Huge money market fund 'breaks the buck'

Sep 17, 2008 @ 11:20 am

By Sue Asci

Signaling the depth of the current financial crisis, the money market industry, once considered to be a safe haven for investors, took a hit yesterday when the nation’s oldest money market mutual fund, The Reserve Primary Fund (RPRXX), lost value and “broke the buck.”

The fund fell below $1 in net asset value yesterday because of its exposure to debt from Lehman Brothers Holdings Inc., which filed for bankruptcy Monday.

The event marked only the second time a money market fund has broken the buck.

The Reserve Management Co. Inc. of New York announced in a statement that redemptions could be delayed for up to seven days, but said those requests that came in prior to 3 p.m. yesterday would be redeemed at $1 per share.

As of 4 p.m. yesterday, the firm’s board of trustees determined that the Lehman holdings had no value.

Shares of the money market fund are now valued at 97 cents.

The fund had $62.6 billion in assets as of Sept. 12 and held $785 million in Lehman Brothers short-term debt, representing about 1.2% of total assets.

“It’s likely to be an anomaly where The Reserve didn’t have deep pockets like everybody else [to offer support for the fund],” said Peter Crane, president of Crane Data LLC of Westborough, Mass., a money market research firm.

“I wouldn’t expect anyone else to follow this, though the hits keep coming. People need to keep it in perspective. Losing three cents on the dollar is not the end of the world.”

In the only previous instance of a money market fund breaking the buck, Community Bancshares paid investors 96% of their principal in 1994, the Investment Company Institute reported.

Money market funds have suffered in the past year from exposure to structured investment vehicles.

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