Reserve Primary Fund, the firm that basically invented the idea of a money market fund back in 1970
just saw its shares fall below $1 a share, which is about as close as money market funds get to going bust. This is the first time this has happened to a money market fund in fifteen years. The firm had almost $800 million in Lehman notes and commercial paper, now valued at $0. Money market funds borrow short and lend long (relatively speaking); once investors noticed all that toxic paper, things went south rapidly. This is only the second money market fund in US history to break the buck, which tells you just how worried you should be about the contagion of this mess.
What was this fund's share price before? According to the article, the notes and commercial paper amounted to 1.24% of the fund's portfolio.
From what I can tell, the problem isn't that their portfolio went to zero; it's that they suffered a bank run.
100s of bank runs and failures to follow in the next 2 months. It will make the Great Depression look like child's play. Buckle up.
The article says that the board revalued the Lehman commercial paper at $0.
I would think that the Lehman paper will be worth something after bankrupcy procedings are concluded....
Or is their some rule that says when the Chaper 11 filing is made funds have to mark those bonds to 0, even if they will be able to recover 50,60 or even 80% of the value?
100s of bank runs and failures to follow in the next 2 months. It will make the Great Depression look like child's play. Buckle up.
For it to replicate the Great Depression, 40% of the banks in the United States would have to fail over a two year period. The Federal Reserve and the Comptroller of the Currency would have to respond to this with a grand 'so long' and allow real interest rates to rise to 12% per annum in order to maintain a gold peg that no longer exists. Public sector deficits would cease to have any effect in stabilizing aggregate demand... and so forth.
it's that they suffered a bank run.
I am mystified. If an asset I hold loses 1.24% of its value, I do not dump the asset in a panic.
"What was this fund's share price before?"
Money market funds typically attempt to maintain a share price of exactly $1.00, protecting the principal investment by investing in things that won't lose the principal. The idea is that the "asset" value doesn't increase or decrease (unlike in a traditional mutual fund, which invests in stocks and bonds that change value) and all gains are interest and dividends.
So, if you lose some of your principal in an investment that isn't supposed to lose principal, that is a very bad thing.
I am mystified. If an asset I hold loses 1.24% of its value, I do not dump the asset in a panic.
But the bank does. You're not going to be able to take on any more deposits if you have to tell your customers they may lose their money if they give it to you. Money market funds are viewed by consumers as just as safe as any bank account. It will be bad if that view doesn't hold true.
Money Funds traditionally pay a $1 per share, regardless. What is relevant is that they "broke the buck". At one time Bent of Reserve Funds wouldn't own commericial paper due to the risks. I'm shocked to even see it on the Annual Report. It's ironic and shocking that this bastion of conservative and fiscally disciplined approach to cash management would have to do this.
This is truly an historic event.
"From what I can tell, the problem isn't that their portfolio went to zero; it's that they suffered a bank run."
The problem is they waited until today to break the buck. So the shareholders who redeemed in the last few days got out whole and stuck the remaining shareholders with the entire loss. This should never have been allowed to happen. If it isn't a violation of the law it should be.
"... This is only the second money market fund in US history to break the buck, ..."
Although the cited article says this, it is not in fact true.
I can't believe how ignorant some of the posts are on this site. Money Market funds strive to maintain a $1 share price. Yet you losers ask the question what was the price before. You deserve to lose your money since you have no clue about the risks in a money market fund which is NOT FDIC insured and most pay less than insured CD's and online savings accounts. Surely proves a fool and his money are soon parted.
I can't believe how ignorant some of the posts are on this site. Money Market funds strive to maintain a $1 share price. Yet you losers ask the question what was the price before. You deserve to lose your money since you have no clue about the risks in a money market fund which is NOT FDIC insured and most pay less than insured CD's and online savings accounts. Surely proves a fool and his money are soon parted.
Money market funds have already been losing value due to the depreciating dollar. Thus, part of the assumed safety has been illusionary. Given the low profits to be had in money market shares, all money market funds should exercise great prudence in how the money is invested for shareholders.
I can't believe how ignorant some of the posts are on this site. Money Market funds strive to maintain a $1 share price.
The money market is neither my trade nor my pastime. I have had no reason to know anything about it.
OK - a question for all you money market fund experts: If the Lehman paper represented 1.24% of the portfolio, why did the price of the fund drop 3% (from $1.00 to $0.97)? Hmmm????
They probably wrote down similar debt, that may have included AIG or other companies falling under pressure on Monday.
hglover:
"OK - a question for all you money market fund experts: If the Lehman paper represented 1.24% of the portfolio, why did the price of the fund drop 3% (from $1.00 to $0.97)? Hmmm????"
Because as I complained above they let 2/3 of their shareholders get out at par sticking the remainder with the entire loss.