Money market funds requiring props as credit crisis spreads

Banks Prop Up Money Market Funds

By Deborah Brewster and Saskia Scholtes
Financial Times, London
Tuesday, November 13, 2007

http://www.ft.com/cms/s/0/39e0b806-922a-11dc-8981-0000779fd2ac.html?ncli...

Banks and mutual fund managers are being forced to prop up their money market funds to prevent ratings agencies from downgrading the funds, as the credit crisis spreads through the financial system.

Bank of America on Tuesday said it would spend $600 million on supporting its money market funds, some of which were exposed to troubled securities.

Legg Mason and SEI Corp. have also provided capital support to their money market funds to protect the funds' credit ratings. A drop in the credit rating would not itself cause the fund to lose money, but it would result in many investors pulling their money out, creating an immediate liquidity drain and a dent in the funds' reputation as a safe harbour.

Money market fund assets have risen by $640 billion to a record $2,340 billion in the year to date, according to iMoneyNet, the market information provider. Investors are pouring record amounts of cash into the funds, which have a reputation for safety but are not insured by the Federal Deposit Insurance Corp.

Standard & Poor's advised two weeks ago that any funds that contained securities issued by Cheyne Finance -- a structured investment vehicle that had been downgraded to default status -- would lose their AAA rating unless the funds guaranteed 50 per cent of the value of the Cheyne securities held.

SEI, which has two funds holding Cheyne securities, managed by Bank of America's Columbia Management, said that it had entered into a $129 million capital support agreement for the funds.

Legg Mason, which has close to $100 billion in money market funds, said it had put $100 million into one of its funds and set up a $238 million line of credit for two other funds.

Credit Suisse and SunTrust are among others whose funds hold Cheyne securities and that have propped up their funds as a result.

As well as protecting the ratings, money market fund managers are trying to ensure the funds do not lose money.

As the credit crisis mounts, the spectre of a fund "breaking the buck" -- a dollar invested falling below its value -- has loomed.

Wachovia Bank during the third quarter bought $1.1 billion in securities from its Evergreen money market funds, and booked a $40 million loss on the securities to avoid the money funds taking the loss.

Investors have not lost money on a US money market fund since 1994 and it is unlikely that any fund operator now would allow such an event to occur.

Should a fund come close to "breaking the buck," its parent company would bail it out.

A spokeswoman for JPMorgan, a big money market fund operator with more than $200 billion, said that its funds did not contain any of the downgraded securities.

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