I want to draw your attention to an article in today's FT on page 16 in the second session called Court Drama Puts Focus on Money Funds. this is a really quite an interesting article. and it I'll read you just the opening, the hook paragraph. which is why I chose it. But then I'll explain it a little bit to you. It says anyone wondering why Mary Schapiro, chairman of the Securities and Exchange Commission, has been trying to push reform of money market funds so doggedly should brave the stale air of Courtroom 6B in Manhattan’s federal courthouse some time over the next couple of weeks. You could do that, Manhattan's Courthouse, 6B. This is where the FCC is reliving a moment in 2008 when the oldest money market fund, the Reserve Primary Fund, suffered a run on the bank, and investors discovered it was owned, owed money by bankrupt Lehman Brothers. Okay, so and it goes on to talk about the guys who a started this fund a reserve primary fund which is a money market mutual fund and apparently it was the first one. money market mutial fund, and it was started in 1969, by, this guy, Bruce Bent, and his son, Bruce Bent. And they, they started, they started this thing, and what is a money market mutial fund? it's a mutual fund. We're used to maybe mutual funds, you think of Magellan as a stock mutual fund, or Fidelity, or something like that. But it's a mutual fund that holds money market assets. so it might hold, in fact, it might hold Euro dollar deposits, for example. Time deposits. Okay. It might hold commercial paper. Okay. They might hold repurchasing agreements. In fact, might. They do hold these things, and other kinds of short-term money market assets and in particular the kind of commercial paper they held was Lehman commercial paper, okay, which is unsecured short-term debt of Lehman Brothers here. They hold all this stuff, okay, and then they issue on the liability side things that are meant to be, to look and feel as if they're bank deposit accounts. Okay? But they're called money market mutual fund shares. Okay. And they, so they're met, it's like a mutual fund, in the sense that what's backing the value of the shares is the value of assets, okay. And in a normal money mutual market fund if you're used to this. You know, at the end of the day they, they calculate something called net asset value, the NAV. Okay? And that becomes the share price. So the number of shares divided into the net asset value, the market value of all of the assets, is the NAV. Okay? Now, the way money market mutual funds work They have sort of some funky accounting in order to keep the NAV equal to one. Okay. So that the shares look and feel as if they're deposit accounts. That if you were to sell one, you would sell it for $1. If you were to sell two, you would sell it for $2. You can, you can, you can treat it as if it's a deposit account. And the way they do that is by messing with the interest that they pay on the, on these deposits. So that all of the fluctuation, the net asset value is absorbed in the interest that, that's paid on, on the NAV. All of these things pay interest and where did these things come from? They came, the market imperfection if you will. regulatory arbitrage that this was a response to was something called regulation q, which forbid banks from paying interest on deposit accounts. it's like amazing to imagine that nowadays okay, but yes it was true. Okay that, thatbanks were forbidden to pay interest on deposit accounts and so Mr. Bent invented the money market mutual fund which did pay. Interest on things that were pretty much like deposit accounts, okay. And so naturally the world beat a path to his door and he built a whole business around this since 1969, okay. What happened in September of 2008 however, is that this commercial paper here suddenly became worthless, okay. when, when, when Lehman. Filed, and so there was not possible to absorb the fluctuation of the NAV in terms of interest, you would have to have a negative interest rate. Okay. And, so, and, and all the holders of these shares learned about this and said I want my money now. Okay, and there was a run on the bank. And that meant that they had to sell stuff and. And and, and ultimately shares were redeemed at 98 cents on the dollar, I think. So, it wasn't like there was a huge, like two cents of a dollar. It was 98 cents a dollar, because they didn't hold so much Lehman paper. You know, they were diversified. So, it wasn't as if somehow they lost all their assets. They lost their Lehma paper, okay, is what, is what they lost. So here's what the court case is about. apparently the [COUGH] apparently the, the SEC is, is claiming that the banks lied to their investors. Okay? That they said by, by telling them that they intended to prop up the fund with their family's cash when in fact, they had no such intention. And Bent says, it would have been impossible to do this. This is a run on a bank. OK? It's not a solvency thing. It's a liquidity thing. And I can't do that. I couldn't do it with all of my wealth. so, there's, they're suing them. OK? At the, at, at the moment. In courtroom 6 B. And you can go and, and, and have a look at that. what happened was that the, as a consequence of this, the Fed. It wasn't the Fed actually, it was the Treasury, essentially created deposit insurance for all mutual funds, okay. In the, in the aftermath of that. there's depotit, deposit insurance for, for regular banks of course. And there was no deposit insurance here. And so once the government is standing behind these shares, you know, end of story. The end, the, the, the run stopped right, right there. Okay. But Mary Shapiro is is is on a warpath. and she's the S, the SEC, so she's concerned about this. These are, she regulates these things. The, the securities. Money market securities part here.
