Monday, November 19, 2007

Breaking the Buck (Not!)

In the last week, we have seen the first indications that some large money market funds may “break the buck”, i.e. because of current losses in asset-backed commercial paper, the assets of the funds will be worth less than $1.00 per share. In other words, the holders of the funds will receive a negative return on their cash investments (otherwise known as a “loss”).

Given the large investments by most money market funds in specialized investment vehicles (SIVs), which issue asset-backed commercial paper secured by mortgages and credit card debt, it is not surprising to see them beginning to take losses in the current environment. We read last week that General Electric has offered an option to buy out the outside investors in its GEAM Trust Enhanced Cash Fund for 96 cents on the dollar. In other words, these investors will lose 4% of their principle invested in the fund. The company has reported that all of those investors have taken the offer. Also, a “Wall Street Journal” article earlier in the week cited an effort by SEI Investments, a large mutual fund administrator, to “guarantee the buck” on money market funds managed for them by Bank of America.

We had been suspicious that this might happen for some time now, so we have moved all of our clients’ cash investments to U.S. Treasury money market funds (or the equivalent), thereby insuring that we will continue to receive some positive return on all of our cash investments. Even though it is widely assumed that major brokerages would support the value of their funds, a large exodus from money funds could impair their ability to do so on a timely basis. We feel it is important to be early in our decision if in fact this scenario develops.

We thought you would like to know that.

Jack and Peter Falker

Note: Jack and Peter Falker and the clients of FalkerInvestments Inc. hold positions in General Electric.