Bailing Out More Money Market Funds

Lehman took $1.8 billion of assets from the funds onto its books, the New York-based firm said in a Securities and Exchange Commission filing yesterday. The company recorded a $300 million loss from the bailout in the first-quarter, according to a person familiar with the writedown.

“These bailouts show there are still challenges ahead of us,” said Sanford C. Bernstein’s Brad Hintz, the third-ranked securities analyst according to Institutional Investor magazine. “There will be more troubled assets held by other entities that brokers will have to take onto their balance sheets.”
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Some of the funds’ investments were either downgraded by ratings companies or declined in “fair value,” Lehman said in the filing. The firm agreed to waive or limit fees charged to certain funds, though it retains the right to recoup them “at a later point in time.” The bailed out funds were overseen by Lehman’s asset management unit.

The funds included so-called money-market funds and an enhanced-cash fund, the person familiar said, declining to be identified because the firm hasn’t made details public. The enhanced funds aim to provide a higher return than traditional money-market funds, considered the safest investment after Treasuries and bank accounts, according to the person. The Wall Street Journal reported the bailout earlier today, citing an unidentified Lehman executive.

Peter Crane, president of Crane Data LLC which tracks money market funds, said the three funds that closed down were probably enhanced ones while the money-market funds were kept operating.

“This sector is a dead man walking,” Crane said in an interview, referring to enhanced-cash funds.

Money managers including Denver-based Janus Capital Group Inc., Chicago-based Northern Trust Corp. and Legg Mason have bailed out money funds that purchased debt sold by structured investment vehicles, which use short-term borrowing to buy higher-yielding assets.