More turbulence in the money market fund world as fallout from the Lehman collapse continues. Putnam closed its $12.3 billion Putnam Prime Money Market Fund while Dryfus and Columbia (a division of BofA) injected funds to keep the net asset value at $1.
Investors began pulling cash out of money market funds and iMoneyNet show that assets dropped to $3.35 trillion from $3.44 trillion, a fall of $89.2 billion, one of the largest single day drops in the history of money market funds.
This run has hit the $12.3 billion Putnam Prime Money Market Fund particularly hard and forced it to close the fund.
"Constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities," Putnam said in a statement. "The Trustees determined to close the fund to ensure equitable treatment of all fund shareholders."
It is unclear when shareholders will receive their money, and whether the payouts would maintain the fund's $1 a share net asset value. If not, shareholders will receive less than they invested.
In addition, both Dreyfus and Colubmia (a division of Bank of America) stated that they will have to invest in select money market funds to keep the net asset value at $1 and protect shareholder money.
"Overall, our exposure to Lehman is limited, accounting for less than 1% of the complex's money fund assets. For the four funds with exposure to Lehman, here is what we have done. The Bank of New York Mellon Corporation ("BNY Mellon") entered into support agreements with Dreyfus Liquid Assets Inc., Dreyfus BASIC Money Market Fund Inc., Dreyfus Worldwide Dollar Money Market Fund, Inc. and Dreyfus Cash Management Plus, Inc., pursuant to which BNY Mellon will support the value of Lehman notes held in the Funds. These agreements are intended to ensure that a decline in the value of the Lehman notes will not result in a decline in the share price of the funds below $1.00."
In a statement posted on its website, Columbia writes:
"Bank of America and Columbia Management have taken a number of steps to manage the money market
mutual funds during this unprecedented period, such as providing capital support to the funds, purchasing
certain assets from the funds, and other measures to seek to ensure that the retail money market funds
continue to transact at $1.00 per share.** As we have stated previously, Bank of America may provide
additional support in the future to the money market mutual funds, but it is under no obligation to do so."
It's clear from this statement that if WaMu or other banks go under, money market funds will continue to face losses. Money market funds generally hold short duration bonds and securities that are considered extremely safe. But as we've learned, what was once considered safe no longer is.
One option for investors looking to part some cash in a safe place is to consider FDIC insured savings and money market accounts, or Certificates of Deposit (CDs). Money market accounts, unlike money market funds are FDIC insured, as are certificates of deposit.
Washington Mutual, a rate leader in the savings and CD space lately, is rumored to be up for sale. The bank has suffered severe losses to its option rate adjustable mortgage portfolio and needs additional capital. It's been offering great rates lately so let's root for it staying independent.
Washington Mutual's online 3.75% APY online savings account as well as some of their CD offers have been highly competitive on BestCashCow over the last couple of months (these rates have since fallen). The bank has used high rates to attract deposits and help fund itself in the face of billions in writedowns in its option rate adjustable loan portfolio. The company's stock has sunk to $2 a share from a 52 week high high of $39.25. The NY Times reports that:
"Its plummeting stock price and the downgrade to junk bond status have also weighed on the bank. And it is paying higher deposit rates than many of its peers to attract customers, Bert Ely, a banking consultant, said."
News is emerging that WaMu is exploring its options and may either sell itself or seek additional capital. Potential suitors interested in buying the bank include Wells Fargo, JPMorgan Chase, and HSBC.
Another option is to raise more capital. That now seems more feasible since one of its investors, TPG Capital agreed to fortego an anti-dilution provision that hampered WaMu's efforts to raise additional money. The anti-dilution agreement would have required a portion of the new capital raised to be paid to TPG Capital, preventing another company from wanting to participate.
From a selfish standpoint I'd like to see WaMu stay independent. As we saw from Countrywide, once it was purchase by Bank of America, their competitive rates dropped like a rock. Cash hungry banks are good for depositors, as long as they don't go under.
One of the largest money market funds has frozen redemptions for seven days as the net asset value of its shares falls below $1.
THIS IS A MONEY MARKET FUND, NOT A MONEY MARKET ACCOUNT. MONEY MARKET FUNDS ARE NOT FDIC INSURED WHILE MONEY MARKET ACCOUNTS ARE.
Marketwatch is reporting that money market fund Primary Fund (RFIXX) is freezing redemptions for seven days starting Tuesday, September 16. 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. Presumably, investors who have money in the fund will not be able to withdraw it until the freeze has been lifted. It's unclear what the net asset value will be at that point. In most cases, the parent company of the fund injects cash or assets to bring the value back to $1 per share.
We'll share more information as we receive it regarding customer withdrawals.
The Primary Fund is mananged the cryptic sounding The Reserve, a financial company that created the world's first money market fund in 1970.
Clearly, the bankruptcy of Lehman blow a giant hole in the funds value. The drop in its NAV shows one of the ways that Lehman's bankruptcy is rippling through the financial world.
It's important to note that The Primary Fund is a money market fund, not an FDIC money market account. A money market fund can be best thought of as a mutual fund with holdings made up primarily of short-term, high-grade debt obligations and cash-on-hand to ensure liquidity. Money market funds are not covered by the FDIC.
