Morgan Stanley Spent $23 Billion to Shore Up Money Market Funds

Morgan Stanley’s money market funds were hit by major redemptions in September, and the firm stepped in to fund half of the withdrawals itself, presumably out of a view that selling the underlying fund assets into a deteriorating market would only lead to distressed prices. But one has to wonder whether the positions that Morgan Stanley effectively paid out at par in aggregate will be worth that any time soon. It also appears the firm parked some of these instruments with the newfangled government facilities on offer.

From Bloomberg:

Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from “various available stabilization facilities.”

Morgan Stanley may have relied on one or more programs set up by the Federal Reserve in the past month to prop up the $3.54 trillion money- market fund industry, analysts said. The Fed has taken steps to restore investor confidence shattered by losses last month at the Reserve Primary Fund, the oldest U.S. money-market fund.

“The outflows in money-market funds were unprecedented, savage” said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, firm that tracks the industry. “Broker-dealers in particular got hard hit because of concerns about their parent companies.”….

[Morgan Stanley spokesperson Erica] Platt declined to describe the “stabilization facilities” that primarily funded Morgan Stanley’s securities purchases from the money- market funds. The most likely source was the Fed, which has set up at least five funding facilities to help ease the credit crunch, including one unveiled Sept. 19 to provide banks and some brokerages with loans to buy asset-backed debt from money-market funds.

The story indicates that some other money managers were better prepared:

BlackRock Inc., the biggest publicly traded U.S. asset manager, said last week that investors pulled $53.8 billion from its prime money-market and securities-lending funds during the last two weeks of September. The funds, which have regained $13.8 billion since Sept. 30, met the redemptions with cash on hand and securities sales, according to spokesman Brian Beades.

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  1. eh

    Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month,…

    Why? Where are they putting the money instead? Under their mattress? In a passbook account? Buying FDIC insured CDs? Or treasury debt (that earns next to nothing in this panic)? Do these people seriously believe their money is in danger? I could understand it if it was mutual funds. Anyway, I park my money in MMFs and have no anxiety about it.

    BTW there has recently been a rather spectacular and rather odd (what I will call) yield inversion. Here you see how SWTXX, a tax exempt MMF from Schwab, yields more than SWVXX, which is taxable. At this point I have not seen a good explanation of why the yield on SWTXX rose so dramatically not long ago — before that it was down around 1.30%, and last week it was briefly above 3.5%. Why the volatility?

  2. Anonymous

    Money, once earned, is a very personal item. Where ‘they’ put their money after withdrawal from a MS Fund is ‘their’ business.

    I suspect most people taking withdrawals placed their money in some sort of US Gov issues. Was this a smart move? I will let you know when my crystal ball is repaired.

    Since the late 1960s I have allocated some of my monthly income to purchase of physical gold. Was it a smart investment? No. Do I sleep well at night? Yes.

    Sometimes peace of mind is worth more to an individual than a high return.

  3. Allan Baraza

    wow..they seriously need to team up with a commercial bank..something like the merrill – BofA deal. How long will it take them to build up deposits? at this rate they could bleed themselves dry.

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