Morgan Stanley injects $23bn into Money Funds Wednesday, October 29, 2008
Despite the US Government underwriting US domiciled money funds, Morgan Stanley had to inject $23bn cash into its money funds in September by buying securities such as US Treasuries to cover net redemptions on the funds which totalling $46bn, which is almost a third of the $134bn in such funds.
Morgan Stanley was able to refinance the purchases through a combination of depositing the assets with the Federal Reserve and via sales in the open market.
This action was to avoid the funds "breaking the buck", given the wave of redemptions which would have required liquidation of assets held by the funds in a climate of volatile prices.
I anticipate redemption levels will have been greatly reduced in October with the introduction of the Government guarantee that offers unlimited protection to investors in funds that have subscribed to the scheme. However, I also believe firms will still top-up funds to avoid breaking the buck, despite the scheme, given the reputational harm that would result from having to call on the guarantee scheme.
Presently, the regulatory capital requirement for fund management firms tends to be relatively low. The actions of firms in topping up funds may well prompt a review of whether their capital base is adequate to meet such reputational commitments, regardless of the actual legal wording that firms have no legal obligations to funds.