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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerEarlier in the week I talked about action some money market funds were having to take to protect their value and avoid having to "break the buck" thanks to the problems in the mortgage market. The Wall Street Journal reports today that the number of money market funds admitting to trouble is increasing {subscription required]. Today's story focuses on FAF Advisors, a unit of U.S. Bancorp (NYSE: USB) , which operates the First American Prime Obligations Fund. This fund posted a notice on its website that alerts its investors to the fact that the fund "entered into an agreement that provides that if a loss is realized on the notes issued by Cheyne Finance LLC, an affiliate of FAF Advisors will contribute capital to the fund, up to the amount of the loss, in an amount necessary to preserve the fund's price at $1.00 per share and to preserve the fund's AAA rating."
Cheyne Finance LLC is an SIV that went into receivership, so that's the one most are focusing on publicly, but as I've discussed before many money market funds hold assets from other SIVs in trouble. Five other fund groups that have moved to protect their funds or developed a plan under agreement with the SEC include Bank of America's (NYSE: BAC) Columbia Management Group, Credit Suisse Asset Management,. Wachovia's (NYSE: WB) Evergreen Investments, SEI Investments Co. and STI Classic Funds. Other funds that held Cheyne-related assets in recent SEC filings include Valic II Company fund, offered by a unit of American International Group, and RiverSource Cash Management fund.
The Journal reports the first fund to break the buck because of this mortgage mess was an enhanced cash fund, similar to a money-market fund, offered by GE Asset Management. It's value recently fell from $1 a share to 96 cents a share. This $5 billion GEAM Trust Enhanced Cash Fund serves institutional investors and seeks to outperform regular money-market funds.
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.
I expect to see even more money market funds enter this long list of funds in trouble. Check your money market funds and find out if they too are holding any of these 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 the "Pocket Idiot's Guide to Investing in Mutual Funds."
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Reader Comments (Page 1 of 1)
11-19-2007 @ 3:18AM
ALASTAIR said...
Money market funds were thought to be just about the safest investment short of Treasury Bills. Considering most of them have commercial paper in their portfolios, we have every reason to fear they may be more risky than just about any other investment at the moment. Together with banks holding housing related investments even Fed Chief Bernanke can't give a value to, why should investors anywhere in the world feel secure now? We aren't getting the clarity we need because nobody can or is willing to provide it for fear it leads to worldwide panic. Something terrible is about to happen.
Just get out of debt now and pay off your mortgage on the declining value of your home . Because that value isn't returning anytime soon. You can bank on it.
11-19-2007 @ 8:19AM
mark said...
Five years ago when the housing market was in the height of the boom, many of us "lay-people" without Harvard MBS's in finance realized a house of cards was being created. Finance companies lured millions of people into getting mortgages with low ARM's and "interest only" mortages. Many "professional renters" were lured into believing they could now afford a house, but the effects of the balloon payments and raising interest rates probably were never properly explained. Now our entire economy suffers because of those actions. Unfortunately our society seems to be teaching - Its OK to be in debt forever. Well, it's not. Shame on the big mortgage institutions for luring the unknowing into this situation. Shame on us all for allowing the current debt load the average American holds. When you make less than 5% on savings in a bank, but have to pay around 20% interest on a bank credit card- we all should strive to pay off all debt in as timely a manner as possible.