More Downgraded, Money Market Funds at Risk; Rock Bottom Prices May be on the Horizon. Is Your Money Market Safe?
Structured investment vehicles, or SIVs, are under increasing scrutiny these days, following recent downgrades by Moody's Investors Service. This has some high-profile money market fund investors worried. Among those affected: Charles Schwab Advisor Cash Reserves and similar funds from Morgan Stanley, Barclays PLC, UBS AG, Deutsche Bank AG, as well as others.
As reported in a December 4, 2007, article in The Wall Street Journal, even though the funds hold a small percentage — 1 percent to 2 percent — of their investments in a SIV, if the SIV debt obligation held by the money fund lost its total value, it could result in a break-the-buck scenario whereby investors receive less than a dollar-for-dollar return on their investment.
The Wall Street Journal article noted that the $14 billion in SIV debt that was downgrade by Moody's, with another $105 billion put under review, “reflected the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities.”
The liabilities are commercial paper, money-market securities sold by banks and other corporations to investors. The proceeds of commercial paper are used to meet short-term operating needs. Commonly bought by money funds, commercial paper generally is regarded as a safe investment. SIV commercial paper, however, is a different story.
SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. Collateralized debt obligations, or CDOs, that own contract rights in mortgage securities are an example. SIVs use proceeds from the sale of commercial paper to pay the principal and interest owed on previously issued, commercial paper that has matured. The mortgage securities include risky subprime mortgages, which doesn't bode well for SIVs.
When subprime loans go into default, the value of the CDOs that hold interests in the loans, and the credit-worthiness of the SIVs that hold the CDOs, plummet. As a result, money funds have pulled back from investing in the SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations unless their holdings are sold at rock bottom or fire-sale prices.
Created in the late 1980s by a group of bankers at Citigroup, SIVs usually are not carried on a sponsor's balance sheet. The fire-sale issue creates a new set of challenges, however, as banks may be forced to consider taking the SIVs onto their balance sheets and supporting the billions of dollars in debt that SIVs might have to pay.
A SIV rescue plan of sorts has been set up by Citigroup, the largest sponsor of SIVs, and other banks in the form of a “super fund” of cash to provide liquidity to their SIVs. However, between October 19 and November 23, CDOs saw a 22% drop in market value. That performance, along with Moody's recent downgrades, has many analysts questioning whether a super fund is the answer. HSBC Holdings PLC has gone on record that it will shut down its SIVs and take $45 billion in asset-backed securities onto its own balance sheet.
In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.
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