Money market funds at risk?
Bank of America, stung by the fallout in subprime mortgages, acted to safeguard a bedrock investment of ordinary Americans: money market mutual funds.
The bank said it planned to set aside $600 million to cover potential losses in its money market funds and an institutional cash management fund.
The action by the second-largest U.S. bank is the largest recent step by a financial institution to ensure that its money funds aren't forced to reduce the value of their shares. Money funds have long appealed to people as super-safe investments. And they've kept their share prices fixed at $1 a share. But unlike banks' money market deposit accounts, money funds are not federally insured.
The crisis in subprime mortgages has jolted the market for the short-term securities that money funds invest in. Even so, assets in money funds recently hit a record $3 trillion.
Bank of America's move is a sign of how the crisis has gone beyond complex institutional portfolios to potentially affect everyday savers.
The bank said in a filing with the Securities and Exchange Commission that $300 million of the money will be used by a group of its money funds that are offered to individuals. The other $300 million will support an institutional cash fund, which isn't technically a money fund.
The money would help keep the funds' share price at $1 if some of their holdings defaulted.
Several other financial institutions have also bolstered their money funds:
- SEI, an institutional money manager based in Oaks, Pa., has set aside $129 million to support two of its money funds.
- Legg Mason, a Baltimore money management firm, has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
- SunTrust has received SEC permission to set up credit lines for two money funds.
What's tripped up many funds are investments in structured investment vehicles, or SIVs. SIVs use short-term loans to buy longer-term assets, such as mortgage-backed securities, that pay higher rates. The SIVs with the worst problems were often invested in subprime mortgages - home loans made to borrowers with risky credit. As housing prices have fallen, many more subprime borrowers have defaulted than Wall Street had expected. As a result, some SIVs have stuck money funds with losses.
Money funds fear that if any fund "broke the buck" falling below $1 a share, investors would flee. That's why they're moving fast to try to avoid defaults.
"What we're seeing is investment managers taking steps to make sure those who invest get their money," says Peter Rizzo, director of Standard & Poor's fund ratings group.
"Is a fund going to break a buck? I think the answer is no," says Peter Crane of Money Fund Intelligence.
Bank of America also said it expects to write down $3 billion of its debt and said the losses could worsen.
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