? We have always bailed out the monied people.

    The next administration better have a good plan to bring colonialism back to pay for all these debts.

  4. Anonymous

    Yves, Terrifc blog, I'm a relitively new reader but have become a big fan. I'm a bond trader from a small Midwestern firm, not a genius, but not oblivious to the obvious. Can anybody tell me what the *@&##! is holdng up equities? – Kujo

  5. Anonymous

    "Can anybody tell me what the *@&##! is holdng up equities?"

    Workers with autopilot 401(k) contributions into equities, following inertia or the mantra that "in the long term equities are a good investment".

  6. dd

    Now is the time to think hard as the asset confiscation has begun and it's a stealth process.
    My guess on equities is anyone with a brain knows bonds and equities via derivatives are inter-changable assets as bond priority is usurped. So, where to go? Treasuries and the visible benchmarks (DOW/S&P) have a better shot at short term survival.

  7. Matt Dubuque


    This breaking of the buck occurs after a regulatory relaxation earlier this year allowing them to hold lower grade securities, following the term-auction bond nuclear implosion.

    Those who are enraged that AIG will be euthanized instead of being forced to die a rapid and extremely painful death should keep in mind that their preferred alternative would have caused MANY more money market funds to break the buck also, and very quickly.

    AIG was one of the BIGGEST players in that market as well.


  8. Anonymous

    Does anyone have suggestions for what to do with money in a long-only 401k, now that money market option is off the table? They won’t let me park it in cash. Not a huge sum, but I don’t want to pay a penalty, I don’t want to be long, and I certainly don’t want to be anywhere near money markets. Several coworkers are asking the same question. If the goal is just to preserve capital, what should we do?

  9. Anonymous

    Anon of 1:07AM

    Beware of Investment Tips from Anonymous users on the internet. Having said that, I couldn’t resist replying.

    I have a SEP-IRA that consists of 20 years of savings that has been 100% in US Treasury paper since 2006. I would like to say I am prescient but in reality I’m just lucky.

    1. If I had a 401-K I would look into funds that invest only in Treasuries. If you believe that the next Fed moves are more likely to be down you may want to look into Funds that invest in 3-10 or 10+ yrs only, otherwise the safest is probably funds that specialize in short maturity paper.

    2. If you think there’s more Inflation (as measured by CPI) look into funds that invest in TIPs.

    My personal fund allocation is in the following ETFs :
    40% TLT, 50% IEF and 10% SHY, although as interest rates keep going down I will probably sell the longer maturities in favor of the shorter paper.

    Adam from Pdy

  10. RebelEconomist

    Anon of 1.07,

    Why are you not allowed to move your 401K money into cash? I apologise if that is a basic question but I am British and do not know the US system.

    I am wondering whether it is a tax regulation – we have similar rules in the UK. If so, it seems to me that this is a disgrace. Governments are shepherding people into more risky assets than they might otherwise choose.

  11. eh

    Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund’s failure “exacerbates some of the flight-to-quality into Treasuries.”

    I don’t 100% get the logic of the flee-ers since govt debt has capital risk too — the market price of the bonds can change based on current interest rates.

  12. eh

    It’s a little extreme to say the MM option is off the table because one fund broke the buck; at my broker I still use them to park free cash, incl free cash in my IRAs, and will continue to do that. Anyway, most brokers offer CDs (incl short term CDs) which are insured if you want to go to term money (shorter terms if you want more flexibility).

    Actually since late 2006/early 2007 when this mess first started I’ve traded my IRAs for nice gains; in this the new short and ultrashort ETFs and funds have been a big help (since an IRA is not a margin acct you cannot sell short in it). I have trouble imagining any circumstance that would make me flee to govt debt as an investment. Of course at times I hold a lot of cash, depending.

  13. Anonymous


    Yes but no default risk, which is what the flee-ers are flee-ing from.

    Look at it this way if the US govt defaults we be all up the creek with no paddle.

  14. Blissex

    «I have trouble imagining any circumstance that would make me flee to govt debt as an investment.»

    Problem is USA debt is denominated in dollars. Most USA debt dollars are foreign and do their accounting in other currencies…

    Also, consider instead of holding USA debt in dollars paying nugatory nominal rates, the alternative of holding german government debt denominated in euros…

    No rational USA based investor should be buying USA debt now.

  15. Anonymous

    NYT: “Where to Keep Cash When No Investment Seems Safe” ERIC DASH, September 10, 2008

    “Bruce R. Bent, who helped invent money market funds in the 1970s and is chief executive of The Reserve, an investment management company, added, “The most important thing is sleeping well at night.”

    I hear that the sleeping accommodations are excellent at the Allentown Federal penitentiary, where I expect Bent will be shortly.

Comments are closed.