Money Market Mess

I keep my IRA account with a broker. On Tuesday night I had 3% of my portfolio allocated to options trades and 97% allocated to cash. Or so I thought.

Wednesday morning my cash suffered a 3% gap. In fact, my cash gets swept each night to the Reserve Primary Fund – a massive money market fund. They broke the buck Tuesday night and managed to fall to $0.97.

Here’s their excuse: “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.”

The full press release is here.

If you don’t want to read the whole thing, here’s the real kicker (for me anyway):

“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.”

My broker has now informed me that I will not be able to place any more trades in the account for the time being. They can’t be cleared if I can’t get the cash from the Reserve Fund. Awesome time not to be able to trade.

Tonight Reserve Funds posted a new press release. Two more of their funds broke the buck. The Reserve Yield Plus Fund priced at $0.97 and the Reserve International Liquidity Fund priced at an astonishing $0.91.

Here is a nice little excerpt from the Reserve Yield Plus Fund Annual Report dated March 31, 2008.

The cash entrusted to us is your reserve resource that you expect to be there no matter what. This is why we call ourselves The Reserve. Be you an individual, institution or a Fortune 500 company, this is your working capital to pay the rent, to finance inventory and receivables, to put food on the table. This is definitely not money to take risks with, and that is exactly how it should be managed.

We have been “accused” by some of asserting these tenets as if they were dogma to which The Reserve pleads: Guilty as charged. If one focused on the goal of effective cash management, the truths to accomplish it are self-evident and unequivocal, and reaching for yield while risking principal, liquidity or peace of mind is not among them…

…Thank you for your confidence in our Reserve. We never forget you have entrusted us with your reserve(s).

Bruce Bent
Chairman and CEO

Nice work Bruce.

I certainly hope these guys are the only ones dumb enough to invest money market assets in worthless paper, but I tend to doubt it. I would not be surprised to see a mass exodus out of non-treasury money market funds. I’m sure that won’t help those still trying to maintain the buck. There could be more carnage to follow. One result already is that everyone wants treasuries and they’re now at the lowest yield since at least WWII.

For information on opening an account with the Reserve Funds, click here.