Money market funds facing a run, panic rules

September 18, 2008

Money market funds manage about three and a half trillion dollars. They have to hold investment grade debt, and are a major source of short term funding for banks and corporations, and finance their day to day operations. They now seems to be facing a run. It is almost unbelievable that both corporate bond market and commercial paper market are imploding at the same time. From Bloomberg:

Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund yesterday and plans to return all cash to investors.

The fund, which as valued yesterday at $1 a share, experienced “significant redemption pressure,” the Boston- based company said in a statement. A drop below $1 a share, known as breaking the break, would have exposed investors to losses.

The fund had no exposure to securities issued by Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc., the company said.

Reserve Primary Fund, the oldest U.S. money-market fund, on Sept. 16 became the first in 14 years to break the buck. Investors pulled 60 percent of their money from the $62.6 billion fund on Sept. 15 and 16 before withdrawals were delayed.

Putnam is a unit of Canadian insurer Great-West Lifeco Inc. ”

“An institutional fund run by Bank of New York Mellon, designed to work like a money-market account fell to less than $1 a share after losses on debt issued by bankrupt Lehman Brothers Holdings Inc.

The $22 billion BNY Institutional Cash Reserves fell to $0.991 a share on Sept. 16, according to an e-mail sent by a bank representative to one client. BNY Mellon has “isolated the Lehman assets in the fund into a separate structure,” Ivan Royle, a spokesman for the New York-based company, said today in an e-mailed statement.

The fund invests cash deposited as collateral by clients who borrow securities from BNY Mellon, the world’s largest custody bank. Lehman debt represented 1.13 percent of the fund’s holdings, according to the statement. Royle declined in an interview to say whether investors withdrawing money from the fund would realize losses.

The BNY Mellon fund, while not a registered money-market fund, is “generally managed to be compliant with the investment-related provisions of” U.S. law governing the accounts, according to a bank brochure.

Reserve Primary Fund, the oldest U.S. money-market fund, on Sept. 16 became the first in 14 years to fall below the $1 a share price, known as “breaking the buck.” Investors pulled 60 percent of their money from the $62.6 billion fund on Sept. 15 and 16 before withdrawals were delayed”

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