The Money Market that busted $1

September 16, 2008 7:06 pm

Not a good sign of the things to come….Reserve Funds busted the $1 money market fund barrier

Sept. 16 (Bloomberg) — Reserve Primary Fund, a money-market mutual fund with $64.8 billion in assets as of Aug. 31, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers Holdings Inc.

Investor redemptions will be delayed as long as seven days, the fund’s owner, New York-based Reserve Management Corp., said today in a statement. Withdrawals requested before 3 p.m. New York time today will be paid at $1 a share

Bruce Bent, chairman of Reserve Management, opened the first money-market mutual fund in 1970. The only other money-market fund to inflict losses on shareholders was the Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.

“This is uncharted territory,” said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. “That’s certainly a stunner.”

The fund held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund’s board revalued the Lehman holdings as worthless effective at 4 p.m. New York time. Lehman filed for bankruptcy protection yesterday.

Bent often said the best money-market funds should be “boring.” He derided other funds that invested in securities linked to subprime mortgages and other risky debt.

“It exacerbates some of the flight-to-quality into Treasuries,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA.


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