Fears about money-market funds grew and more funds closed or struggled, as investors pulled money out of the generally conservative investment vehicles.
Boston-based Putnam Investments said it would close its $12.3 billion Prime Money Market Fund, which is offered to institutional investors, as of 5 p.m. Wednesday, and distribute its assets due to "significant redemption pressure." The fund has no exposure to Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc. at the parent-company level, Putnam said in a statement, but was closing due to a reaction to marketwide liquidity issues.
"Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities," the statement said. For that reason, the fund was closed to "ensure equitable treatment of all fund shareholders," it said.
Reserve Management Corp., which rocked the more-than-$3-trillion money-market fund industry with news that its Primary Fund is losing money, on Thursday said the net asset value, or NAV, of two of its other funds have dropped below the $1-per-share level as well. The loss came as a result of exposure to defaulted Lehman Brothers commercial paper.
The NAV of the Reserve Yield Plus and Reserve International Liquidity funds were set to 97 cents and 91 cents, respectively, as of 5 p.m. Tuesday, the New York money manager said in a statement on its Web site dated Thursday.
In addition, Bank of New York Mellon Corp. said it would isolate the Lehman assets in its $22 billion Institutional Cash Reserve Fund, which account for 1.13% of the fund, into a separate structure to maintain liquidity and treat clients fairly. The NAV of the fund, which is designed to work like a money-market fund, fell below $1. The Institutional Cash Reserve Fund has no connection to the Dreyfus fund family.
"The entire industry is operating in highly unusual market conditions," the firm said in a statement. "We are continuing to monitor very closely all market-related activity in our money-market, cash and securities lending operations."
The news came as other sponsors of money-market funds rushed to reassure investors about their funds' safety and as some stepped in to support their funds. In addition, the Money Fund Report noted that money-market funds had experienced their biggest one-week outflow ever in the week ended Tuesday. Money-fund assets fell by $89.38 billion in the week, with institutional investors withdrawing $93.57 billion and individual or retail investors adding $4.19 billion, according to the report, published by iMoneyNet Inc.
"That is the largest we've ever seen for a one-week net outflow," said Connie Bugbee, managing director at iMoneyNet. "The second-largest was in the $50 billion-dollar range in June of this year." While part of that outflow was the result of a quarterly corporate tax due date, much of its was also likely due to outflows from the Primary Fund, Bugbee said.
Preliminary money-market fund data being reported Thursday show continued outflows in prime money-market funds, and significant inflows to government money-market funds, Bugbee said.
Peter Crane, president of Crane Data LLC, which also tracks flows to money-market funds, said assets to money funds declined by $78.71 billion, or 2.6%, Wednesday, the day after the Reserve Primary Fund reported its loss. Some $32.3 billion, or 41%, of that was from Reserve funds, Crane said. Money-market fund assets decreased $143.44 billion, or 4.8%, in the week through Wednesday, to about $3.1 trillion, with the Reserve funds responsible for $59.9 billion of that, Crane said.
Taxable seven-day yields fell 0.02% to 2.11% Wednesday and are up 0.02% over the week through Wednesday, according to Crane. The average seven-day simple yield rose 0.01% to 2.29%, Crane said.
Reserve Management Corp. said Tuesday that the NAV of its Primary Fund, which at one time had $62 billion in assets, fell below 97 cents, marking the first time in 14 years that the NAV of a money-market fund had gone below the $1-per-share level, which these generally conservative funds strive to maintain. Crane said the Primary Fund's assets had dropped to $24 billion by Tuesday.
Redemption requests for the Primary and Reserve International Liquidity funds received prior to 3 p.m. on Tuesday will be redeemed at a NAV of $1 per share, the Reserve said in its statement. Requests received after that will be redeemed at the funds' end-of-day NAV on the day of the request, it said.
Redemption requests for Reserve Yield Plus Fund received after Tuesday will be redeemed at the fund's end-of-day NAV on the day of the request, it said. Requests received before then will be redeemed at 97 cents per share, the firm said.
The Reserve had no comment Thursday.
Standard & Poor's Financial Institutions Ratings reported Tuesday that the $260 million Colorado Diversified Trust's NAV had dipped below $1, due to a realized loss of principal of almost 2% stemming from Lehman exposure, and that it was liquidated Wednesday.
A spokesman for the fund's advisor, First National Bank, in Ft. Collins, Colo., said the fund's remaining assets — $264,000 — were transferred Wednesday into the Colorado Local Government Liquid Asset Trust.
Colorado Diversified Trust wasn't a registered money-market fund, but was run according to the rules which govern money-market funds, according to Peter Rizzo, a senior director at S&P's Financial Institutions Ratings.
As of Tuesday, Standard & Poor's had placed nine Reserve Funds on credit watch with negative implications based on the potential for material outflows in the coming days and weeks. They included Reserve Yield Plus, along with the Interstate Tax Exempt, Primary II, Treasury & Repo, U.S. Government, U.S. Government II, USD International Government, USD International Treasury & Repo and USD International Treasury funds.
No other money-market funds rated by Standard & Poor's are expected to break the $1 NAV level as a result of Lehman exposure, Rizzo said in an interview Thursday. As to the possible impact to money-market funds as a result of further market turmoil, Rizzo said, "It's a fluid situation. As credit changes day to day, funds must react in the way they feel is appropriate and in the best interests of their shareholders."
