Saturday, September 20, 2008

Anatomy of a run

The Treasury put a program in to guarantee Money Market Funds. Here's what the NY Times had to say:

The federal government took two aggressive steps on Friday to restore confidence in money market funds, which consumers have long considered to be as safe as bank savings accounts, but which have come under increasing stress in the current market turmoil.

The Treasury Department announced that, at least temporarily, it would guarantee money market funds against losses up to $50 billion.

“For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program,” the Treasury said in a statement.

And to make sure there is an adequate market if money funds have to sell assets to meet withdrawals, the Federal Reserve said that it would expand its emergency lending program to help commercial banks finance the purchase of asset-backed securities from the funds.

Make no mistake about it, it was the Reserve Fund that pushed the Treasury's hand. Here's the Reader's Digest version of the events that happened last week concerning the Reverse Fund, who "Make cash perform in ways never expected." Not quite what they had in mind.

The Reseve Fund had a $785 million piece of Lehman bonds, about 1.2% of their $62 billion of assets Primary Fund. With Lehman's bankruptcy, they wrote down this piece to zero, but not before those who panicked first, yanked out $20 billion of assets. Their money market funds were then written down to .97, along with their Yield Plus fund, and the International liquidity fund was cut to .91.

How big was the panic? Look at their statement on Friday. It speaks for itself. They halted all rights of redemption:

A Statement Regarding The Reserve Primary and U.S. Government Funds

New York, September 19, 2008 - The Reserve Fund, on behalf of two of its series, the Primary Fund and the U.S. Government Fund, today filed with the Securities and Exchange Commission (“SEC”) an Application for an Order to suspend all rights of redemption from either fund and to postpone the date of payment of redemption proceeds for a period longer than seven days after the tender of shares for redemption. The Staff of the SEC has advised the Fund that it intends to recommend the issuance of such Order.

The filing of the Application, pursuant to Section 22(e) of the Investment Company Act of 1940, was precipitated by the extraordinary market conditions of the past several days including the filing, on September 15, 2008, by Lehman Brothers Holdings Inc. of a petition for bankruptcy protection. These conditions contributed to unprecedented requests for redemptions for each of these two funds. The Primary Fund, which had approximately $62 billion in assets under management at the opening of business on September 15, 2008, has received redemption requests this week of approximately $60 billion.

The U.S. Government Fund, which had approximately $10 billion in assets under management at the opening of business on September 15, 2008, has received redemption requests this week of approximately $6 billion. With continued significant illiquidity in the markets, the Funds’ investment adviser is unable to dispose of securities to fund redemptions without impairing the net asset value of each fund.

The issuance of the Order is intended to ensure an orderly liquidation of securities in each Fund and that all shareholders in both Funds are protected in the process.

The Reserve is the oldest money market fund manager in the world. And they could of been put out of business in a day. $60 billion out of $62 billion in assets asked to be withdrawn.

Does anybody think Treasury had a choice? It wasn't just Hank Paulson breaking the neck of the shorts with a sledge hammer. It was about the solvency of the financial system.

What was Paulson supposed to do? The hammer of the market was overpowering the system!

And you can't gore the shorts or drive a railroad spike with a tack hammer!

Remember Buffy the Vampire Slayer?

Spike: I had a plan.
Angel: You, a plan?
Spike: Yeah, a good plan. Smart. Carefully laid out. But I got bored!

This time, Spike won!

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