At least three dozen money-market mutual funds were at risk of failing during the financial crisis, besides one that did end up collapsing, Moody's Investors Service said.
The report shows how shaky the nearly $3 trillion money-fund industry was after Lehman Brothers' September 2008 collapse.
Around the time that a soured Lehman investment triggered the demise of the $64 billion Reserve Primary Fund, Moody's says at least 36 other U.S. money funds were also at risk of "breaking the buck" — failing to ensure clients could get back at least a dollar for each dollar they put in.
But investors avoided losses because at least 20 companies spent billions to prop up their funds, Moody's said. Support included purchasing the soured investments that put the funds at risk, funneling company money directly into the fund, or securing a letter of credit.
Moody's also found 26 European money funds that were endangered. All told, companies with U.S. and European funds that were at risk spent about $12.1 billion, before taxes, to prop them up, Moody's found.
Damage to the normally safe-harbor investments from the financial crisis "was unlike any experienced during their previous almost 36 years of operation," said Henry Shilling, a Moody's vice president who wrote the report.
Money funds put clients' cash to work by investing in short-term debt and other safe investments. Returns are typically small, since money funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed.
Moody's report isn't the first disclosure of the near-failures at money funds during the financial crisis. The study attempts to tally up the total number that were endangered among the hundreds of money funds available to investors, and the costs.
The report also found 146 instances before the crisis where fund companies had to rescue funds to prevent them from breaking the buck.
A researcher with another firm tracking the money-fund industry, Peter Crane of Crane Data, said the $12.1 billion in pretax expenses cited by Moody's as having been spent to prop up funds far overstates the long-term costs. Many fund companies that tried to shield clients from losses by purchasing failed portfolio investments ended up selling those holdings later, sometimes without big losses, Crane noted. Money from those sales could eventually absorb some of the upfront costs to prop up a fund.
Crane said fund companies typically have systems in place to quickly rescue a fund if one investment in its portfolio sours, and the value of the fund's assets is in danger of sinking below the $1-per-share safety benchmark. So it's unlikely many of the 36 funds that Moody's cited would have ultimately broken the buck, he said.
"It was bad, but this makes it seem a lot worse than it really was," said Crane, publisher of the newsletter Money Fund Intelligence.
Money funds' largely unblemished safety record took its biggest hit when the value of Reserve Primary's assets dipped to 97 cents per share.
The fund disintegrated after announcing that the $785 million it held in Lehman debt had become worthless when the investment bank filed for bankruptcy protection. Institutional clients demanded cash back, and the fund's managers were forced to sell the fund's assets at steep discounts during the market plunge in September 2008.
While nearly all shareholder cash has since been returned, it was the first time individual money fund investors suffered losses since Reserve Primary launched the industry in 1972. The fund's collapse shocked Wall Street and stoked fears of a full-blown economic collapse.
As investors rushed out of money funds, the federal government stepped in with a temporary guarantee program that has since expired. The Securities and Exchange Commission is phasing in rules this year to make money funds safer.
Money funds held nearly $4 trillion in late 2008 as investors sought safe places to stash cash during the financial crisis, but they now hold only about $2.8 trillion. Investors have been fleeing the funds largely because yields have hovered barely above zero since early last year. Yields normally ranging from 2 percent to 4 percent now average 0.04 percent — four bucks a year for each $10,000 invested — making even bank account returns look good.
Low interest rates are depressing fund company profits as well as money fund yields. Moody's said those factors and others could leave fund companies less likely to continue propping up troubled money funds.
The companies "may be less likely to support their funds if they are exposed to significant losses in the future," Moody's said.
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