Should We Panic Yet? Another Institutional Money Fund Breaks the Buck

Bank of New York Mellon has just announced that a $22 billion institutional money fund which it manages has broken the buck because of exposure to Lehman Brothers. This has prompted another flight to quality and pushed yields on the 2 year note down to 1.35 percent. The 2 year swap spread is wider by 33 basis points. The 2 year/10year spread has jumped to nearly 195 basis points from 169 basis points at the open.

The frightening part about this story is that Bank of New York Mellon is supposed to be the best and the brightest at managing the short sector of the market. How could they have owned Lehman paper down to the bitter end? Here is the story via Bloomberg:

BNY Mellon Institutional Cash Fund Hit by Lehman Debt Losses
2008-09-18 16:23:17.440 GMT

By Christopher Condon
     Sept. 18 (Bloomberg) — An institutional fund run by Bank
of New York Mellon Corp. designed to work like a money-market
account fell to less than $1 a share after losses on debt issued
by bankrupt Lehman Brothers Holdings Inc.
     The $22 billion BNY Institutional Cash Reserves fell to
$0.991 a share on Sept. 16, according to an e-mail sent by a
bank representative to one client. BNY Mellon has “isolated the
Lehman assets in the fund into a separate structure,” Ivan
Royle, a spokesman for the New York-based company, said today in
an e-mailed statement.
     The fund invests cash deposited as collateral by clients
who borrow securities from BNY Mellon, the world’s largest
custody bank. Lehman debt represented 1.13 percent of the fund’s
holdings, according to the statement. Royle declined in an
interview to say whether investors withdrawing money from the
fund would realize losses.
     The BNY Mellon fund, while not a registered money-market
fund, is “generally managed to be compliant with the
investment-related provisions of” U.S. law governing the
accounts, according to a bank brochure.
     Reserve Primary Fund, the oldest U.S. money-market fund, on
Sept. 16 became the first in 14 years to fall below the $1 a
share price, known as “breaking the buck.” Investors pulled
60 percent of their money from the $62.6 billion fund on Sept.
15 and 16 before withdrawals were delayed.
     Money-market funds, considered the safest investments after
bank deposits and Treasury debt, strive to preserve a $1-a-share
net asset value, meaning that investors can always get back
their principal. Companies including Wachovia Corp. have pledged
to support their money-market funds with losses linked to
Lehman.

                        Monitoring Markets

     Royle said the fund represents less than 1 percent of the
bank’s total securities lending and “collective fund
activity.”
     He said the fund’s clients had been informed and the bank
was “continuing to monitor very closely all market related
activity to our money-market, cash and securities lending
operations.”
     BNY Mellon was down $3.07, or 9.3 percent, to $30.03 at
11:12 a.m. in New York Stock Exchange composite trading. It has
fallen 38 percent this year, in line with the Standard and
Poor’s 500 Financials Index.
     The company is the world’s largest custody bank,
administering $23 trillion in assets as of June 30.
     Lehman, once the fourth-largest U.S. investment bank, filed
for bankruptcy on Sept. 15. Reserve Primary held $785 million in
Lehman debt, which the fund revalued as worthless on Sept. 16.

Comments

[AlexS:]

"The Best and the Brightist". Wasn't that a book about how a bunch of really smart people got in over their heads in the Vietnam war? And wasn't that similar to the name of the geniuses that helped FDR extend the Depression for another 8 years after he took office?

2008 Sep 18 02:56 PM