Banks Prop Up Money market Funds as Credit Crisis Spreads
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Banks Prop Up Money market Funds as Credit Crisis Spreads
Via NY Transfer News Collective * All the News that Doesn't Fit
Financial Times - Nov 13, 2007
http://www.ft.com/cms/s/0/39e0b806-922a-11dc-8981-0000779fd2ac.html
Banks Prop Up Money Market Funds
By Deborah Brewster and Saskia Scholtes
Banks and mutual fund managers are being forced to prop up their
money market funds to prevent ratings agencies from downgrading the
funds, as the credit crisis spreads through the financial system.
Bank of America on Tuesday said it would spend $600 million on
supporting its money market funds, some of which were exposed to
troubled securities.
Legg Mason and SEI Corp. have also provided capital support to their
money market funds to protect the funds' credit ratings. A drop in
the credit rating would not itself cause the fund to lose money,
but it would result in many investors pulling their money out,
creating an immediate liquidity drain and a dent in the funds'
reputation as a safe harbour.
Money market fund assets have risen by $640 billion to a record
$2,340 billion in the year to date, according to iMoneyNet, the
market information provider. Investors are pouring record amounts
of cash into the funds, which have a reputation for safety but are
not insured by the Federal Deposit Insurance Corp.
Standard & Poor's advised two weeks ago that any funds that contained
securities issued by Cheyne Finance -- a structured investment
vehicle that had been downgraded to default status -- would lose
their AAA rating unless the funds guaranteed 50 per cent of the
value of the Cheyne securities held.
SEI, which has two funds holding Cheyne securities, managed by
Bank of America's Columbia Management, said that it had entered
into a $129 million capital support agreement for the funds.
Legg Mason, which has close to $100 billion in money market funds,
said it had put $100 million into one of its funds and set up a
$238 million line of credit for two other funds.
Credit Suisse and SunTrust are among others whose funds hold Cheyne
securities and that have propped up their funds as a result.
As well as protecting the ratings, money market fund managers are
trying to ensure the funds do not lose money.
As the credit crisis mounts, the spectre of a fund "breaking the
buck" -- a dollar invested falling below its value -- has loomed.
Wachovia Bank during the third quarter bought $1.1 billion in
securities from its Evergreen money market funds, and booked a $40
million loss on the securities to avoid the money funds taking the
loss.
Investors have not lost money on a US money market fund since 1994
and it is unlikely that any fund operator now would allow such an
event to occur.
Should a fund come close to "breaking the buck," its parent company
would bail it out.
A spokeswoman for JPMorgan, a big money market fund operator with
more than $200 billion, said that its funds did not contain any of
the downgraded securities.
*
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