Morgan Stanley Propped Up Money-Market Funds With $23 Billion

Morgan Stanley Propped Up Money-Market Funds With $23 Billion

Oct. 27 (Bloomberg) -- Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from ``various available stabilization facilities.''

Morgan Stanley may have relied on one or more programs set up by the Federal Reserve in the past month to prop up the $3.54 trillion money- market fund industry, analysts said. The Fed has taken steps to restore investor confidence shattered by losses last month at the Reserve Primary Fund, the oldest U.S. money-market fund.

``The outflows in money-market funds were unprecedented, savage'' said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, firm that tracks the industry. ``Broker-dealers in particular got hard hit because of concerns about their parent companies.''

Morgan Stanley bought the fund assets to ``ensure that redemption obligations were met amidst illiquid trading markets,'' Erica Platt, a spokeswoman for the firm, said in an e-mailed statement. Fed spokeswoman Susan Stawick declined to comment on whether Morgan Stanley had used central bank financing to aid its money-market funds.

Run on Funds

Individuals and institutions use money-market funds to earn a yield until the cash is needed. They are considered the safest investments after bank deposits and U.S. Treasuries, in part because they buy only highly rated fixed-income securities with an average maturity of 90 days or less. That reputation was undermined by the Sept. 15 bankruptcy filing of Lehman Brothers Holdings Inc.

The following day, the $62.5 billion Reserve Primary Fund said it wrote down to zero the value of $785 million of debt issued by the investment bank. That caused its asset value to fall below the $1-a-share purchase price, the first money-market fund in 14 years to break the buck. New York-based Reserve Management Corp. froze the fund.

The news triggered a run on prime money-market funds, which buy both corporate and government debt. Shareholders yanked $488 billion during the month from prime funds, according to data compiled by Westborough-based iMoneyNet.

Morgan Stanley shares fell as much as 69 percent during the week of Lehman's bankruptcy filing to a low of $11.70. The company's money funds have remained at $1 a share ``during the unprecedented market turmoil,'' Platt said in the e-mail.

Two Solutions

BlackRock Inc., the biggest publicly traded U.S. asset manager, said last week that investors pulled $53.8 billion from its prime money-market and securities-lending funds during the last two weeks of September. The funds, which have regained $13.8 billion since Sept. 30, met the redemptions with cash on hand and securities sales, according to spokesman Brian Beades.

Morgan Stanley injected cash into its money-market funds by purchasing their investments in municipal debt, certificates of deposit and commercial paper, which had become difficult to sell on the open market, according to its 10-Q filing with the U.S. Securities and Exchange Commission. The move permitted Morgan Stanley's funds to repay shareholders without having to sell the securities at a loss.

Morgan Stanley, which had $134 billion of money-market assets as of Aug. 31, didn't specify in the filing which funds had outflows. According to monthly notices sent to investors, its Prime Portfolio dropped to $10.4 billion from $36 billion during September and its Money Market Portfolio fell to $5.8 billion from $14.7 billion.

Fed Role

Both Morgan Stanley funds had more than 55 percent of assets in commercial paper at the end of August, according to the investor notices. On average, prime money-market funds had about 45 percent of assets in the corporate IOUs at the end of August, according to iMoneyNet.

Platt declined to describe the ``stabilization facilities'' that primarily funded Morgan Stanley's securities purchases from the money- market funds. The most likely source was the Fed, which has set up at least five funding facilities to help ease the credit crunch, including one unveiled Sept. 19 to provide banks and some brokerages with loans to buy asset-backed debt from money-market funds.

`Only Choice'

In addition, the Fed two days later approved applications by Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies -- ending the era of stand-alone investment banks -- and increased the availability of loans to the two firms. The Fed announced a Money Market Investor Funding Facility last week that will provide up to $540 billion in loans to buy assets, including commercial paper and certificates of deposit from funds hit with redemptions.

``Morgan Stanley faced the same problem as every other firm: the markets were very illiquid,'' said Brad Hintz, a securities-industry analyst at Sanford C. Bernstein & Co. in New York. ``Its only choice for financing was to go to the Fed.''

BLOOMBERG