More than a year before it ‘broke the buck’ with losses that spread chaos through the financial system last week, the Reserve Primary Fund began loading up on a type of short-term debt that the money-market fund had long shunned.
Even as Bruce Bent, the fund’s founder, told shareholders in a July 2008 letter that the fund had ‘unwavering discipline focused on protecting your principal,’ Reserve was gobbling up commercial paper. By May of this year, 54% of the fund’s holdings were in commercial paper, up from 0.9% about a year earlier. Exposure to drab but safe certificates of deposit plunged.
While the run on money funds that was ignited by the fund’s losses has eased, Mr. Bent’s failure to follow his own advice on the virtues of conservative investing is having catastrophic consequences for Reserve’s money-market funds, managed by Reserve Management Co.
The firm lost 90% of its assets, which had fallen to $8.5 billion as of Monday, down from nearly $86 billion at the start of September, according to iMoneyNet Inc. Reserve faces at least two lawsuits over its disclosure of losses on soured Lehman Brothers Holdings Inc. securities and indefinite suspension of further redemptions.
So then, it appears that Bruce Bent lied. I hope the FBI wants to have a little chat with him. I hope that some good lawyers are preparing to sue him for all he’s worth and try to recover a few cents on the dollar for those he lied to.
30 years to life should be about right…