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Rating:Vanguard Wore the White Hat and Reserve the Black One During AMLF Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, December 02, 2010

Vanguard Wore the White Hat and Reserve the Black One During AMLF

News summary by MFWire's editors

Yesterday's dump of TARP and AMLF data from the Federal Reserve is giving fodder to reporters, including those covering the mutual fund beat. While much of the coverage focuses generally, the Fed papers did reveal the extent of borrowing by the Reserve money funds, that more than Reserve's funds were at risk of breaking the buck and one name that is notably absent despite being one of the largest money fund advisors.

Daisy Maxey at the Wall Street Journal provides the names of which mutual fund firms were selling asset-backed securities through the Asset-backed Commercial Paper Money-Market Mutual Fund Liquidity Facility (AMLF).

Those mutual fund advisors include nine of the 10 largest money mutual fund advisors: Fidelity Investments [see profile], J.P. Morgan Chase & Co. [see profile], BlackRock Inc. [see profile], Federated Investors Inc. [see profile], Dreyfus Corp. [see profile], Charles Schwab Corp. [see profile], Goldman Sachs Group Inc. [see profile], Columbia Management [see profile] and Morgan Stanley.

The absent name according to the WSJ: Vanguard [see profile]. (In a separate report, Bloomberg Businessweek's Chris Condon points out that Legg Mason [see profile] also did not take the funds).

As usual, spokespeople for the fund firms danced with Maxey's questions. Dreyfus' person called the time "an unprecedented market environment" and that using the program was in the "best interest of our shareholders." BlackRock's said that the program "prevented a run" and that it quickly returned the funds to "normal functioning." Fidelity's person stated that the Boston Behemoth used the program "proactively." Schwab's person essentially said that their funds used the program to execute a trading strategy. Goldman Sachs, J.P. Morgan and Morgan Stanley kept mum and Federated and Columbia avoided the paper's queries altogether.

The final word goes to the SEC's top lawyer, Karrie McMillan: "The new SEC requirements will go a long way toward having more liquidity. If there were to be a lot of redemptions, the liquidity would help."

A separate article in the WSJ's "overheard" column highlights the fact that Vanguard's name is missing from among those money mutual fund advisors that lined up at the Fed's door. That article fails to add to the facts or the debate, though.

One angle no report picks up on is that at the time, at least one of those fund firms on the Fed list was implying that Vanguard was more at risk than other money fund advisors because of its financial structure. Since Vanguard is mutually owned by its funds' shareholders, it would not be able to tap public stock or bond markets as easily as its rivals. Or so went the argument (from a spokesperson for a publicly-owned fund firm no less). Perhaps it was that risk that kept Vanguard's management behaving more prudently? Or would that be a Boglehead's argument?

Actually, Vanguard's spokesperson Rebecca Katz kind of made that point to Bloomberg BusinessWeek. Katz told the news service that the fund firm decided before global credit markets froze to stop buying asset-backed debt.

"We had concerns that even the superior programs might have problems rolling over their paper, and therefore had ceased purchasing them," she said.

Meanwhile, BB points out that The Reserve [see profile] cost the Fed more than any other AMLF recipient. The article also recounts the Putnam Investment's sale of its Putnam Prime Money Market Fund to Federated Investors.

Reserve sold $19.4 billion of securities to the AMLF. That was the most of any money fund advisor, but not by as much as you might think. JP Morgan's money funds sold $17.7 billion to the AMLF in all of its funds with its Prime Money Market Fund selling $15.6 billion. Fidelity, the largets money fund advisor, sold $5.4 billion.

All told, the AMLF was tapped for $152 billion in sales, according to the article. 

Edited by: Sean Hanna, Editor in Chief

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