Subprime problems are hitting money funds

Nov 19, 2007 @ 12:01 am

By Ilana Polyak

Money market funds usually are as boring as it gets in the investment business. They are cash, after all, plus a minuscule rate of interest, that mutual fund companies make available with instant liquidity.

Lately, however, money market funds have taken on the drama normally associated with hedge funds and other exotic instruments. A growing number of parent fund companies are stepping in to provide assurances that their money funds won't fall in value if one of their dicey investments falters.

Blame it once more on the meltdown in the subprime-mortgage market. Some money market funds, which are limited only to the most highly rated debt instruments that are under 13 months in duration, have found themselves with some questionable structured investment vehicles tied to subprime loans.

Rather than ride out the storm and let the chips fall where they may, the funds' parent companies have swooped in to buy up the securities or provide guarantees that their shareholders won't suffer losses should a loss occur.

"The cash business is a game of confidence," said Peter Crane, president of Crane Data LLC, a Westborough, Mass., firm that tracks money market fund investments. "You want to address any little problem immediately," said Mr. Crane, who also is publisher of the Money Fund Intelligence, the firm's newsletter.

Breaking the buck, or posting a net asset value of less than $1, is the cardinal sin in managing money market funds, which many see as a substitute to federally insured bank accounts.

As a result, fund companies go to great lengths to maintain the perception of safety.

Recently, Wachovia Securities LLC of Richmond, Va., acknowledged a $40-million-dollar loss related to bailing out certain securities from its Boston-based Evergreen Investments money market funds.

"This was meant to send a message of confidence to investors," said Laura Fay, a spokeswoman with Evergreen Investment Management Co. LLC.

"It was positively received," she said, noting that asset flows into the funds increased after Wachovia took that step.

Credit Suisse Group of Zurich, Switzerland, meanwhile, purchased asset-backed commercial paper, floating-rate notes, notes issued by collateralized debt obligation vehicles and SIVs from its CS Institution Prime Money Market Fund, amounting to unrealized losses of $125 million.

Last week, Charlotte, N.C.-based Bank of America Corp. announced that it would spend $600 million supporting its Columbia-branded money market funds. Legg Mason Inc. of Baltimore poured $100 million into one of its cash funds and set up $238 million in credit to support two others, according to a Nov. 9 regulatory filing.

SEI Investments Corp. of Oaks, Pa., meanwhile, provided a capital support agreement to two of its in-house money funds holdings issued by London-based Cheyne Finance LLC after Standard & Poor's, a New York rating agency, announced that it would place any fund holding Cheyne's paper on credit watch with negative implications unless the fund company provided credit support.

"Once Cheyne deteriorated to the point of default, it wasn't consistent with our criteria of a triple-A fund," said Peter Rizzo, a director in S&P's fund-rating group. He added that the company doesn't tell the funds it rates what steps to take, but SEI and others chose to provide credit support.

The last time money funds found themselves in so much hot water was in 1994, when they suffered losses in their derivative investments after California's Orange County filed for bankruptcy protection. Then, as now, fund companies stepped in to absorb losses so that NAVs would not fall, and retail funds would not "break the buck."

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