Money markets have always been considered a safe haven. Not any more. For a paltry extra .1%+- in yield, many money market funds have invested in SIVs and other toxic debt instruments. As a result, Investor Safe Haven Has Become a Concern.

Key points From The Article

  • Bank of America said that it would provide as much as $600 million to prop up several Columbia Management funds, which bought large amounts of debt issued by structured investment vehicles, or SIVs, that is now worth less than it paid.
  • Credit Suisse said it had booked about $125 million in unrealized losses after it bought notes issued by collateralized debt obligations and SIVs in its money market fund.
  • The Wachovia Corporation said it had made a similar pre-emptive strike, recording a $40 million loss to buy distressed notes from its Evergreen money market fund.
  • Legg Mason said it had recently secured letters of credit worth $238 million for two of its money funds, and will likely incur a $4.7 million loss in the fourth quarter. In October, it invested $100 million in another money fund to “provide additional liquidity support” but did not purchase SIV- related commercial paper.
  • SEI Investments, a money manager near Philadelphia, said that it planned to shield two funds from losses from debt issued by Cheyne Financial, a SIV that was forced to liquidate.
  • The bailouts reflect the fact that while the managers of money market funds have no legal obligation to assure the funds do not lose money, they fear that losses might lead investors to flee the fund and perhaps take money out of other funds managed by the company. Such losses could also damage a firm’s reputation.

GE Says “Who Cares About Reputation Any More?”

Mortgage Woes Damage a GE Bond Fund

A SHORT-TERM INSTITUTIONAL BOND RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

The GE fund, totaling $5 billion, is an “enhanced” cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share. The bulk of the money in the fund comes from GE’s pension trust and other GE employee benefit plans.

In a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited “extreme conditions in the credit markets” and told investors that “it will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund’s yield to zero.”

In the e-mail, GE Asset Management said the fund has “sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist.”

Based on information on GE Asset Management’s Website, the enhanced cash fund has about 27% of its assets in home-equity asset-backed securities, 23% in residential mortgage securities and the rest in a mix of securities, including credit-card securities and corporate bonds. This information is as of June 30.

The 4% loss suffered by outside investors is sizable relative to the added returns that the fund generated relative to short-term investments. The one-year return on the fund through June 30 was 5.49%, versus one-month Libor of 5.39%.

GE Asset Management has “ceased taking new investments” in the fund “based on our belief that recent extreme conditions in the credit markets, including liquidity concerns and value dislocations, will continue in the foreseeable future.”

GE’s pension and benefit plans could suffer additional losses in the fund as more securities are liquidated. It’s unclear whether GE Asset Management plans to wind down the fund.

Add GE to the seemingly endless set of companies that was stupidly chasing yield. GE made an extra .1%+- or so for three years (.3%+- total) and now have given back 4% in one fell swoop.

Congratulations are in order to GE for breaking the buck. Someone had to do it. Others will likely follow suit.

Mike Shedlock / Mish
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