Posted on 01/03/2010 11:29:24 AM PST by blackminorca
Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." You read that right: this does not refer to the charter of procyclical, leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA's latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal."
(Excerpt) Read more at zerohedge.com ...
The run on money market funds occurred due to the failure of Lehman Bros on September 15th. The Reserve Fund, the original money market fund, was heavily invested in Lehman Bros paper and it “broke the buck” meaning its shares fell below a dollar. This was just more fallout from the collapse of the mortgage bubble. No conspiracy needed.
“What does this leave us? Bank savings accounts at .33%?”
Ally Bank savings is 1.5%
Curiouser and curiouser as the days go by...
“which will be forced into buying Treasury debt “
I don’t see where you get that from the article. Money markets invest in short term corporate paper and will continue to do so. You just won’t be able to liquidate immediately if there is a crisis.
Bump, so I can find it later.
more fall-out from Reserve Fund’s issues last year. IIRC, their denial of redemptions caused a run on the money markets that the fed had to directly shut down in september.
Or by scaring the “H” out of people, and causing them to pull out their money they now present a tax bill for everything including the deed to the ranch, and the first born.
pretty sure it was related to reserve fund’s problems after lehman went under. At that point, it made perfect sense to pull your funds out of US Money Markets if you had another country to put them in.
No, it wasn’t “engineered” or set up. The explanation for the collapse of the Reserve Primary Fund was rather simple. Here’s the executive summary:
The Reserve Primary Fund was a money market fund that was used by broker/dealers/hedge funds as a money market fund. They owned paper from a large number of banks and financial institutions as the basis of the Primary Fund. When Lehman tipped over, they declared the $785 million in Lehman paper to be “worthless,” which causes the NAV of the Reserve Fund to fall below $1.00/share, or in street lingo “break the buck.”
Suddenly, people realized that after 40 years or so of growing to think of money market funds as being “safe as cash,” they were not, and that the widening gyre on Wall Street was breaking a LOT of assumptions about how the debt markets worked. If money market funds were no longer free of exposure to liquidity risk, then nothing was. A stampede ensued to start pulling money out of money market funds.
Now, the way these fund work is that they have a nice cushion of cash, but that they maintain a regularly rolling ladder of short-term debt paper.
Have a look at the portfolio of the Reserve Primary Fund in the report below and you’ll see what I mean. See how short-dated those bonds are? They’re rolling 10’s to 100’s of millions of any particular type of paper in a month.
http://www.reservefunds.com/pdfs/pgtannual.pdf
Ah, but if suddenly everyone wants to cash out at once... well then, the fund is sunk. They would have to sell into a crashing market, with low return of capital because no one wants the stuff. The investors would be taking some serious losses. And that would hold true for most all money market funds, not just Reserve’s.
On that week in September, we came within a few hours of complete melt-down of the markets in the US. There was no enough cash or “slack” in the system to allow the redemption of that much money in so short a time. As the demand for cash-outs would have increased, the liquidity risk would have multiplied in most all instruments, which would have spread the failure out beyond just the debt markets to all other markets - in effect, re-creating the crash of 1907 in some aspects.
later
The MM crises was real and would have had profound effects.
I find it curious that only one of many Reserve MM funds “Broke the Buck”.
Do you think they rolled ALL of there Lehman holdings into one fund ?
Losing 1 percent on cash is a really big deal.
I'm curious as to how much cross investment in money markets is really going on.
If there is any uncertainty in these investments among the Banks and their counter parties, we should see it in the TED Spread.
Best of luck
Also, Lehman brothers was one of the biggest commercial paper hangers on Wall Street. They placed more CP daily than almost any other firm. Suddenly that conduit was closed. So when the outstanding CP came due Lehman wasn't there to roll it. A lot of stuff happened very quickly and can be called a perfect storm of defaults.
Which is why all of my money market funds are now safely esconced in an off shore bank outside US jurisdiction.
Ping to the list, This is HUGE!
Too late, I already got all of mine out and it’s somewhere they will never get their hands on it and I do mean NEVER!
HA HA. They can’t get me. I don’t have any money!
I know of a certain MM fund that hasn’t earned a penny of interest since October 2009, I guess that’s because of the Lehman failure.
Bank Holiday, de-value the currency (half of what you had is gone), next.
Ally Bank is the bankrupt GMAC. They just took some more taxpayer money and this ain’t gonna get better....I’d rather put it in my mattress.
Curiouser and curiouser as the days go by...
I heard Old Man Potter is guaranteeing 50 cents on the dollar - cash money, for your money market account ...
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