managed by New York-based money market fund inventor The Reserve, said late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero.
As of 4 p.m., Eastern, the value of the fund's share was 97 cents. The Reserve said that redemption requests received before 3 p.m. will be paid out at $1 a share. The company said Primary Fund will continue to accept new money.
While Primary Fund's Lehman holding was small compared to the fund's overall size, the fact that it froze redemptions reflects a surge in redemption requests by investors.
The size and speed of the withdrawals was stunning. At 3 p.m. on Tuesday, Primary Fund's assets stood at $23 billion, a $40 billion hit from the $62.6 billion in the fund on Friday, a spokeswoman for The Reserve told MarketWatch late Tuesday.
"Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption," The Reserve said in a prepared statement.
Retail account holders affected
Reserve Primary has both institutional and retail accounts. "This appears to be the first case where a retail investor will lose money in a money market fund." said Peter Crane, president of market research firm Crane Data in Westborough, Mass., though he called the situation "an anomaly."
Money market funds pride themselves on their liquidity and the safety of their investments. All money market shares are priced at $1 -- a figure so important to the industry that fund companies take losses to keep the share price from dipping below $1, which is known as breaking the buck.
"They didn't just break the buck, they shattered it," said Don Phillips, managing director at investment research firm Morningstar Inc.about The Reserve fund.
This is only the second time that a money market fund's net asset value has dipped below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate.
Phillips said the fact that The Reserve had to break the buck reflects the seriousness of its troubles. "People say that if you break the buck on a money market fund you're saying that you don't want to be in the money market business anymore."
Phillips speculated that because The Reserve is solely a money market shop, it didn't have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp. , would be able.
Fidelity, other money fund giants reassure investors
Some of the largest money-market fund providers sought to calm investors in the wake of The Reserve's announcement.
Fidelity Investments said that its money market funds are sound. "We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments," said Anne Crowley, spokeswoman, in an email response.
She added: "We have been proactive in keeping our money market funds safe and in protecting the $1 net asset value, which has always been our number one objective in managing these funds."
Fidelity's taxable, general purpose money market funds have no exposure to any Lehman Brothers entity, Crowley said. The taxable money market funds do have "modest" exposure to two issuers that are subsidiaries of troubled American International Group she noted.
"Fidelity is confident that these holdings will pay full principal at maturity," she said.
Vanguard Group also issued a statement reaffirming the integrity of its money funds.
"We are confident in the stability of Vanguard's money market funds," spokesman John Woerth said in an email. "Our largest money market fund is Vanguard Prime Money Market Fund which currently holds more than half of its assets in Treasury and agency securities. In addition, Prime Money Market Fund and our other money market funds have no exposure to money market instruments issued by securities dealers, including distressed issuers like Lehman and AIG."
At Wells Fargo & Co. a spokesman also noted that its money market funds are secure.
"None of the Wells Fargo Advantage Money Market Funds hold securities issued by or guaranteed by Lehman Brothers or American International Group. The value of our money market funds continues to remain stable and the net asset value of the funds remains at $1 a share," he said in an email reply.
A spokesman for brokerage giant Charles Schwab & Co. said the company "does not own any Lehman securities in the Schwab Money Funds."
On Monday, Wachovia said it would pump money into three Evergreen money market funds. Evergreen would not disclose how much is being put into the funds.
While money market funds are supposed to be liquid, they are permitted by law to postpone payment of redemptions by up to seven days. Any further delays would require regulatory approval, however.
The Reserve was founded in 1970 by Bruce Bent, and launched the first money market fund soon after. As of Friday, the company had $127 billion in assets under management, according to a spokeswoman. The size of the money market fund industry is about $3.5 trillion, according to iMoneyNet.
Federated Investors which has about $270 billion in money market fund assets, declined all comment for this story, including whether the Reserve's troubles or fears surrounding Lehman debt had affected its own funds.
BlackRock Inc. sent a letter to its money market shareholders on Monday telling them that its funds had no Lehman debt.
"We do not have any holdings of Lehman Brothers paper, nor is Lehman a counterparty to any repurchase agreements in our 2a-7 registered money market funds," noted Simon Mendelson, managing director in BlackRock's COO global cash management group.
The credit crisis has put pressure on money market funds, several of which have had to take steps to prop up their funds as the value of their holdings -- which frequently included mortgage-backed securities -- has declined. According to money Crane Data, 20 fund companies in the past 13 months have had to pour their own money into their funds to prevent them from breaking the buck. 
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