Bloomberg is reporting Reserve Money Fund Falls Below $1 a Share, Delays Withdrawals

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

Shareholders pulled more than 60 percent of the fund’s $64.8 billion in assets in the two days since Lehman folded. Losses on the securities firm’s debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement. Redemptions were suspended for as long as seven days.

Assets in money-market funds, considered the safest investments after cash and bank deposits, rose to a record $3.59 trillion this month as stock and commodity markets fell.

“This is going to unsettle investors and probably create further runs on other money funds,” Geoff Bobroff, a mutual- fund consultant in East Greenwich, Rhode Island, said in an interview.

The $260 million Colorado Diversified Trust has also fallen below $1 a share because of losses on New York-based Lehman’s debt, according to the S&P; statement. The fund pools investments for state and local governments and schools, according to its Web site.

Reserve Primary held $785 million in Lehman commercial paper and medium-term notes. The fund’s board decided yesterday that the debt was worthless. That pushed the fund’s net asset value to 97 cents a share, the company said in the statement. Investors who requested redemptions by 3 p.m. New York time yesterday will get all their money back.

Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve the $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.

“We’d all forgotten that any investment comes with risk and we’re learning it the hard way now,” said Kiyoshi Ishigane, a Tokyo-based senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $61 billion. “Even the safest investments, like the money-market funds, are starting to pose risks and that shouldn’t be a surprise given the crisis in the financial industry.”

Seven Day Freeze

MarketWatch is reporting Money market giant freezes redemptions

One of the first and largest money market funds has put a seven-day freeze on redemptions after the net asset value of its shares fell below $1. Primary Fund (RFIXX) a $62 billion fund managed by money market fund inventor The Reserve, said Tuesday afternoon that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero. As of 4 p.m., the value of the fund’s share is 97 cents. The Reserve said that redemption requests received before 3 p.m. Tuesday will be paid out at $1 a share.

What Happened?

What happened is a couple of fund managers who arguably should have known better, relied on continually hopeless ratings by Moody’s, Fitch, and the S&P.; It took the big three an actual bankruptcy to downgrade Lehman as noted in Moody’s, Fitch, S&P;, SEC are Useless. The rating agencies only downgraded AIG one notch, and are pathetically behind on rating mortgage backed securities.

Expect to see more blowups likes these, especially with any money market fund making a claim of “high yield”. The only way to achieve high yield is to take risks. A 3% loss does not sound steep except there are not supposed to be (and there should not be) any losses at all.

The only truly safe place at the moment is in US treasuries held to duration, CDs held to duration, checking accounts, and savings accounts. The CDs, checking accounts, and savings accounts have an additional stipulation that they must be under the FDIC limit.

Mike “Mish” Shedlock
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