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By Jason Simpkins
A short-term institutional bond managed by General Electric Asset Management suffered such extreme losses from mortgage and asset-backed securities that it has offered investors the option of redeeming their holdings at 96 cents on the dollar. Barron's first reported the losses in the General Electric (GE) fund on Wednesday.
The GEAM Trust Enhanced Cash Trust is an enhanced-cash fund, which means it aspires to provide a higher yield than a conventional money-market fund while preserving principal and maintaining an asset value of $1 per share. When a fund's shares drop below $1, it's known as "breaking the buck," which is exactly what the $5 billion GEAM Trust Enhanced Cash Trust did.
It is only the second time in history an enhanced-cash fund has done so. The only money-market fund to ever fail was Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives.
According to Barron's, a Nov. 8 e-mail from the company said the fund had "sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist." As a result, outside institutional investors took a 4% hit to their holdings, a significant loss considering the one-year return on the fund through June 30 was 5.49%.
All outside investors in the fund, who, according to spokesman Chris Linehan, accounted "several hundreds of millions of dollars," pulled their money, Bloomberg News reported. Most of the fund's money before the redemptions came from GE's corporate pension plan, and remains invested. That means the company's benefit and pension plans could suffer additional losses from the fund, as more securities are liquidated.
The setback at the GEAM Trust Enhanced Cash Trust is just the latest in a series of crises-level events being faced by funds in the money markets and short-term bond markets. Many such funds have more leeway to boost yields by buying lower-rated – but higher-yielding – securities, which has left many of those higher-yielding funds staring directly at the problems in the global credit markets.
"When you get involved in this contest for when you can make three basis points more here or two basis points more there, that's insane," Bruce Bent, creator of the first money-market fund in 1970, told Bloomberg, "It's not what I designed my money fund to do."
Bank of America Corp. (BAC), and others, are reportedly propping up their money-market funds in a frantic effort to cushion against possible losses on debt issued by structured investment funds.
Bank of America, the nation's second largest bank, said Tuesday that it would provide up to $600 million to funds that bought asset-backed securities. Legg Mason Inc. (LM), Cheyne Debt, and SunTrust Banks Inc. (STI) have taken similar steps to ensure the security of their riskier assets.
Structured Investment Vehicles (SIVs) were set up by banks and investment firms to profit by borrowing money at low rates and owning securities that pay higher yields. They sell short-term debt, including mortgage-backed securities. Investors have retreated from these types of holdings since securities backed by subprime mortgages began defaulting in record numbers back in August.
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