Tuesday, October 27, 2009
Breaking the Buck
One of the casualties in last falls financial crisis was the Reserve Primary Fund which broke the buck after its holdings of Lehman paper became worthless with Lehman's bankruptcy.
It has been repeatedly claimed (large pdf file, see page 10) that this was only the second time a money market had broken the buck. The previous instance having occurred in 1994. This claim is false as I have reason to know as I was a shareholder in the Merrill Lynch Ready Assets Trust on August 27, 1982 when it broke the buck. To be sure it didn't break it by very much, the value of a share falling to about $.999671. This was before the SEC adopted penny rounding (allowing money market funds to round their value to the nearest penny) in 1983. Contrary to current propaganda by the money market fund industry this was not the end of life as we know it. The fund computers had no trouble dealing with this event and as far as I know there was no panic or run on the fund.
In my view the SEC was wrong to allow penny rounding in the first place and should take this opportunity to eliminate it. It is ridiculous that some fund computers can not handle prices other than $1.00. And if small fluctuations were visible this would encourage the funds to operate in a more conservative way. Finally this would discourage runs because if fund assets are fairly valued every day there is no advantage to redeeming first when a fund runs into trouble. Unlike the case at the Reserve Primary Fund where many investors were able to get out whole sticking the slow and trusting with the entire loss.
The picture is a scan of one of the two letters I received concerning Ready Assets breaking the buck.