Money fund rescue smacks banks
Tally for 21 financial institutions to prop up their money funds: $5 billion. Next: a hit to earnings.
By Mark Bruno
October 5, 2008 12:01 AM ET
Washington’s $700 billion plan to rescue banks from toxic mortgages isn’t the only bailout effort that’s been brought on by the credit crisis.
Nearly two dozen financial institutions have been forced to plow an estimated $5 billion into money-market funds to protect investors from losses since the credit crunch tightened in August 2007.
The moves are aimed at keeping clients as well as restoring stability to money-market funds and other cash strategies—a must, given the massive outflows from such funds in recent weeks. But the support measures could also hit some companies’ third-quarter performance.
Already, Bank of New York Mellon, Legg Mason and Northern Trust have reported that their efforts to firm up money-market funds and cash strategies this year will weigh on their Q3 earnings.
BNY Mellon, the parent company of Dreyfus, disclosed in a filing last week it will take a $425 million charge for propping up four Dreyfus funds—in addition to five commingled funds and one securities lending fund—that held stakes in now-bankrupt Lehman Brothers. BNY Mellon officials noted that the bank still expects to be profitable for the quarter.
“It’s a substantial amount of money in some cases, but it’s clearly a better option than allowing one of your funds to break the buck,” said John Foff, senior analyst at SNL Financial, referring to the poisonous practice of allowing a money fund’s net asset value to drop below $1 a share. “It’s taking on some pain in the short term, but should ensure some longer-term stability in their businesses, and in the money-market industry.”
Investors have yanked $260 billion from money market mutual fund offerings since the credit crunch morphed into a credit crisis in the beginning of September, after pouring in some $1 trillion in institutional assets during the previous 12 months, according to data from the Investment Company Institute.
According to an estimate by money-market research firm Crane Data, 21 financial institutions have pumped more than $5 billion in capital into their money-market funds during the last 13 months—the most since 40 money-market funds were bailed out almost 15 years ago.
That’s a significant price for what has long been considered among the safest of all assets, said Crane Data founder Peter Crane. “There’s been some kryptonite out there for money-market funds in this environment,” he noted.
The latest radioactive holding for money-market funds was commercial paper issued by Lehman Brothers, which filed for bankruptcy on Sept. 15. Since then, at least five firms have elected to prop up funds with capital from their parent companies because their money-market funds held debt issued by Lehman—holdings that although they were relatively small, could have potentially caused the funds’ net asset values to drop below $1 a share.
This “breaking the buck” occurred at one fund last month: the Reserve’s Primary Fund, which saw redemption requests of $60 billion in two days after investors learned the fund had $785 billion in Lehman debt. Just last week, the firm said it would liquidate the fund and return the remaining assets to investors.
Five companies that have propped up their funds in the past few weeks—Evergreen Investments, RiverSource Investments, Columbia Management, Russell Investments and Dreyfus—each acknowledged that they had money-market funds holding Lehman debt after the company filed for bankruptcy. Combined, the five firms had at least $1.5 billion in Lehman exposure among them, according to company filings.
Not all of the companies disclosed how much they would infuse into their funds to compensate for the Lehman debt, but Mr. Crane estimates the figure at a combined $1 billion. (Last Wednesday, Wachovia, Evergreen’s parent, actually elected to buy the $494 million in Lehman debt that was spread across three Evergreen funds, which had roughly $29 billion in combined assets.)
Even firms whose money-market funds were not exposed to the recent Lehman bankruptcy are nagged by issues that required them to begin propping their funds up months ago. A number of banks and asset managers have made moves over the last year to support funds that had investments in commercial paper or other short-term debt issued by troubled structured investment vehicles (the other “kryptonite”) such as Whistlejacket Capital, White Pine Finance, Axon Financial and Cheyne Finance.
Just last week, two firms, Legg Mason and Northern Trust, each revealed that they will provide additional reserves for several of their money-market, cash or short-term funds to ensure that they maintain a $1 a share NAV. Legg Mason added a combined $630 million to three of its funds; this move, combined with some previous support provided to money-market funds earlier this year, prompted the asset manager to note that it will likely take a $318 million non-cash charge for the quarter.
Northern Trust, meanwhile, said it would add $321 million to support several of its funds, if necessary. In February, the company had originally noted that it would make $229 million available for several of its funds that held notes issued by Whistlejacket and White Pine, so the latest round of backing makes $550 million in capital available to its funds.
The move was made to build investor confidence in its offerings by “dramatically increasing the maximum amount of support” the company will make available to the funds, explained spokesman John O’Connell. He added that it also ensures that Northern’s publicly rated funds will maintain their AAA rating, a requirement for many institutional investors.
At the same time, these backup measures could translate into a pretax charge of $290 million in the third quarter, Northern Trust noted early last week.
Roger Smith, an analyst at Fox-Pitt Kelton, said restoring investor confidence in money-market funds and cash strategies may be beyond the control of investment managers. The Treasury Department’s move to begin temporarily guaranteeing the share price of money-market funds last week will help managers, “but it may not be enough to move the needle right away,” he said. “There’s still too much uncertainty and anxiety.”
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081005/REG/810039951/1006/BANKING
Tally for 21 financial institutions to prop up their money funds: $5 billion. Next: a hit to earnings.
By Mark Bruno
October 5, 2008 12:01 AM ET
Washington’s $700 billion plan to rescue banks from toxic mortgages isn’t the only bailout effort that’s been brought on by the credit crisis.
Nearly two dozen financial institutions have been forced to plow an estimated $5 billion into money-market funds to protect investors from losses since the credit crunch tightened in August 2007.
The moves are aimed at keeping clients as well as restoring stability to money-market funds and other cash strategies—a must, given the massive outflows from such funds in recent weeks. But the support measures could also hit some companies’ third-quarter performance.
Already, Bank of New York Mellon, Legg Mason and Northern Trust have reported that their efforts to firm up money-market funds and cash strategies this year will weigh on their Q3 earnings.
BNY Mellon, the parent company of Dreyfus, disclosed in a filing last week it will take a $425 million charge for propping up four Dreyfus funds—in addition to five commingled funds and one securities lending fund—that held stakes in now-bankrupt Lehman Brothers. BNY Mellon officials noted that the bank still expects to be profitable for the quarter.
“It’s a substantial amount of money in some cases, but it’s clearly a better option than allowing one of your funds to break the buck,” said John Foff, senior analyst at SNL Financial, referring to the poisonous practice of allowing a money fund’s net asset value to drop below $1 a share. “It’s taking on some pain in the short term, but should ensure some longer-term stability in their businesses, and in the money-market industry.”
Investors have yanked $260 billion from money market mutual fund offerings since the credit crunch morphed into a credit crisis in the beginning of September, after pouring in some $1 trillion in institutional assets during the previous 12 months, according to data from the Investment Company Institute.
According to an estimate by money-market research firm Crane Data, 21 financial institutions have pumped more than $5 billion in capital into their money-market funds during the last 13 months—the most since 40 money-market funds were bailed out almost 15 years ago.
That’s a significant price for what has long been considered among the safest of all assets, said Crane Data founder Peter Crane. “There’s been some kryptonite out there for money-market funds in this environment,” he noted.
The latest radioactive holding for money-market funds was commercial paper issued by Lehman Brothers, which filed for bankruptcy on Sept. 15. Since then, at least five firms have elected to prop up funds with capital from their parent companies because their money-market funds held debt issued by Lehman—holdings that although they were relatively small, could have potentially caused the funds’ net asset values to drop below $1 a share.
This “breaking the buck” occurred at one fund last month: the Reserve’s Primary Fund, which saw redemption requests of $60 billion in two days after investors learned the fund had $785 billion in Lehman debt. Just last week, the firm said it would liquidate the fund and return the remaining assets to investors.
Five companies that have propped up their funds in the past few weeks—Evergreen Investments, RiverSource Investments, Columbia Management, Russell Investments and Dreyfus—each acknowledged that they had money-market funds holding Lehman debt after the company filed for bankruptcy. Combined, the five firms had at least $1.5 billion in Lehman exposure among them, according to company filings.
Not all of the companies disclosed how much they would infuse into their funds to compensate for the Lehman debt, but Mr. Crane estimates the figure at a combined $1 billion. (Last Wednesday, Wachovia, Evergreen’s parent, actually elected to buy the $494 million in Lehman debt that was spread across three Evergreen funds, which had roughly $29 billion in combined assets.)
Even firms whose money-market funds were not exposed to the recent Lehman bankruptcy are nagged by issues that required them to begin propping their funds up months ago. A number of banks and asset managers have made moves over the last year to support funds that had investments in commercial paper or other short-term debt issued by troubled structured investment vehicles (the other “kryptonite”) such as Whistlejacket Capital, White Pine Finance, Axon Financial and Cheyne Finance.
Just last week, two firms, Legg Mason and Northern Trust, each revealed that they will provide additional reserves for several of their money-market, cash or short-term funds to ensure that they maintain a $1 a share NAV. Legg Mason added a combined $630 million to three of its funds; this move, combined with some previous support provided to money-market funds earlier this year, prompted the asset manager to note that it will likely take a $318 million non-cash charge for the quarter.
Northern Trust, meanwhile, said it would add $321 million to support several of its funds, if necessary. In February, the company had originally noted that it would make $229 million available for several of its funds that held notes issued by Whistlejacket and White Pine, so the latest round of backing makes $550 million in capital available to its funds.
The move was made to build investor confidence in its offerings by “dramatically increasing the maximum amount of support” the company will make available to the funds, explained spokesman John O’Connell. He added that it also ensures that Northern’s publicly rated funds will maintain their AAA rating, a requirement for many institutional investors.
At the same time, these backup measures could translate into a pretax charge of $290 million in the third quarter, Northern Trust noted early last week.
Roger Smith, an analyst at Fox-Pitt Kelton, said restoring investor confidence in money-market funds and cash strategies may be beyond the control of investment managers. The Treasury Department’s move to begin temporarily guaranteeing the share price of money-market funds last week will help managers, “but it may not be enough to move the needle right away,” he said. “There’s still too much uncertainty and anxiety.”
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081005/REG/810039951/1006/BANKING