The money market mutuals.
A note out from Citi’s North America bank team today answers a few questions people might have about money market funds’ exposure to Lehman debt in light of Reserve Primary’s collapse.
The numbers might of course, seem small, but forget not that only fractional moves in asset prices can cause money market funds to fail. Consider: Reserve Primary had $65bn aum and all it took was $785m of defaulting LEH CP to break the buck - about 1.2% of assets.
Some of Citi’s findings:
Bank of America: $400 mil - Per the Columbia Funds website, Bank of America has $400 mil of LEH CP exposure equivalent to 0.73% of the $55 bil Columbia Cash Reserves fund. BAC described their overall exposure to Lehman was “nominal” on its conference call Monday. We est 3Q EPS impact could be $0.05.
Wachovia: $494 mil - Per the Evergreen Investments website, WB has LEH exposure of $309 mil (1.94%) in Evergreen Instl Money Market Fund, $110 mil (1.66%) in the Evergreen Money Market Fund, and $75 mil (0.97%) in Evergreen Prime Cash Management Fund. Wachovia has said they have entered into support agreements with these funds. We est 3Q EPS impact could be ~$0.15.
Wells Fargo: $249 mil - Wells announced on 9/16 it will see an OTTI non-cash charge to 3Q08 for investments in LEH senior unsecured notes ($90 mil) and perpetual pfd securities ($109 mil). The notes currently trade at 25-30c and the preferreds are nearly worthless. WFC also had ~$50 mil unsecured LEH counterparty exp. WFC said it has no direct lending exp to LEH and no exp through Wells Fargo Advantage Money Mkt Funds. We est 3Q EPS impact could be ~$0.04.
SunTrust: $70 mil - STI has not disclosed its LEH exposure, however, the RidgeWorth Investments website shows a $70 mil holding, of Lehman Brothers VRN with a 9/28/08 maturity date in its Prime Quality Money Market mutual fund as of August 31. We were not able to find any additional Lehman issued paper in the subsidiary’s eight other money market mutual funds. Assuming STI provided full support, we estimate 3Q EPS impact could be ~$0.13.
New York Community: $37 mil - In an 8K NYB disclosed that it has $37 mil of exposure to Lehman through a $25 million senior note and $12 mil of two preferred issues. Though the company indicated that it will determine OTTI at the end of the quarter and that it believes it will have “minimal” impact to earnings, tangible and regulatory capital, we estimate maximum EPS impact could be $0.07.
Reserve Primary’s big problem, of course, was that it didn’t have a bank to stand behind it, which all the above funds do. The three Evergreen Investment funds, for example, which have large LEH exposures, have all been propped up by Wachovia.
The real issue here though is the fear the collapse of LEH and Reserve Primary has created. If you were a money market fund - so absolutely sensitive to the tiniest changes in asset risk - would you be lending CP to Morgan Stanley or Goldman right now? Not likely.
Money market funds are huge, lumbering and incredibly dull organisations, but they’re right at the heart of this crisis; their pullback from buying ABCP triggered the first big ructions in the market way back in August last year. Their pullback from financial CP buying led directly to the collapse of Northern Rock. Gillian Tett said it best:
If there is one painful lesson that investors have learnt over the past 12 months, it is that it is not just the smartest guy in the room who can blow up the system. The dull, plodding nerds can be lethal too.
