Three weeks ago I warned that you should review the holdings of your money market funds because they could be exposed to the mortgage mess. Well, today the Wall Street Journal reports that several money market funds are taking action to shore up their holdings because of exposure to one of the troubled SIVs -- Cheyne Finance LLC, which was downgraded to default status last month by S&P after the SIV went into receivership.
Bank of America (NYSE: BAC)'s money management arm, Columbia Management, is managing two of the money market funds discussed in today's Journal story - SEI Investments Daily Income Trust Prime Obligation Fund and SEI Daily Income Trust Money Market Fund. In my story three weeks ago, I warned about the SIV holdings in Columbia Cash Reserves Fund. I also warned about holdings in other Bank of America mutual funds managed by Columbia. Other mutual funds holding SIVs mentioned in the Journal's story this morning include STI Classic Funds from SunTrust Banks (NYSE: STI) and Credit Suisse Group money market funds.
All this is finally becoming public because S&P took the position that exposure to troubled SIVs like Cheyne Finance LLC was not "consistent with its criteria for receiving its highest ratings for money-market funds." Money market funds are not supposed to invest in low-grade securities. The big fear for investors and government regulators is that losses in these riskier holdings could drive the asset value of a money market fund below $1 a share or "break the buck." The only time that happened was in 1994 after a money market fund faced losses because of the 1994 derivative crisis.
The Journal reports that the fund managers named in this article have already contacted the SEC with plans to shore up their money market funds and avoid "breaking the buck." The plans involve financial guarantees by the money managers or banks for their SIV holdings. That means the managers or banks will take the loss from SIVs held in the money market fund if necessary rather than risk "breaking the buck."
The big question now is how big will these losses grow and when will a money market fund finally fall below $1 because the losses were just too great? As I mentioned in my story three weeks ago, Columbia Cash Reserves Fund had five of the biggest SIVs in its portfolio including Cullinan (HSBC Bank), K2 (Dresdner), Sigma (Gordian Knot), Links Finance (Bank of Montreal) and Sedna (Citibank International). In addition to these five, the other major SIVs are Centauri, Beta Finance and Five Finance -- all managed by Citigroup (NYSE: C) -- Tango Finance managed by Rabobank International and Victoria Finance managed by Ceres Capital Partners.
Check your money market funds and find out if they too are holding SIVs. Even better, find out if your mutual fund is insured by the FDIC. If not, consider switching to one that is.
Lita Epstein has written more than 20 books including "Reading Financial Reports for Dummies" and "Trading for Dummies.
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Reader Comments (Page 1 of 1)
12-10-2007 @ 3:47PM
Lewis Gunari said...
I find it amazing that the average American cannot comprehend the covert, back door tweeking and micro-managing taking place within the US banking system, at the hands of Bernanke, Paulson and Bush, who refuse to explain (comprehensively), to the public, the risk...Yet, they work overtime to restore confidence in a system, that at this point, remains as doomed to fail as it did three months ago...With no responsible explanation or warning given to those who remain ignorant of the risk.
It seems to me - The big shots have decided to try and rescue the ship, BEFORE giving the public the option to get into the lifeboat - Shameful!