Money funds' shares get shored up

Several companies that run money market mutual funds have been quietly stepping in and replacing some of their troubled assets to keep shareholders from losing money.

Money funds, which hold $3.5 trillion, have built a reputation as a safe and easily accessible investment. Though uninsured, they keep their share price at $1 so investors won't ever lose money. No retail money fund has ever had its share price drop below $1; "breaking a buck," as the industry calls it. The funds invest in short-term, high-quality securities, such as Treasury bills and commercial paper, IOUs issued by financially strong companies.

In the past year, though, several firms have sought permission from the Securities and Exchange Commission to shore up their money funds, often by removing securities issued by "structured investment vehicles," or SIVs. Many SIVs have run into trouble because they hold subprime-mortgage-backed securities.

The SEC sent a letter to Northern Trust on July 16, extending the time it could inject cash as needed to back three of its institutional money funds. Those funds had invested in notes issued by two troubled SIVs, Whistlejacket Capital and White Pine Finance. (Any cash used by the funds would come from Northern Trust, not the fund shareholders.)

The SEC issued a similar letter on June 25 to HSBC, allowing it to continue to support the HSBC Investor Money Market Fund.

The Northern Trust and HSBC money funds are just two of the latest that have needed to be propped up. Legg Mason said last month that it had taken a one-time charge of $155 million in the quarter to account for money it spent to shore up its money funds. Wells Fargo, SEI, Allianz Dresdner, Bank of America and Evergreen are a few of the other companies that have propped up their money funds since the subprime crisis began last August.

"The funds had paper in their portfolio whose price may be indeterminate," says Jeff Tjornehoj, a research analyst at Lipper. "It's far more expedient to remove the paper from the portfolio until the market has more clarity."

Money funds ran into similar problems in 1994. Then, about 20 fund companies asked the SEC for permission to buy out risky derivatives contracts from money funds. Twelve other companies acted to shore up tax-free money funds affected by the municipal-bond meltdown in Orange County, Calif.

Shareholders today should be reassured that fund companies are stepping up to the plate, Tjornehoj says. "The last thing any fund sponsor would do would be to allow its money fund share price to fall below a dollar."

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