Publications & Resources

July/August 2008
Focus: Lending & Credit

WIB Service Corporation Report
Ensuring a Liquid Market for Loans: Proactive Steps to Alleviate a Crisis of Confidence

By Anne K. Scully, WIB Service Corporation President


“Upon the conduct of each depends the fate of all.”
- Alexander the Great

The market turmoil of the past year took its toll on money market funds – and nearly took to the brink several large funds that held investments in structured investment vehicles (SIVs) or collateralized debt obligations backed by subprime mortgage loans.

Bruce Bent, creator of the first money market fund in 1970, and chairman of WIB-endorsed VIP, The Reserve, has always been a leader in the money fund industry. During the last year, he has become a pivotal resource to whom the industry and media have turned to gain insight regarding the unfolding events. 

Given the approximately $3.5 trillion invested  in money market funds, he has criticized the funds’ investment strategies and management as inappropriate and the antithesis of their intended core competence – to provide effective cash management and to give investors immediate liquidity, a reasonable rate of return and safety – without any SIV or direct subprime exposure.  [The Reserve has approximately $105 billion in assets, holds no investments in SIVs, and has no direct exposure to the subprime mortgage market – residential/commercial MBS or CDOs.]

Mr. Bent recognized that, if not addressed, investors’ loss of confidence could lead to further market instability and illiquidity and concomitant implications for both the money funds and commercial banking industries. 

In January of this year, he wrote a letter to his investors in which he addressed the current headlines and what The Reserve was doing to ensure there is always a liquid and fluid market for both investors and the banking community. 

Entitled “The Safety of Your Reserve,” Chairman Bent outlines his firm’s philosophy and tenets of operation, many of which echo those of our community bankers. I am pleased to share his “Letter From The Chairman” below.

The Safety of Your Reserve

By Bruce R. Bent, Chairman, The Reserve

The current liquidity and mortgage crises have provoked everyone – institutions, corporations and individuals – to question just how safe their cash really is. And it’s about time.

The management of a money market fund is counter-cultural to the vast majority of organizations that sponsor or manage virtually all the money funds because these organizations are not specialists in cash management. Rather they manage stock and bond funds, the focus of which is the highest rate of return, not safety of principal, liquidity and soundness of sleep.

When we created the world’s first money fund in 1970, we clearly stipulated the tenets that define a money fund: sanctity of principal, immediate liquidity, a reasonable rate of return – all while living under the overarching rubric of boring investors into a sound sleep. Unfortunately, a number of firms that sponsor money funds, and a number of investors that selected them, have lost sight of the purpose of a money fund and the simple rules that guide them in their foolhardy quest for a few extra basis points. (A basis point is 1/100 of 1%, or $10 on $100,000 invested for an entire year.) The cash entrusted to a money fund is your reserve resource that you expect to be there no matter what. This is why we call ourselves The Reserve. Be you an individual, institution or a Fortune 500 company, this is your working capital to pay the rent, to finance inventory and receivables, to put food on the table. This is definitely not money to take risks with, and that is exactly how it should be managed.

We have been “accused” by some of asserting these tenets as if they were dogma, to which The Reserve pleads: Guilty as charged. If one focused on the goal of effective cash management, the truths to accomplish it are self evident and unequivocal, and reaching for yield while risking principal, liquidity or peace of mind is not among them. Let us hope that this dance on the precipice will re-instill the objectivity that is crucial to cash management in both the money managers and the investors who have exhorted them to take a flyer. After all, how dangerous could it be? It’s only cash management.

Cash is the very lifeblood of every individual and organization, yet despite the critical nature of cash, it is the least researched asset class, the results of which have created the current problems in the market place.

Thank you for your confidence in our Reserve. We never forget you have entrusted us with your reserve(s).

Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.