Current Status of the Reserve Primary Fund
Oct 6, 2008
The Reserve Primary Fund (“Fund”), a money-market mutual fund, “broke the buck” in mid-September when it fell below $1 a share in net asset value. This was due in large part to its losses on debt issued by Lehman Brothers Holding, Inc. Investors typically rely on money-market funds as safe havens for short-term or emergency cash; and insurers often rely on these funds as “safe havens” for investing their surplus.
As of September 12, the Fund held $62.6 billion in assets, including $785 million in bonds issued by Lehman Brothers. The Reserve announced on September 16 that it was marking down those holdings to zero, prompting a flood of redemptions. Reserve Management originally said it would take seven days to redeem investors. However, it subsequently received a temporary order from the Securities and Exchange Commission to further postpone payment.
The remaining investors in the Fund have been expecting to receive 97 cents on the dollar as liquidation plans are finalized. It is now becoming clear the Fund could return much less or take longer than shareholders had hoped.
As previously noted, the Fund had approximately $62 billion in early September. It has redeemed about $10 billion, and on September 30, it announced plans to distribute an additional $20 billion on a pro-rata basis in mid-October. Apparently the Fund was able to raise that money in recent weeks by cashing in liquid certificates of deposit and letting other debts mature. However, the Fund is now in a difficult position with its remaining $32 billion in assets, which is tied up in bank commercial paper. Prices for such debt have been declining in recent weeks, and yields have soared.
Shareholders of the Fund who did not redeem their shares before redemptions froze are suing. A class action amended complaint was filed September 19 in the U.S. District Court for the Southern District of New York. The complaint alleges the Fund “deviated from its stated investment objective by sacrificing preservation of capital and liquidity in pursuit of higher yields. This strategy was exemplified by the Fund’s disastrous and unreasonable concentration of $785 million face value in commercial paper issued by Lehman.”
If you have any questions or would like additional information, please do not hesitate to contact Colodny Fass.
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