A money market fund–and not just any money market fund–breaks the buck

The Reserve, the company that invented money market funds, just announced that its $62 billion Primary Fund is going to break the buck–that is, be valued at less than the usual $1 a share. The reason: Lehman’s bankruptcy. To quote the Dow Jones newswire story:

New York money manager the Reserve said Tuesday that its Primary Fund is valuing its debt securities issued by Lehman, which have a face value of $785 million, at zero effective at 4 p.m. EDT Tuesday.

As a result, the net asset value of the Primary Fund, which had $64.85 billion in assets as of May 31, was 97 cents per share as of 4 p.m., the firm said in a statement late Tuesday.

Money market funds have broken the buck before, but not since 1994. And I’d presume those Lehman securities will eventually turn out be worth a bunch more than zero. This isn’t a permanent loss. But money funds are all about liquidity–that is, the ability to get your money whenever you want it. Right now there just isn’t enough to go around.

Oh, and if you were wondering what impact the Lehman bankruptcy might have on regular folks, this is a pretty good example. Expect more buck-breaking to come.

Update: About a year ago I did an interview with Reserve founder Bruce Bent. A sample:

Should everybody sell every money fund that they’re involved with other than the Reserve Fund because they’re all going to break the buck? The answer is no. I am unaware of any money fund that’s gonna break the buck.

There was lots of talk then of potential buck-breaking at money funds that owned subprime mortgage securities (The Reserve did not). But the fund sponsors, mostly big asset management operations, all pulled money from elsewhere to prevent that from happening, and some are surely doing that again now. The Reserve, which only does money funds, doesn’t have that kind of cushion–but it has also never needed it before because it managed its funds carefully.

Update 2: An explanation from the WSJ for the discrepancies in numbers discussed in the comments below:

The loss was made worse by a run on the fund. Over two days, investors pulled more than half of their assets from the fund, once valued at $64 billion.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

Curmudgeon

Hmmm. By my calculations, that’s 1.2 percent of the fund face value, which means that, absent other information, a share should be worth 98.8 cents. That means one of two things – the fund had much less than $64.85 billion before this writedown, owing to significant withdrawals or other losses; or something funny is going on. What’s your thought?
Justin Fox

The fund must have shrunk. The $62 billion size I cited was from June 30, the $64.85 billion in the Dow Jones story from May 31. The reason would have to have been withdrawals, not losses.
Justin Fox

But if $785 million amounted to 3% of the fund, then the fund would only have $26 billion in it, which seems like way too steep a decline. I’m thinking there must have already been other losses, and they were taking them on the chin to keep the fund at a buck, but the Lehman loss was just too much so they just went ahead and decided to recognize all the losses.
Curmudgeon

I don’t think there’s any other conclusion except more losses than just Lehman securities. Funny the story doesn’t say anything about that. It would have to be about another billion dollars.
http://curiouscapitalist.blogs.time.com/2010/05/20/should-we-get-rid-of-deposit-insurance/ Should we get rid of deposit insurance? – The Curious Capitalist – TIME.com

[...] I would have bought this before the financial crisis, but, as you may recall, the Reserve Fund "broke the buck" because it held commercial paper from Lehman Brothers. When that happened, such panic ensured that [...]
http://www.seniorhomecareinformation.com/hospice-care/should-we-get-rid-of-deposit-insurance/ Should We Get Rid of Deposit Insurance? | Senior Home Care Information

[...] I would have bought this before the financial crisis, but, as you may recall, the Reserve Fund “broke the buck” because it held commercial paper from Lehman Brothers. When that happened, such panic ensured that [...]