By Christopher Condon
Sept. 16 (Bloomberg) -- 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 bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 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, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
Money-market funds are considered the safest investments after cash and bank deposits, and Reserve Primary's losses come as confidence in financial markets has been shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial banks and Lehman's bankruptcy yesterday. 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 LLC in Westborough, Massachusetts, which tracks money-market funds. ``That's certainly a stunner.''
Reserve Primary, run by closely held Reserve Management Corp. 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 effective 4 p.m. New York time, the company said today in a statement.
Unable to Prop Up Fund
Spokeswoman Ming Lee Hatch said she couldn't immediately comment on whether the company planned to secure credit to support the fund or wind it down. Investors who requested redemptions by 3 p.m. today will get all their money back.
Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund's failure ``exacerbates some of the flight-to-quality into Treasuries.''
Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner.
``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' Lehman holdings totaled $494 million.
Money-market funds, which are regulated in the U.S. 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. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. 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-based trade group.
``The company and its counsel apprised staff of the fund's situation earlier today and discussions between staff and the company and its counsel are continuing,'' Andrew J. Donohue, director of the SEC's investment management division, said in a statement. ``SEC examiners are on-site at the fund to monitor activities.''
ICI President Paul Schott Stevens released a statement attempting to bolster investor confidence in money-market funds.
``The fundamental structure of money-market funds remains sound,'' he said in the statement. ``These funds are subject to strict regulation governing credit quality, liquidity, diversification and transparency.''
Federal Reserve spokesman David Skidmore declined to comment.
Bruce Bent, chairman of Reserve Management, often said the best money-market funds should be ``boring.'' He derided other funds that invested in securities linked to subprime mortgages and other risky debt.
Reserve Management's assets rose 95 percent in the year ending June 30 to $125 billion, as investors sought safety from falling equity markets. Banks and other institutional investors accounted for 65 percent of total assets.
To contact the reporter on this story: Christopher Condon in Boston at [email protected]
Last Updated: September 16, 2008 19:02 EDT