Putnam closes money market fund; Columbia, Dreyfus act to save $1 a share net asset value

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More turbulence in the money market fund world as fallout from the Lehman collapse continues. Putnam closed its $12.3 billion Putnam Prime Money Market Fund while Dryfus and Columbia (a division of BofA) injected funds to keep the net asset value at $1.

The collapse of Lehman sent additional shock waves through the money market fund world.  Yesterday, the Primary Fund (RFIXX), one of the largest and oldest money market funds suspended redemptions for seven days while it tries to bring its net asset value back to $1.  Its $785 million holding of Lehman Brothers Holdings debt broke the buck. 

Investors began pulling cash out of money market funds and iMoneyNet show that assets dropped to $3.35 trillion from $3.44 trillion, a fall of $89.2 billion, one of the largest single day drops in the history of money  market funds.

This run has hit the $12.3 billion Putnam Prime Money Market Fund particularly hard and forced it to close the fund.  

"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," Putnam said in a statement. "The Trustees determined to close the fund to ensure equitable treatment of all fund shareholders."

It is unclear when shareholders will receive their money, and whether the payouts would maintain the fund's $1 a share net asset value.  If not, shareholders will receive less than they invested.

In addition, both Dreyfus and Colubmia (a division of Bank of America) stated that they will have to invest in select money market funds to keep the net asset value at $1 and protect shareholder money.

Dreyfus posted a statement on its website:

"Overall, our exposure to Lehman is limited, accounting for less than 1% of the complex's money fund assets. For the four funds with exposure to Lehman, here is what we have done. The Bank of New York Mellon Corporation ("BNY Mellon") entered into support agreements with Dreyfus Liquid Assets Inc., Dreyfus BASIC Money Market Fund Inc., Dreyfus Worldwide Dollar Money Market Fund, Inc. and Dreyfus Cash Management Plus, Inc., pursuant to which BNY Mellon will support the value of Lehman notes held in the Funds. These agreements are intended to ensure that a decline in the value of the Lehman notes will not result in a decline in the share price of the funds below $1.00."

In a statement posted on its website, Columbia writes:

"Bank of America and Columbia Management have taken a number of steps to manage the money market
mutual funds during this unprecedented period, such as providing capital support to the funds, purchasing
certain assets from the funds, and other measures to seek to ensure that the retail money market funds
continue to transact at $1.00 per share.** As we have stated previously, Bank of America may provide
additional support in the future to the money market mutual funds, but it is under no obligation to do so."

It's clear from this statement that if WaMu or other banks go under, money market funds will continue to face losses.  Money market funds generally hold short duration bonds and securities that are considered extremely safe.  But as we've learned, what was once considered safe no longer is.

One option for investors looking to part some cash in a safe place is to consider FDIC insured savings and money market accounts, or Certificates of Deposit (CDs).  Money market accounts, unlike money market funds are FDIC insured, as are certificates of deposit.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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