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Posts Tagged ‘breaking the buck’

SEC’s New Money Market Fund Rules

Posted by Larry Doyle on January 29th, 2010 10:44 AM |

Sense on Cents once again thanks our friends at 12th Street Capital for providing tremendously useful information and analysis. What do we learn today? The new rules adopted by the SEC for money market funds.

The overview of these rules is provided by Orrick, Herrington and Sutcliffe LLP.  The driving force behind the new SEC rules is an effort to promote greater disclosure and liquidity within money market portfolios. After the crisis of 2008-whenever (it’s not over yet), money market funds were and are much riskier than previously perceived. The risks lay in the fact that these funds invested in a fair amount of risky assets. Now that the government backstop of this industry has ceased, the new rules are needed for the industry to move forward.

Investors need to know that when these rules are effective (sometime  in 2010), funds can ‘break the buck’ ($1.00 NAV, net asset value) and suspend redemptions.  

Navigate accordingly knowing that the money market industry is not what it used to be.

Thanks again to 12th Street and to Orrick for this 2-page overview. Click on image to open pdf document:

LD

Money Market Funds Losing Uncle Sam’s Support…Today!!

Posted by Larry Doyle on September 18th, 2009 3:34 PM |

Our equity and bond markets reflect lessened risks and increased economic recovery, right? Well, investors in money market funds are taking on significantly greater risk today, whether they know it or not. How so? Today is the day that Uncle Sam is ending his federal backstop for money market funds. What does this mean? On a going forward basis, money market funds may very well ‘break the buck.’

Traditionally, the money market industry has prided itself on its ability to market these funds as being the effective equivalent of bank deposits. Bank deposits, however, are federally insured up to 250k.  Money market funds were presumed to have such safe investments that they would always maintain a $1.00 NAV (net asset value). That ‘sales pitch’ worked for a long time until a year ago when Lehman failed. A number of funds holding short term debt issued by Lehman, as well as other questionable assets, were poised to ‘break the buck.’  Hank Paulson and Ben Bernanke realized they needed to step in to stem this flow of money so they implemented a federal backstop of these money market funds. That backstop ends . . . today!! As such, whether investors appreciate it or not, they now have significantly more risk in these funds.

This story is receiving very little focus in the midst of all else that is going on along our economic landscape. That said, it bears real attention. The Wall Street Journal provides a cursory overview today in writing, Treasury Winds Down Money-Fund Backstop:

Now that the panic that flowed through financial markets last year has eased, the U.S. Treasury Department is making way for an usual rescue program set up to protect money-market funds to expire Friday.

U.S. officials established the Guarantee Program for Money Market Funds one year ago, during the height of the financial crisis, in the wake of the failure of Lehman Brothers Holdings Inc.

But now that an economic recovery might be taking hold, the government is allowing the program to wind down.

“As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well,” Treasury Secretary Timothy Geithner said in a statement.

Secretary Geithner may be premature because although markets have recovered, a number of sectors of our overall economy remain severely stressed. The investment assets correlated with these sectors are no longer deemed as safe as once thought.

While the panic on Wall Street has obviously passed, investors in money market funds should not blindly accept that these funds will maintain a $1.00 NAV going forward. The fact is, many of these funds do have investments in a variety of short term instruments that have declined in value.

While the SEC has recently implemented rules in an attempt to insure that money funds will have sufficient liquidity for investors, those rules do not guarantee that funds can’t or won’t break the buck.

I strongly encourage investors in money market funds to check with their brokers or financial planners to review the nature of the underlying assets in their money market funds. I would particularly look out for investments in any type of auction-rate securities.

In addition to this caution, I would also strongly encourage investors in municipal money market funds NOT to invest in funds which have investments in the newly designed municipal auction-rate security known as x-Tender or Windows.

In the Brave New World of the Uncle Sam economy, ‘Buyer Beware!’

LD

Related Sense on Cents Commentary:
No Time for Complacency on Insurance and Money Fund Exposures (July 29, 2009)
Municipal Money Market Funds: Caveat Emptor (June 29, 2009)
The Buck Is Beginning to Break (June 25, 2009)

Municipal Money Market Funds: Caveat Emptor

Posted by Larry Doyle on June 29th, 2009 6:17 PM |

If and when your money market fund “breaks the buck,” will you be there to collect the change?

I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.

In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”

Today the Wall Street Journal offers another whiff of the factory and gives us further reason to stay away from municipal money funds specifically. The WSJ writes, Mutual-Fund Giants Give Mixed Reviews to SEC Proposals:

The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)

Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?

Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?

Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of  municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.

I will keep my nose to the ground in an attempt to sniff this out.  Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.

LD

The Buck Is Beginning to Break

Posted by Larry Doyle on June 25th, 2009 12:31 PM |

Investors in money market funds are generally under the assumption that those funds would always maintain a $1.00 NAV (net asset value). Well, investors should lose that assumption and prepare themselves for funds beginning to ‘break the buck.’ Do not panic, but let’s review developments in this $3.8 trillion sector of the market.

When markets were seizing up last September upon the failure of Lehman Bros., the U.S. Treasury provided a temporary backstop of money market funds so they would not break the buck and cause a “run on the fund.” Here is the Treasury statement from last September: Treasury’s Temporary Guarantee for Money Market Funds.

From that site, you will see links to other Treasury announcements on this topic. One of those links is Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds. I strongly recommend investors review these FAQs. I specifically highlight the question regarding funds’ ‘breaking the buck.’

What if another fund in an investor’s fund family breaks the buck before this program starts? Is the investor covered?

The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor’s fund, doesn’t affect the investor’s fund’s eligibility. Investors should contact their fund to determine if their fund participates in the program.

The temporary guarantee was extended on March 31, 2009 as highlighted by this Treasury announcement: Treasury Announces Extension of Guarantee for Money Market Funds.

Well, investors should prepare themselves for this guarantee of money market funds to end and that certain funds will begin to ‘break the buck.’ One does not need to be a savant to see this development in a recent release from SEC chair, Mary Schapiro. Here is the full SEC Statement on this topic.

Let’s address a few critically important points . . .  (more…)

The Wall Street “Sausage-Making” Process

Posted by Larry Doyle on June 20th, 2009 9:01 AM |

Why do pigs need to go through such a curing process before finding their way to market? The innards of a pig are filled with all sorts of waste. In the same vein, the new Wall Street pig, otherwise known as an x-Tender security (but hereby deemed Porky Pig at Sense on Cents), is also filled with similar “junk.” I will try to make this quick, but bring a mask as we navigate the Wall Street sausage factory.

Please recall from my post yesterday, “An Auction-Rate Pig by Any Other Name Is Still a Pig”, that this ‘new’ Wall Street product is merely a revised version of THE LARGEST fraud perpetrated in the history of finance. This “pig” allows municipalities to address long-term funding needs via the short term debt market. The arbitrage involved in that process is akin to slaughtering the pig and making sausage.

Given the stench surrounding this product, take a deep breath as we tip-toe through the pigsty and move into the sausage factory. The Wall Street Journal can serve as our tour guide as it writes, Belt-Tightening by States Squeezes Cities and Towns. Let me connect the dots.

As this article highlights, municipalities across our country are increasingly financially strapped by a combination of decreasing tax revenues and lessened state funding. Regrettably, these municipalities are forced to cut expenses via a reduction in services and layoffs. Additionally, it is only logical to expect that municipalities will increase taxes to bridge their financial gap.

Add it all up, though, and it is very clear that an overwhelming number of municipalities in our nation are not as creditworthy today as a year or two ago. When credit ratings decline, borrowing costs go up. Those increased borrowing costs further squeeze the municipalities. What to do? Let’s enter the sausage factory.

With the blessing of the SEC, and the wizardry of financial engineers on Wall Street, municipalities can address long-term funding needs by borrowing money via the short-term market with a ‘promise’ to repay the funds if the short-term market shuts down. These municipal deals, much like sausage, are packaged and distributed via money market funds that incorporate a variety of short term deals. As such, the poorer credit quality of the municipality is “processed” and sold without investors fully appreciating the contents of the money market fund.

This works, right? The municipality receives the badly needed funds and the Wall Street banks earn their fees. Meanwhile, investors – who by nature move in and out of money market funds expecting them never to “break the buck” (meaning the funds will always maintain a $1.00 net asset value) – are kept in the dark.

Investors should appreciate that money market funds will likely “break the buck” going forward. All one needs to do is review the fiasco involved with the longstanding money market fund, The Reserve Fund.  Investors in that money market fund are now involved in a protracted legal dispute and the value of the fund is truly a great unknown. What happened? The fund took increased credit risk in a variety of products. Investors were clueless of these credit risks.

The same “sausage-making” is going on with this new x-Tender product. I exhort every investor to “check the contents” and ask the “butcher”, that being your broker or financial planner, as to what is going into that money market fund before you buy it.

LD






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