AIG break the buck on their money fund Friday, September 26, 2008
AIG Life (UK), part of the US insurance group rescued by the US Government, has advised investors in its Premier Bond enhanced money market fund that it will wind-up the fund in mid December and that investors should not expect to receive all of their capital back. The $5.8bn fund is already closed to redemptions after facing a deluge of withdrawal requests it couldn't meet.
Similar to other enhanced funds, the AIG had a heavy weighting in illiquid paper in order to generate higher returns. Illiquidity and depressed prices mean the fund will suffer losses by selling early rather than holding the paper to maturity.
More on this here and here.
The fund had been popular because AIG offered a rate which was 50 to 70 basis points better than deposits offered by rival providers. It did this through a wrapper which meant that tax on the interest payments could be avoided.
This fund almost certainly falls outside of the US announced scheme to underwrite money funds as this was not offered by one of AIG's US entities.