ICI Forms Money Fund Working Group
The Investment Company Institute is forming a money market mutual fund working group, to be chaired by Vanguard Chairman John Brennan. Senior executives from BlackRock, Federated Investors and JPMorgan will also serve on the panel. Brennan has already been heading an informal group of industry executives working with the Federal Reserve, U.S. Treasury and the Securities and Exchange Commission. The SEC indicated in September it will be reviewing Rule 2a-7, which pertains to money market funds.
Money market mutual funds experienced a record $200 billion run in the two weeks following the second fund ever to break the buck when, on Sept. 16, the net asset value of Reserve Funds' Primary Fund fell to 97 cents. Primary held $785 million in commercial paper in Lehman Brothers that became worthless when the firm suddenly filed for bankruptcy.
According to the ICI, money market funds finance 40% of commercial paper and 20% apiece of marketable Treasury bills and municipal securities. "Events in September and October underscore the vital role that the [mutual fund money] market plays in the nation's economy as a source of financing for U.S. businesses, financial institutions, consumers and municipalities," Brennan said.
Lazard Capital to Pay $2.8M for Gifts to Fidelity
In response to the Securities and Exchange Commission's charges that it spent more than $600,000 on improper gifts and entertainment for Fidelity Investments traders, Lazard Capital Markets is paying $2.8 million.
Most notably, the SEC said that Lazard Capital Markets executives wooed former Fidelity equity trader Thomas H. Bruderman with lavish trips, often on private jets, to Europe, the Bahamas, the Caribbean, Florida and Napa Valley, Calif., inclusive of meals, expensive wine and lodging. Lazard Capital Markets executives even supplied Bruderman with race car driving lessons, adult entertainment and $50,000 toward an elaborate bachelor party for him in Miami.
"Mutual fund traders owe their loyalty and allegiance solely to the funds and their investors," said George Curtis, deputy director of the SEC division of enforcement. "When registered representatives provide mutual fund traders with prohibited travel, entertainment and gifts, it may impair their objective judgment and harm investors."
David P. Bergers, regional director of the SEC's Boston regional office, added: "Brokerage firms and their supervisory personnel must reasonably implement procedures to prevent employees from illegally providing compensation for brokerage business. The Commission will hold them accountable when they fail to do so."
Lazard Capital Markets consented to the order without admitting or denying the findings, and agreed to be censured and forfeit questionable profits of $1,817,629, plus prejudgment interest of $429,379.04 and a $600,000 penalty. The SEC said that Lazard's brokerage commissions from Fidelity tripled between 2000 and 2004 to as much as $4 million a year.
Four former employees will also pay penalties of between $25,000 and $75,000 apiece and be suspended from the industry from between three months and nine months.
Fidelity already paid $8 million in March to settle the charges, while Jefferies paid $10 million in 2006. Fourteen of those two firms' employees have reached tentative or final SEC settlements in the matter, including Fidelity's famous portfolio manager Peter Lynch, who paid $20,000 over accusations he accepted concert and sports tickets.
Money Fund Flows Return After Historic $200B Run
After a $200 billion run on money market funds in September, the operations of, and flows to, money market funds are beginning to return to normal.
For one, interbank lending has begun to resume, making money market funds more comfortable about investing in short-term commercial paper, and less worried about having enough cash on hand to meet excessive redemptions.
For another, 20 major fund firms have supported money market funds that held securities in companies hit by the financial crisis with additional money to keep their net asset values whole. In addition, nearly all of the money market funds available signed up for the U.S. Treasury's temporary insurance program. On top of this, the government said it would loan more than $1 trillion to banks to buy commercial paper; the government also began buying commercial paper directly from issuers on Oct. 27, and it offered up to $540 billion in financing directly to money market funds.
Thus, after losing $200 billion in the first two weeks after Reserve Funds' Primary Fund broke the buck, about $120 billion in inflows have returned to money market funds.
Banks, Firms Fail to Return To Commercial Paper
The London interbank offer rates for three-month dollar funds reached a five month low of 2.70625% last Tuesday, but banks still failed to loan money, and commercial paper issuance also lags.
Although the influx of billions of dollars into the banking system, aggressive rate cuts and Federal Reserve's backstop of three-month commercial paper have eased the credit crisis, experts said it is far from over, Reuters reports.
In Europe, for instance, banks have deposited a record $364 billion with the European Central Bank. And the daily supply of commercial paper fell for a third straight day last Monday, while no 81-day-plus commercial paper was issued that day. By comparison, $7.47 billion worth of longer-term commercial paper was issued the previous Friday.
"We are generally in better shape, but we are not out of the woods," said Jason Brady, a portfolio manager with Thornburg Investment Management. "The CP market is still a bit of a mess."
Bogle Sees 'Radical' Improvement in Market
The price-to-earnings of stocks and other fundamentals have "improved radically," John Bogle, founder of Vanguard, told Reuters. "It seems to me that people have lost sight of the fact that the fundamentals have improved radically."
Bogle added: "The value of the U.S. stock market was $18 trillion a year ago, and now it's about $9.5 trillion. Anyone who believes that American business is worth $8 trillion less than it was a year ago, I think, is a fool."
That said, Bogle believes stocks were overvalued before the credit crisis hit. "So, there was some hot air in the system," he continued. "We blew it out, but I think we have overblown it."
Morningstar CEO Sees M&A Opportunities Ahead
"We have plenty of cash and investments on our balance sheet. I think we are in a good position to make acquisitions." That was a recent remark by Morningstar CEO Joe Mansueto to Reuters. Morningstar has $309.6 million in cash and investments on its balance sheet.
Mansueto also pointed to the recent strengthening of the U.S. dollar as another reason why he would be interested in making purchases, particularly overseas.
"Growth may have come down a bit, but we are still in a growth mode," he added. "We have a lot of open positions today at Morningstar, so we are still hiring people. We are not even looking at anything near layoffs."
Morningstar has been hot on the acquisition trail for the past two years, beginning with its purchase of Standard & Poor's mutual fund data business in March 2007 for $55 million. Morningstar purchased a data, media and investor relations website this past January for $51.6 million from Ipreo Holdings.
Those acquisitions helped Morningstar deliver an 11.6% increase in third quarter net earnings, of $22.2 million, or 45 cents a share, up from $19.9 million, or 41 cents a share, from the year earlier.
Moody's Downgrades Lehman Libor Fund
Due to what it calls deteriorating weighted average credit quality, along with a volatile and falling net asset value, Moody's has downgraded its rating for the Lehman Brothers Enhanced Libor Fund from Aaa/MR3 to A/MR5.
Moody's said the rating would remain on review for further downgrade, due to the funds risky holdings in securities backed by residential mortgages and credit card payments.
Earlier, on Sept. 18, Moody's placed all Lehman Brothers funds on review due to concerns over the parent company, which filed for bankruptcy three days prior.
Moody's said it "expects the portfolio's market risk to remain elevated due to market illiquidity and worsening fundamental performance in most asset classes in the fund's underlying portfolio."
Moody's explained that funds rated A are considered to be medium- to upper-grade investment vehicles, while MR refers to mutual funds' market risk, i.e. the volatility of their NAV as caused by holdings, interest rate risk, prepayment and extension risk, liquidity and concentration risks, currency risk and derivatives risk. Funds rated MR5 are judged to have very high sensitivity to changing interest rates and other market conditions.
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