Cash Management

As Money Funds Suffer, Firms Look Closer

Lehman-tinged BNY Institutional Cash fund joins Reserve Primary in "breaking the buck," and Putnam closes a fund under investor "pressure." But PG&...
Roy HarrisSeptember 18, 2008

The once-unquestioned safety of money market mutual funds is drawing serious questioning among corporate investors now.

And while many still see it as irrational to bail out of money funds blindly, in some cases it apparently has paid off to question potential fund vulnerabilities, and move to exit early.

A cascade of new money-market-fund problems threatened today in the wake of Tuesday’s decline in value to below $1 a share of the Reserve Primary Fund, an event cited as only the second time in history that such a fund “broke the buck,” in Wall Street’s parlance. Thursday, a second institutional fund — the $22-billion BNY Institutional Cash Reserves fund, run by Bank of New York Mellon Corp. — joined Reserve Primary in breaking the buck.

According a report in Bloomberg News, the BNY fund fell to $0.991 a share in value. Like the Reserve Primary Fund, the BNY fund was reported to have contained Lehman Brothers debt — exposing it to losses after Lehman filed for bankruptcy earlier in the week.

Lehman debt represented 1.13 percent of the fund’s holdings, Bloomberg said, citing an E-mailed statement from BNY. A bank spokesman, however, said that BNY had “isolated the Lehman assets in the fund into a separate structure,” according to the report.

As both happy and sad corporate stories from corporate money-market-fund investors began to circulate, one company breathing a sigh of relief was PG&E Corp., which until recently was invested in the Reserve Primary Fund.

In an interview with, Chris Johns, its senior vice president, CFO, and treasurer, said the California power company had the “good fortune” to spot the Lehman connections there, and “we pulled out before the issues” hit and the Reserve Fund broke the buck. Johns credited his assistant treasurer, Nick Bijur, with making the catch.

“Nick and his team did a wonderful job,” said Johns. “Even though Lehman was only a small part of that [fund], we took the preemptive move to pull out of there.”

Added Bijur, “On Monday, when we saw that 1.3 percent of the fund was in Lehman, even though it is small, we decided to be prudent — to sell and get out of it. We did that at 7:47 AM PST.” On Tuesday, at 1 PM, “it officially broke the buck.”

Johns cited lessons of the California energy shortfall, with its infamous 2000 brown-outs, as helping PG&E, and noted that “this is the third time in my tenure that I’ve gone through a crisis here, and the focus is on cash.” The company’s processes involve “making sure we have taken all the prudent steps necessary to meet our cash needs.” And that includes verifying that money market funds are healthy.

Another asset manager reporting a shock in a fund today was Putnam Investments, which, according to a Reuters report, closed its $15-billion Prime Money Market Fund. Putnam, now owned by Canada’s Great-West Lifeco, said in a statement that the board of trustees of its funds had voted to close that fund because of “significant redemption pressure” faced by the company on Wednesday. “The trustees’ action was not related to the portfolio’s credit quality,” the company said, “but was instead a reaction to marketwide liquidity issues.”

In two explanations issued online, Putnam said that as of Aug. 31 its money market funds had no exposure to Lehman securities, or to Lehman Brothers as a repurchase-agreement counterparty. Further, Putnam funds owned no securities issued “at the parent-company level” by American International Group — recently bailed out by the U.S. government — or of the troubled Washington Mutual financial institution. Putnam also said that it “continues to have no structured investment vehicle holdings in any of our money market funds.”

Putnam distinguished, too, between institutional funds and retail funds. It noted that the “institutional money market funds that serve this audience experience much greater flows of money,” and that “because a small number of clients can represent a large percentage of portfolio assets, their investments and redemptions have a correspondingly greater effect on institutional funds versus retail funds.”

In the case of Reserve Primary, considered to be the inventor of the money market fund, $785 million was held in Lehman debt, which was revalued as worthless on Sept. 16, Bloomberg said.

Tim Reason contributed to this story.