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SEPTEMBER 20, 2008

Bailout of Money Funds Seems to Stanch Outflow

Fear That Had Gripped $3.4 Trillion Market Abates, Ending the Reluctance of Funds to Buy
Vital Commercial Paper
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By DIYA GULLAPALLI and SHEFALI ANAND

The federal bailout of money-market funds seems to have stanched the outflow of investments
that bedeviled the industry this past week -- and ended the economy-threatening reluctance of
the funds to buy vital commercial paper.
As news broke that the government will insure fund assets and the Federal Reserve will lend to
funds, the fear that had gripped the $3.4 trillion money-fund realm abated. Larry Fink, chief
executive of asset manager BlackRock Inc., which sponsors nine money funds, said the
situation "is stabilizing." The investor rush out of money funds appeared to end, and the
commercial-paper market came back to life.
The news came too late for the embattled Reserve Primary Fund, which had helped touch off

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the crisis. Almost all the fund's investors have requested withdrawals. On Friday, the fund, run
by Reserve Management Co., announced it is suspending redemptions and delaying payment

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for longer than its previously disclosed seven-day hiatus.

On Friday, the U.S. Treasury said it was establishing a temporary guaranty program for the
money-fund industry. For the next year, it is insuring retail and institutional funds, though not
those investing exclusively in municipal and government debt. Funds must pay a fee to
participate in the program.

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The insurance program will be financed with as much as $50 billion from the Treasury's
Exchange Stabilization Fund, which was created in 1934. President George W. Bush had to sign
off on Treasury's use of the fund. Also, the Federal Reserve said it will essentially lend as much
as $230 billion to the industry, via banks, to be used against their illiquid asset-backed holdings.
The withdrawals from money funds were stunning. They generated by far the highest
redemptions on record, losing $144.5 billion through earlier this past week, according to AMG
Data Services. The industry had only $7.1 billion in redemptions the week before.
The redemptions subsequently created huge problems for the $1.7 trillion commercial-paper
market. Money funds weren't buying the paper anymore and were dumping it to cash out fleeing
investors. This threatened to tip the economy into recession by cutting off a vital funding source

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The funds' push into Treasurys helped pull their short-term yields down to zero, which backfired
on the money funds. On Friday, fund tracker Lipper said that more than 40% of the 1,263 U.S.

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taxable money-market mutual funds it tracks posted zero returns amid their negligible returns
from their concentration in government paper.

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Bailout of Money Funds Seems to Stanch Outflow - WSJ.com

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As a result of money funds' buyers strike, commercial paper became increasingly expensive,
soaring to 8% yields from a little more than 2% the week before as investors demanded to get
paid more for taking on increasing risk. Companies like International Business Machines Corp.
had to pay as much as 6% for such borrowing this week.

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The possibility of businesses shutting down for want of funding, said Paul Schott Stevens, the
Investment Company Institute president, was bracing for the government. He told Washington
officials of the worry conveyed by his talks with executives this past week at dozens of fund
firms.
Although system-wide statistics for money funds weren't immediately available Friday, anecdotal
evidence suggests that the investor exodus was receding, barring some new eruption.
Some money-fund customers canceled plans to redeem their investments in cash, according to
Legg Mason, which manages $187 billion in money funds. Meanwhile, funds across the industry
that had charged into the relative safety of Treasurys reversed course.

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At Federated Investors Inc., which manages more than $240 billion in money funds, fund
manager Deborah Cunningham noticed a swift decline in calls from worried clients on Friday.
The tone of money-fund investors who did call, she said, "is a thousand times lighter." Instead of
asking about the funds' exposure to troubled names like Lehman Brothers Holdings Inc. and
American International Group Inc., "today's question is: are you going to participate in the
insurance," she says. Federated money funds don't own Lehman or AIG paper.
Investors' historic run on money funds began after one of the largest, Reserve Primary Fund, on
Tuesday "broke the buck," or went under the sacrosanct $1-a-share net asset value. The cause
was its debt holdings in Lehman, which went to zero when the firm filed for bankruptcy. The

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money funds on Wednesday and Thursday. That stampede out the door caused another
prominent fund, the $12.3 billion Putnam Prime Money Fund (Institutional) to shut down on

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While the stock market cheered the federal rescue plan, small bankers decried the Federal
Deposit Insurance Corp.-like protection extended to money funds. Camden R. Fine, head of the

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fund's dip under $1 NAV eroded investors' confidence, causing them to pull out in droves across

Independent Community Bankers of America, cautioned that the federal plan risked draining
funding from small banks.

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Fallout from the Reserve fund debacle continued. Ameriprise Financial announced on Friday
that it has filed a suit in U.S. District Court in Minnesota against the fund's parent, Reserve
Management. Ameriprise and a subsidiary hold more than 300,000 retail-client accounts in the
fund. Third Avenue Institutional International Value Fund also filed a suit on Friday in U.S.
District Court in the Southern District of New York alleging, among other things, that Reserve
misled investors earlier in the week about its ability to preserve $1 net asset value. Reserve
declined requests for comment.

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Anusha Shrivastava contributed to this article.

Write to Diya Gullapalli at diya.gullapalli@wsj.com and Shefali Anand at

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9/11/15, 11:40 AM

Bailout of Money Funds Seems to Stanch Outflow - WSJ.com

file:///Users/saumitre/other/read/articles/finance/money-market-...

shefali.anand@wsj.com
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