US money market funds suffered an estimated $197bn of net outflows last week as confidence in their safe-haven status weakened after one fund “broke the buck” and others closed. The outflows mark a new and potentially dangerous phase for the $3,400bn money market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets. Some fund operators face the prospect of either closing funds to halt redemptions or engineering more costly bail-outs of their funds. The funds were rocked last week by the news that the oldest, Reserve’s Primary fund, would return only 97 cents in the dollar. On Friday, shareholders in the Reserve fund filed a lawsuit in Manhattan, charging that the fund had failed to follow its objective of preserving capital and instead had pursued yield by buying $785m in Lehman commercial paper. The fund had to write down the value of that paper to zero and closed the fund.

This entry was posted by Gwen Robinson on Tuesday, September 23rd, 2008 at 5:35 and is filed under Capital markets. Tagged with Reserve. Edit this entry.