Reserve Fund Update

Shefali Anand and Diya Gullapalli of the Wall Street Journal [subscription required] report today, "Reserve Fund Will Return $20 Billion to Investors."

We discussed the news item of The Reserve Primary Fund "breaking the buck" over two weeks ago. Today's WSJ report leads us to believe that the fund appears to be making good with it's investors.

By way of background, here's what happened two weeks ago:

The whole imbroglio started when the Reserve Primary Fund, flagship of Reserve Management Corp., announced Sept. 16 that its $1 net asset value had fallen three cents. That was partly due to its investments in Lehman Brothers Holdings Inc., which had filed for bankruptcy protection a day earlier. No money fund had "broken the buck" since 1994, and the news set off a firestorm.

The fund got massive redemption requests Sept. 15 and 16, and finally received an exemption from the Securities and Exchange Commission to suspend payments. Investors have asked to redeem almost the entire $62 billion that was in the fund before the problem hit. Only about $10 billion has been redeemed, said the Reserve spokeswoman.

Here's new information as of today:

The fund said it would redeem $20 billion to investors in the fund as of Sept. 15. As part of a liquidation of Reserve Primary, this move would reimburse investors for 30% to 40% of their original investments. The reason the outlay is $20 billion, a Reserve spokeswoman said, is that this sum is what is "currently available at the fund at this time."

The partial distribution is expected to occur on or about Oct. 13, and will be made pro rata in proportion to the number of shares each investor held as of the close of business Sept. 15. Shares that were tendered for redemption Sept. 15 but weren't paid off will be included in determining shares held by an investor. The fund will repay shareholders in cash, not in its underlying assets, short-term debt holdings.

It isn't clear, however, how much money they will get back for the remaining two-thirds portion -- or how the parent company will pay for this. The reimbursement for the rest may be 97% of the unpaid balance, or less.

Here are some "victims":

The latest casualty from the fund's problems emerged Tuesday with the liquidation of a small Florida health-maintenance organization with 16,000 members. The HMO's money was frozen inside Reserve Primary.

Retail clients were apparently not spared:

Many of those left in the fund are retail clients, including elderly investors in nursing homes, according to a person familiar with the matter. But other bigger institutional or corporate clients are stuck, too.

Finally, there is the inevitable shareholder lawsuit:

Meanwhile, Reserve Primary Fund investors who are stuck in the fund or were cashed out at less than $1 net asset value are fighting in court to force those who got out whole to pool back their money so everyone may share the fund's loss equally.

This is not over yet - stay tuned...