A money-market mutual fund that notoriously "broke the buck" has set aside a $3.5 billion reserve to cover litigation costs and damages.
A money-market mutual fund that notoriously "broke the buck" has set aside a $3.5 billion reserve to cover litigation costs and damages, which will reduce the payout to clients exposed to losses in a normally safe-harbor investment.
The Reserve Primary Fund's trustees also said they expect investors ultimately could receive 91.72 cents for each dollar they put in the the fund, based in part on the size of the reserve announced Thursday by Reserve Management Co.
The final amount investors receive in the fund's ongoing liquidation depends on whether legal and other costs end up higher or lower than expected, which would require adjusting the reserve's size, the New York-based company said.
"No one would be happier than us to distribute more money," the fund's independent trustees said in a statement. "Unfortunately, there are 27 lawsuits seeking all sorts of damages, leaving us no choice but to set aside this sum to protect the interests of all shareholders."
The $3.5 billion reserve is more than four times the size of an investment holding in the Primary Fund that triggered the investor losses: $785 million in unsecured debt of the investment bank Lehman Brothers.
After Lehman filed for bankruptcy protection on Sept. 15, Reserve Management's board declared its investment in the Lehman debt worthless. That triggered a rush of orders from institutional clients to pull money out of the fund. Those orders gutted the fund's value as fund managers were forced to sell assets amid sharply declining markets.
The Lehman investment amounted to more than 1 percent of the $64 billion in assets the fund held shortly before the bankruptcy.
The day afterward, Reserve said the Primary Fund had "broken the buck" when the value of its assets fell to 97 cents per investor dollar put in — below the dollar-for-dollar level needed to fully repay clients.
The expense from the newly established reserve could add another 5 cents of losses on the dollar, based on the potential 91.72 cent payout level that the trustees are currently estimating.
The fund has so far returned to investors nearly $44 billion, or 85 percent of the assets it held before it broke the buck.
The episode was the first such investor exposure to money-market losses since 1994, and created fears about the safety of the more than $3 trillion in assets held in money-market funds.
The government ultimately stepped in with a temporary program to guarantee money funds, but the Primary Fund — the first money fund, established in 1970 — didn't qualify and is in the process of liquidating.
In addition to the lawsuits filed by investors, Reserve Management faces regulatory scrutiny.
Last month, Massachusetts' top securities regulator, Secretary of State William Galvin, filed an administrative complaint accusing the fund's managers of lying about its safety in a futile bid to prevent investors from pulling out cash.
In December, Reserve Management said it expected federal securities regulators to bring a separate civil case against it. That case has not yet been filed.
