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.”
Update: More on this here.
Interesting and a little scary. The implication here is that even CASH may not be safe in the present market.
ICXC
John
In face of inflation, CASH has never been safe in any market.
But this wasn’t “cash”.
[blockquote] 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. [/blockquote]
These were investments in the continued ability of Lehman to pay off current liabilities. So, if Lehman goes bankrupt, then Reserve Fund is going to lose interest and probably take a haircut on the principal. In the meantime, the fund investors might not even get 97 cents on the dollar. That price is just the best guess today.