Subprime fallout hits big money market funds
— -- The bank said it planned to set aside $600 million to cover potential losses in its money market funds and an institutional cash management fund.
The action by the second-largest U.S. bank is the largest recent step by a financial institution to ensure that its money funds aren't forced to reduce the value of their shares. Money funds have long appealed to people as super-safe investments. And they've kept their share prices fixed at $1 a share. But unlike banks' money market deposit accounts, money funds are not federally insured.
The crisis in subprime mortgages has jolted the market for the short-term securities that money funds invest in. Even so, assets in money funds recently hit a record $3 trillion.
Bank of America's move is a sign of how the crisis has gone beyond complex institutional portfolios to potentially affect everyday savers.
The bank said in a filing with the Securities and Exchange Commission that $300 million of the money will be used by a group of its money funds that are offered to individuals. The other $300 million will support an institutional cash fund, which isn't technically a money fund.
The money would help keep the funds' share price at $1 if some of their holdings defaulted.
Several other financial institutions have also bolstered their money funds:
•SEI, an institutional money manager based in Oaks, Pa., has set aside $129 million to support two of its money funds.
•Legg Mason, a Baltimore money management firm, has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
What's tripped up many funds are investments in structured investment vehicles, or SIVs. SIVs use short-term loans to buy longer-term assets, such as mortgage-backed securities, that pay higher rates. The SIVs with the worst problems were often invested in subprime mortgages — home loans made to borrowers with risky credit. As housing prices have fallen, many more subprime borrowers have defaulted than Wall Street had expected. As a result, some SIVs have stuck money funds with losses.
