Now this is rather spectacularly catastrophic. Reserve Primary Fund - a $64.8bn money market mutual - has broken the buck.
Money-market funds are said to break the buck when their net asset value falls below $1 a share. The whole point of a money market fund is that that doesn’t happen.
Redemptions in Reserve Primary are being delayed by seven days, but assuming they come thick and fast thereafter, then the fund’s unwind could be rather painful: A $64.8bn firesale.
The cause of it all? The fund held $785m in Lehman commercial paper and MTM notes.
Buying short-term paper is the key activity of money market funds. Indeed, it’s the pullback of such extremely conservative funds from the short term debt markets that has so roiled banks. It’s what sent Northern Rock under, as well as did it in for SIVs, ABCP conduits and such like. Lehman’s failure is exactly the kind of event such funds were fearing, of course.
S&P has put nine other such funds on watch, thanks to suspected holdings of LEH paper. This could all get horribly messy. Money market funds are huge: US funds’ assets stood at $3.58 trillion last week.
We’ll be watching the Fed’s commercial paper metrics: if the outstanding figure falls, it will indicate yet another big pullback and a collapse in confidence. Liquidity will be very much back on the cards as a serious problem.
