Money market mutual funds used to be considered among the safest investments by holding short-term U.S. Treasury and agency debt in order to minimize risk.
Only rarely in the history of modern finance have money market funds “broken the buck” – trading below the $1 per share net asset value that all such funds seek to maintain. But that was before this year’s credit crunch…
The ongoing trauma of the U.S. sub-prime crisis is revealing plenty of risky assets in some of the biggest money market funds in the nation. In fact, both Legg Mason and SunTrust Banks recently propped-up shaky “money-market funds to cushion them from possible losses on debt issued by structured investment vehicles” or SIVs, according to Bloomberg news.
Will Bad Debts from Leaky SIVs Drown Money Market Funds?
To recap, SIVs are off balance sheet entities set up by banks and brokers to buy other securities, typically risky sub-prime mortgage debt, way too much of it as it turns out. Most of the cash needed to purchase theses securities is raised by issuing commercial paper, which usually matures in 270 days or less.
As I have commented before (The Credit Crunch Rolls On in CP Market), when the crisis intensified this summer, the market for asset-backed commercial paper crashed 30% in value – falling from $1.2 trillion in early August to less than $850 billion now. This means that SIVs are stuck in a real cash-crunch, unable to roll-over and repay billions in outstanding commercial paper.
OK, so how does this relate to money market mutual funds, you ask?
Well, it seems that quite a few funds, hungry to boost yields in a low-return environment, gobbled up a bit too much of the most toxic asset backed commercial paper. Now, after the market crashed 30% in value, money funds are bracing for big potential losses on the commercial paper investments they hold.
“U.S. money funds have $50 billion in SIV debt”
According to Bloomberg, “Legg Mason invested $100 million in one of its money funds and arranged $238 million in credit for two others. Funds run by Legg Mason held about $10 billion of SIV debt, accounting for 6 percent of the company's money-market assets at the end of October, according to its filing with the SEC.”
Meanwhile, SunTrust has petitioned the SEC to bail-out two of its money market funds that purchased $115 million in notes issued by a SIV called Cheyne Plc, that’s now in big trouble and facing liquidation.
Last month, Wachovia reported a $40 million loss on asset-backed commercial paper it bought from its Evergreen Investment Management division. One of Evergreen’s money market funds had nearly $3 billion in asset-backed paper at the end of March, but has since cut back it’s holdings to $1.76 billion at the end of September.
And there’s a lot more of this toxic sub-prime paper floating around in the financial system. In fact, the 10 largest managers of U.S. money funds have $50 billion in SIV debt,” according to Bloomberg.
Don’t be surprised to find even more sub-prime mortgage losses surfacing in the most unlikely places.
What’s in your money-market fund's wallet?
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