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.
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..