MutualFundWire.com: UPDATE 1 | Shrapnel From Lehman Implosion Hits Bent and Co.

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Wednesday, September 17, 2008

UPDATE 1 | Shrapnel From Lehman Implosion Hits Bent and Co.

The Reserve's Primary Fund has broken the buck and Reserve officials said Tuesday redemptions from the money market fund will not be transmitted for up to seven days.

For the full story on the the death of the Reserve and its Primary Fund, see MFWire's timeline.

Company officials said the value of the debt securities issued by Lehman Brothers Holdings and held by the fund, with a face value of $785 million, has been valued at zero as of 4:00 EST Tuesday. The fund's NAV is $0.97 per share.

The drop of 300 bps in the NAV means that The Reserve will have to come up with $1.95 billion to shore up the fund.

William Donoghue, chairman of W.E. Donoghue & Co., an advisory firm, tells the MFWire, "Bruce Bent is a maverick. This just proves that no good deed goes unpunished."

"The Reserve offers low fee products that get high returns. They did not have any extra money for one day crisis'," he added.

The company may look to some of their clients that they sub-advise money-funds for. These clients would not be well served if the fund was allowed to continue to run a deficit. The Reserve brand name would thus be weakened giving their funds less credibility.

This is only the second time a money-market fund has "broken the buck", in their entire history. The only other fund to do so was a small regional fund in 1994. In most cases the sponsors of the fund prop it up so that the NAV does not fall below a dollar.

The Primary Fund had assets of about $65 billion in August 31. Reuters reports that the assets of the fund had fallen 65 percent, to $23 billion, as of Tuesday.

The Reserve's announcement prompted the ICI's Paul Schott Stevens to issue a statement: "Today, Reserve Management Corporation announced that one of its money mutual market funds is unable to maintain a $1.00 net asset value (NAV), an event triggered by unprecedented market conditions that have affected a wide range of financial firms. This type of event—known as “breaking the buck”—is extremely rare." To see Stevens' full statement click here.

Other companies that have recently had to shore up their money funds include: US Bancorp's FAF Advisors, Columbia, Credit Suisse, SEI Investments and Evergreen Investments. (see MFWire, November 16, 2007)

Below is the statement issued by The Reserve on Tuesday:

Company Press Release

Statement from the Reserve The Board of Trustees of The Reserve Fund, after reviewing the unprecedented market events of the past several days and their impact on The Primary Fund, a series of The Reserve Fund and taking into account recommendations made by Reserve Management Company, Inc., the investment manager of The Primary Fund, approved the following actions with respect to The Primary Fund only:

The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00PM New York time today. As a result, the NAV of the Primary Fund, effective as of 4:00PM, is $0.97 per share. All redemption requests received prior to 3:00PM today will be redeemed at a net asset value of $1.00 per share.

Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption. The seven-day redemption delay will not apply to debit card transactions, ACH transactions or checks written against the assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000.

The Primary Fund will continue to accept purchase orders.

Effective tomorrow, September 17, 2008, the NAV for the Primary Fund will be calculated once a day at 5:00PM, New York time.