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Us money funds still vulnerable ny fed blog


NEW YORK, June 11 U.S. money market mutual funds are still vulnerable to heavy redemptions in times of financial turmoil, which could destabilize the broader banking system, Federal Reserve staff members said in blog post on Monday. Investors have been worried that the euro zone's debt troubles could spiral into another global crisis like the one of 2007-2009. Back in September 2008, the $65 billion Reserve Primary Fund, one of the oldest and biggest money funds, broke the buck, or its per-share value fell below $1. That happened because of the fund's heavy losses on debt holdings in Lehman Brothers, which had collapsed a few days earlier. The demise of the Reserve fund is seen as a watershed moment of the global financial crisis. It caused credit markets to dry up and led the Fed and major central banks to embark on unprecedented measures to stabilize the banking system. U.S. regulators have since enacted tighter rules to ensure another money fund will not break the buck again, but the New York Fed blog said weak spots in the structure of money funds remained, making them susceptible to runs by big institutional investors."These shareholders reportedly place great value on principal stability and are prone to fleeing money funds quickly at any sign of trouble," wrote staff members of the New York Fed along with an economist with the Fed Board of Governors.

The comments appeared in an entry, "Money Market Funds and Systemic Risk," published on the New York Fed's online blog, "Liberty Street Economics."A stampede out of a money fund compounds its losses as it is forced to sell less-liquid investments to meet redemptions. Less-liquid assets might be sold at sold at steep discounts, the blog said.

"For this reason, shareholders have an incentive to run from troubled money funds as they leave behind risks and costs to be borne by those who remain invested in the fund," the blog said. Since January 2010, the U.S. Securities and Exchange Commission has required money funds to hold more Treasury bills and other low-risk investments and securities with short-maturities in an effort to curb the $2.6 trillion industry's systemic risk. Money funds are major providers of short-term credit. They own more than 40 percent of all U.S. commercial paper and roughly a third of all certificates of deposit.

Still, their lack of a capital buffer and their tools to maintain $1 share value, including rounding share value, make them vulnerable to heavy redemptions in times of crisis."Investors still have incentives to run at the first sign of trouble," the four authors of the blog post said. Marco Cipriani is a senior economist at the New York Fed's money and payments studies group, while Antoine Martin is the function head of that group. Michael Holscher is a member of the bank's markets group, and Patrick McCabe is a senior economist at the Fed's Board of Governors. They said in the blog that in a future post, they would put forth a proposal for improving the stability of money market funds by making them less vulnerable to runs.

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Your money financing options open up for costly divorces


When big dollars are at stake in a divorce settlement - a situation faced by billionaire oilman Harold Hamm after his headline-grabbing breakup - the litigation tends to drag on for months, if not years. But a protracted court battle is expensive and may seem unaffordable for the "less moneyed" spouse divorcing an estranged partner with deep pockets. That's why a mini-industry has emerged to help finance the legal costs of breaking up with someone wealthy enough to make a long court fight worth the upfront expense."One of the first tactics a spouse will do to get the other to wave the white flag is run up legal fees against the other," says Brendan Lyle, chief executive of BBL Churchill, a New York firm that specializes in divorce financing."It builds pressure on the other spouse when one can drop $40,000 on court costs without breaking a sweat and the other can't. We're in there to help alleviate that problem."Divorce financing is a relatively new field, emerging in the United States around 2009. It is a small subset of a growing industry that gives access to third-party funding to prospective litigants that can't afford to fund their cases on their own. The size of the wider field is hard to peg because only two companies are traded publicly - Juridica Investments Ltd and Burford Capital Ltd - although a myriad of other financiers are in the business."It's just a fraction of cases that receive funding, but it is expanding dramatically," say Maya Steinitz, an associate professor at the University of Iowa College of Law in Iowa City, Iowa. Among firms that specialize in divorce, BBL Churchill loans money to clients, usually after receiving a retainer of $10,000 to $15,000."Most of our clients are wives of doctors, or husbands of doctors, hedge fund managers and finance company managers, accountants and accounting partners," BBL's Lyle says. Balance Point Divorce Funding, based in Beverly Hills, California, takes a different approach. It doesn't loan clients money, but structures agreements as investments in the outcome of the case.

"With a loan, you have an absolute obligation to repay and there could be scenarios where the lender gets more than the client," founder Stacey Knapp says. "We are in tandem with the client."Balance Point started in 2009 with funds from Knapp's own divorce settlement. Now Asta Funding Inc, an asset management company in Englewood Cliffs, New Jersey, backs the firm. When Churchill started, also in 2009, the firm fielded one application every two weeks, Lyle says. It now it gets about five a day. His company is currently backed by Three Hills Partners - comprised of private equity from Jon and Steve Sabes of Minneapolis and Patrick Preece of Greenwich, Connecticut.

EVALUATING CASES Divorce financing companies do a significant amount of underwriting - research to calculate the client's chances of prevailing and whether the potential settlement is worth the time and resources."We understand that there are limits to what we do and we are trying to make sure that all of our loans come through," says Lyle. Both Churchill and Balance Point step in only when the client has exhausted other avenues. Many first try to get their own lawyers or financial management firms to back the case, or ask the opposing party with deep pockets to pay the legal fees. The money the firms provide pays attorney costs and other expenses, such as bringing in a forensic attorney to testify on the client's behalf. The typical loan at Churchill is $250,000 and, on average, it takes 14 months to pay back.

Each case is different, says Lyle, but the interest rates are akin to credit cards, usually 16 to 19 percent. The most expensive loan to date that BBL Churchill has financed was $800,000 and the lowest amount is $25,000. Knapp, on the other hand, makes smaller investments and will refer clients who need more to Churchill. Her company does not require clients to put up any money as a retainer and all of her potential clients must vet the investment agreement with an independent attorney who has no tie to the case."The risk-reward analysis needs to be done, to make sure the loan makes sense," says Lisa Hanson, a Philadelphia-based financial adviser who specializes divorce financial planning."You'd want at least $500,000 in your settlement and it seems like typically you'd be looking at a marriage that has at least $4 to $5 million in marital assets. And it really should only be done if you have no other options."Rosemary Frank, a Brentwood, Tennessee, financial adviser, prefers that her clients borrow on an already-open home equity line of credit or use funds from the marital estate to pay for a divorce. She also recommends borrowing against a non-retirement portfolio, using the investments - stocks, bonds, mutual funds - as collateral. But sometimes that simply is not enough to foot the bill, Knapp says."Litigation funding levels the playing field," she says. "Money is the great equalizer. It means you had a shot."