Money-Market Fund 'Breaks the Buck'

By Christopher Condon
Bloomberg News
Wednesday, September 17, 2008

Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman Brothers Holdings, which filed for bankruptcy protection Monday.

The fund, whose assets plunged more 60 percent, to $23 billion, in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as "breaking the buck." Reserve Primary's asset value fell to 97 cents a share, and redemptions were suspended for as long as seven days.

The fund's losses came as confidence in financial markets has been shaken by the collapse of the subprime mortgage market, the failure of several U.S. commercial banks and Lehman's bankruptcy filing.

Money-market funds are considered the safest investments after cash and bank deposits. The only other money-market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest rate derivatives.

"This is uncharted territory," said Peter Crane, president of Crane Data, which tracks money-market funds. "That's certainly a stunner."

Reserve Primary, run by Reserve Management in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund's board revalued the Lehman holdings as worthless yesterday, the company said.

Spokeswoman Ming Lee Hatch would not comment on whether the company planned to secure credit to support the fund or wind it down.

Money-market funds, which are regulated by the Securities and Exchange Commission, strive to preserve a $1-a-share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. The funds are required to hold debt that matures in 13 months or less, and the securities must have top short-term corporate debt ratings.

U.S. money-market mutual fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion, set a week earlier, according to the Investment Company Institute, a Washington trade group.

Reserve notified SEC staff of the fund's situation yesterday, said Andrew J. Donohue, director of the SEC's investment management division.

"The fundamental structure of money-market funds remains sound," ICI President Paul Schott Stevens said in a statement. "These funds are subject to strict regulation governing credit quality, liquidity, diversification and transparency."

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