Banks and mutual fund managers are being forced to prop up their money market funds to prevent ratings agencies from downgrading the funds, as the credit crisis spreads further through the financial system, the FT reports on Wednesday.
Bank of America on Tuesday said it would spend $600m on supporting its money market funds, some of which were exposed to troubled securities.
Legg Mason and SEI Corporation are among others to have provided capital support to their money market funds in order to protect the funds’ credit ratings. A drop in the credit rating would not itself cause the fund to lose money, but it would result in many investors pulling their money out, creating an immediate liquidity drain and a dent in the funds’ reputation as a safe harbour, says the report.
Money market fund assets have risen by $640bn to a record $2,340bn in the year to date, according to iMoneyNet, the market information provider. Investors are pouring record amounts of cash into the funds, which have a reputation for safety but are not insured by the Federal Deposit Insurance Corporation.
As well as protecting the ratings, money market fund managers are trying to ensure the funds do not lose money.As the credit crisis mounts, the spectre of a fund “breaking the buck” - a dollar invested falling below its value - has loomed.
Wachovia Bank in the third quarter bought $1.1bn in securities from its Evergreen money market funds, and booked a $40m loss on the securities to avoid the money funds taking the loss.
Investors have not lost money on a US money market fund since 1994 and it is unlikely any fund operator now would allow such an event to occur.
Should a fund come close to “breaking the buck”, its parent company would bail it out.
A spokeswoman for JPMorgan, a big money market fund operator with more than $200bn, said that its funds did not contain any of the downgraded securities.