Reserve Shutting Down Second Troubled Fund

Reserve Management has shut down its U.S. Government Fund, the second fund it has liquidated, and has given no indication yet of when investors can expect their money to be returned.

 

Illiquid market conditions are preventing it from returning the fund’s $10 billion in assets to investors, the company said. Although Reserve said the value of the underlying assets of the fund’s shares was $1 as of Tuesday, Reserve did not promise those investors can expect full repayment of shares.

 

“We can’t imagine the government not backing these securities, which is another way of saying we expect to recover the full amount when they mature,” Bruce Bent, Reserve vice chairman and president, told investors in an online notice. The fund’s short-term securities are simply illiquid, he said.

 

As markets conditions improve, the company said in a separate statement, the fund will “restore liquidity to investors. We will liquidate assets as soon as we can, but we don’t think it is in our shareholders’ interests to sell at fire-sale prices."

 

Except for the Primary Fund’s $785 million exposure to Lehman Holdings commercial paper, now worthless, “we have no reason to think our investments have any credit problems,” Reserve Management stated. “Of course, things can change, particularly considering the continued global fiscal problems, so we can’t we certain about whether we’ll be paid in full at maturity. But right now, we believe we will.”

 

Beginning Oct. 2, Reserve began posting the holdings of all of its funds’ holdings as of the close of business the previous day, along with the holdings’ maturity schedule. As of that date, for instance, the U.S. Government Fund held $1.65 trillion of debt in Fannie Mae with various maturity dates extending as late as Oct. 7, 2009. The fund held another $4.38 trillion in Federal Home Loan Bank notes with the latest maturity of Dec. 28, 2009.

 

As to the charge that Reserve tipped off some investors on Monday, Sept. 15 that the Primary Fund had broken the buck, the firm vehemently denied the allegations.

 

“The notion that the Reserve would secretly tip investors with material nonpublic information and create a ‘run’ on the Reserve Primary Fund is absurd,” the company said. “The fund’s portfolio holdings were available to any investor who asked, including the people who have sued us. Shareholders in the fund should be outraged that these lawsuits are causing the fund to waste valuable time and effort in litigation at a time when all efforts should be focused on getting money back to investors. When the dust settles, we are confident that the ‘insider trading’ allegations will be dismissed.”

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