money market funds have big europe debt exposure

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staustin
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money market funds have big europe debt exposure

Post by staustin » Mon Jun 27, 2011 9:51 am

From Bill Fleckenstein:

In the most recent issue of Grant's Interest Rate Observer, an article headlined "Big fat zero" points out that the five largest money market mutual funds (three Fidelity funds, one Vanguard and one BlackRock), with combined assets of about $400 billion, have about 41% of their money in European bank debt.
After a paragraph of lecturing about the evils of greedy bankers and an incompetent fed, he states:

The point in all of this is that because no one is being compensated no matter where they put their savings, there is really no point in taking any risk at all. Thus, it probably makes sense for those who can to shift their holdings to Treasury bills.

Money market funds holding 45%+ positions in european debt is a little unnerving...

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Post by dbr » Mon Jun 27, 2011 9:56 am

It strikes me as unusual that an investor would have large fractions of a portfolio in MM funds. Usually such holdings are for convenience as conduits for transactions and for managing cash.

Is this a tempest in a teapot?

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Post by sscritic » Mon Jun 27, 2011 10:04 am


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From Larry Edelson

Post by steveinnh » Mon Jun 27, 2011 5:25 pm

An EXTREMELY IMPORTANT WARNING:

The venerable James Grant of Grant’s Interest Rate Observer recently published an article confirming what I suspected all along: Money Market Mutual Funds, or MMMFs, are plowing tons of their investors’ money into European banks and securities in search of higher yields.

Never mind the fact that they’re picking up, at best, one more basis point of yield (.01) for their investors — enough to double your principal in 6,931.8 years — they’re taking on huge lop-sided risks investing in Europe’s banks, just as the European sovereign debt crisis is starting to pick up momentum.

Grant cites the five largest money market mutual funds, which hold a total of about $230 billion of customer funds. An average of 41% of their assets are invested in Europe.

That’s insane. When Europe goes down the tubes, which it will, that money is at risk, big time. And even if Europe doesn’t totally meltdown, the euro is sure to get annihilated in the months ahead. So the currency risk alone could cause these funds to inflict some pretty heavy losses on their depositors.

The five money market mutual funds Grant cites are …

• Fidelity Cash Reserves (FDRXX)

• Vanguard Reserve Prime (VMRXX)

• Fidelity Inst. Prime MM Portfolio (FIPXX)

• Fidelity Inst. Money Market Portfolio (FNSXX)

• BlackRock Liquidity TempFund (TMPXX)

If you own any of these money market funds, just get the heck out. Period.

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Post by wintermute » Mon Jun 27, 2011 7:31 pm

Why keep anything in a MM fund? Credit risk with almost no interest. Keep some cash in your IRA for rebalancing (some (most?) are FDIC insured) and the rest in IRA CD's (Penfed, Discover, Ally, others). Even a 3 month IRA CD pays about 10 times what MM funds do now. Or even consider a taxable CD.

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Post by jmzf1958 » Mon Jun 27, 2011 8:20 pm

I have my money in VMMXX. Is this at risk? Thanks. Judy

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Post by Alan S. » Mon Jun 27, 2011 8:34 pm

Much less, but still about 17% in eurozone instruments per 2/28/11 annual report. But that could change considerably in 4 months time.

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Post by nisiprius » Mon Jun 27, 2011 8:36 pm

:oops: I posted wrong and misleading information. See post immediately below. I'm leaving my text below in place just so people will know what it was about.
jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
For starters, how much of it was in there before September, 2008? If, by any chance, this is a long-established holding, then it is guaranteed by a special Treasury guarantee program, which insured shareholder assets in participating money market funds as of the close of business on September 19, 2008..
Last edited by nisiprius on Tue Jun 28, 2011 10:47 am, edited 3 times in total.
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Post by Langkawi » Mon Jun 27, 2011 8:46 pm

nisiprius wrote:
jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
For starters, how much of it was in there before September, 2008? If, by any chance, this is a long-established holding, then it is guaranteed by a special Treasury guarantee program, which insured shareholder assets in participating money market funds as of the close of business on September 19, 2008..
From your link:
the guarantee program expired in September 2009

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Post by Alan S. » Mon Jun 27, 2011 9:10 pm

And the big question here is whether the guarantee would be reinstated if euro contagion spread to US MM funds. If not, it would be very de stabilizing.

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Post by Biil McNeal » Mon Jun 27, 2011 9:40 pm

If euro banks have a credit crisis and debt prices tank, will funds like VMMXX drop below $1?

What if treasuries drop and yields go up?

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Post by Grt2bOutdoors » Mon Jun 27, 2011 9:52 pm

This is all so vaguely familiar. Oh yes, now I remember, I was warning about this two years back how the money funds were investing in paper that was less than kosher. The safest of paper is FDIC insured CD's, US Treasuries and with a small measure of comfort, U.S. agency paper. Everything else offers varying degrees of risk. There is no free lunch - not even in money market funds - it doesn't matter what fund family offers it - when your dealing with billions of dollars, chances are you are investing in similar types of securities, even if the names are different.

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Post by Grt2bOutdoors » Mon Jun 27, 2011 10:00 pm

Biil McNeal wrote:If euro banks have a credit crisis and debt prices tank, will funds like VMMXX drop below $1?
What if treasuries drop and yields go up?
It could happen if there were to be a "run" on money funds. Money market funds only have so much in cash available, then they will liquidate securities to match redemptions and/or if they have a bank credit line available borrow from that and pay down the credit line with liquidated securities and/or new investment money that inevitably comes in from day to day. The real question you ought to ask yourself is how likely do you think it is for the fund to be able to redeem shares if say 25-50% of investors come running in the door at the same time and say "sell me out and wire money to me immediately"? If you are uncomfortable with that thought and the answer of "none", then you should not be investing, period. Think of it this way, money funds are supposed to be the most liquid of all investments, if such a scenario exists for those types of funds, what do you think it would be like if credit markets froze up again - think your short term bond fund is any more liquid?

This is a topic I'm surprised has not made it onto the Marketwatch articles that a few well known and respected writers post on. Just how accessible is your money?

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Post by Biil McNeal » Mon Jun 27, 2011 10:07 pm

How do I get cash out of VMMXX to regular cash in a Vanguard brokerage account?

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Post by steve roy » Mon Jun 27, 2011 10:11 pm

I have a related question somebody might be able to answer:

I've got a bunch of moolah in Vanguard's short term bond index fund. But I'm figuring that maybe better to have Vanguard's short term Federal or Treasury bond fund. What do you think?

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Post by Grt2bOutdoors » Mon Jun 27, 2011 10:47 pm

steve roy wrote:I have a related question somebody might be able to answer:

I've got a bunch of moolah in Vanguard's short term bond index fund. But I'm figuring that maybe better to have Vanguard's short term Federal or Treasury bond fund. What do you think?
Beta as of 5/31/11
Vanguard Short-Term Bond Index Inv 1.03
Vanguard Short-Term Federal Inv .85 Vanguard Short-Term Treasury Inv .65

It's like comparing apples to oranges - bond index holds alot of corporate names coupled with sovereign debt (republic of italy :roll: shows up on a couple of pages of their 1301 holdings - i wouldn't lend them a dime, much less at 2-3% interest, but that's just me.), finance subsidiaries of banks, some banks and subprime type shops. If your comfortable with it, keep it.

Short Term Federal is actively managed and holds mainly agency paper - Fannie Mae, Freddie Mac, FHLB, some Treasury Notes/Bonds. Since both Fannie and Freddie are guaranteed by the government wouldn't be too concerned about them. Treasury fund is just that, no surprises lurking under the hood about what it owns.

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Post by Elysium » Tue Jun 28, 2011 9:24 am

Chinese premier Wen Jiabao during his trip to Eurozone has promised increased purchase of Euro debt by China in order to strengthen Euro. China already has a very large stake in Euro and Eurozone is now China's largest trading partner. I think my miniscule amount in Vanguard PMM will be safe, considering what is at stake with China's billions in Euro debt.

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Post by dbr » Tue Jun 28, 2011 10:21 am

Biil McNeal wrote:How do I get cash out of VMMXX to regular cash in a Vanguard brokerage account?
I don't have accounts at Vanguard, but I would imagine you can go online and dinitiate an electronic transaction to move the funds from VMMXX to your brokerage sweep fund. You may have to first set up the funds for electronic transfer, but that may have already been done. That process for that should be available online as well.

Alternatively one can call Vanguard and have the money moved.

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Post by nisiprius » Tue Jun 28, 2011 10:46 am

Langkawi wrote:
nisiprius wrote:
jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
For starters, how much of it was in there before September, 2008? If, by any chance, this is a long-established holding, then it is guaranteed by a special Treasury guarantee program, which insured shareholder assets in participating money market funds as of the close of business on September 19, 2008..
From your link:
the guarantee program expired in September 2009
:oops: Shame on me. I edited my post accordingly.
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Re: money market funds have big europe debt exposure

Post by Valuethinker » Tue Jun 28, 2011 10:56 am

staustin wrote:From Bill Fleckenstein:

In the most recent issue of Grant's Interest Rate Observer, an article headlined "Big fat zero" points out that the five largest money market mutual funds (three Fidelity funds, one Vanguard and one BlackRock), with combined assets of about $400 billion, have about 41% of their money in European bank debt.
After a paragraph of lecturing about the evils of greedy bankers and an incompetent fed, he states:

The point in all of this is that because no one is being compensated no matter where they put their savings, there is really no point in taking any risk at all. Thus, it probably makes sense for those who can to shift their holdings to Treasury bills.

Money market funds holding 45%+ positions in european debt is a little unnerving...
Which banks and what paper?

Because if it is RBS or Lloyds, your backstop is the UK taxpayer-- owns 80% and 40% respectively.

I would presume the German and French governments would bail out their banks.

If it is Irish, Greek or Portugese banks, maybe Spanish, the risk is higher. Especially Greek of course.

Money has been flowing out of the first 3 -- rather than 'a bank run' what has been called 'a bank walk'. The cash supplier of last resort has become the European Central Bank-- the ECB now has huge ST deposits with those 3 banking systems.

Hang on. It's gonna be a fun ride ;-).

Or in terms of one of my favourite films (Airport: 1970), George Kennedy is the mechanic Patroni, and the 707 is stuck on runway 2-9er, with a bomb-struck plane with a damaged stabilizer coming in to a snow bound runways coming in. The airport controller, Bakersfield (Burt Lancaster) orders him out of the cockpit so the snowploughs can destroy the 707 and try to clear the wreckage from the runway in time:


Mel Bakersfeld (Burt Lancaster): Joe, this is Mel. There's no more time. Stop all engines and get out. Repeat. Stop all engines.
Cockpit qualified young man: Mr. Patroni, she won't take much more.
Joe Patroni (George Kennedy): Well anyway, she's gonna get it.
Mel Bakersfeld: Joe, the plows are moving. Shut down and hold on! Joe Patroni! Do you read me? Acknowledge!
Mel Bakersfeld: Joe! Shut down!
Cockpit qualified young man: Mr. Patroni? Don't you hear him? Shut down.
Joe Patroni: I can't hear a thing. There's too much noise. Hold on. We're GOIN FOR BROKE!
Cockpit qualified young man: [after the plane gets out of the ditch] The instruction book said that was impossible.
Joe Patroni: That's one nice thing about the 707. It can do everything BUT read.
[throws his chewed and soggy cigar over his shoulder]
Last edited by Valuethinker on Tue Jun 28, 2011 11:03 am, edited 1 time in total.

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Post by FabLab » Tue Jun 28, 2011 11:00 am

nisiprius wrote::oops: I posted wrong and misleading information. See post immediately below. I'm leaving my text below in place just so people will know what it was about.
jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
For starters, how much of it was in there before September, 2008? If, by any chance, this is a long-established holding, then it is guaranteed by a special Treasury guarantee program, which insured shareholder assets in participating money market funds as of the close of business on September 19, 2008..
But at least you could be commended on your usage of arresting colors. On my Mac, it came out in sort of an Army fatigue green and a teal blue. Very attractive :D
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Post by Valuethinker » Tue Jun 28, 2011 11:05 am

Dieharder wrote:Chinese premier Wen Jiabao during his trip to Eurozone has promised increased purchase of Euro debt by China in order to strengthen Euro. China already has a very large stake in Euro and Eurozone is now China's largest trading partner. I think my miniscule amount in Vanguard PMM will be safe, considering what is at stake with China's billions in Euro debt.
The ECB can indeed print Euros and buy the ST debt of troubled banks.

Whether it will do so is an interesting question. German politics say not.

But it CAN be done. Nothing is impossible.

We have nothing to fear but fear itself.

And our 3 main weapons are surprise, fear and a fanatical devotion to the Pope. No one expects the Spanish Default.

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Post by Valuethinker » Tue Jun 28, 2011 11:06 am

Biil McNeal wrote:If euro banks have a credit crisis and debt prices tank, will funds like VMMXX drop below $1?

What if treasuries drop and yields go up?
It is possible.

But if the Euro goes, US Treasury bonds will likely go up.

Note T Bills less than 1 month are paying negative interest right now-- trading at above face value.

We last saw that, I believe, in September-October 2008.

People are prepared to accept a negative interest rate from the US government.

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Post by Valuethinker » Tue Jun 28, 2011 11:08 am

dbr wrote:It strikes me as unusual that an investor would have large fractions of a portfolio in MM funds. Usually such holdings are for convenience as conduits for transactions and for managing cash.

Is this a tempest in a teapot?
Conduit, or SIV, has a very specific crash-specific financial meaning.

In a sense, the 2008 crash began with conduit meltdowns, which began in 2007 (it was all to do with the Asset Backed Commercial Paper meltdown).

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Post by dbr » Tue Jun 28, 2011 12:26 pm

Valuethinker wrote:
dbr wrote:It strikes me as unusual that an investor would have large fractions of a portfolio in MM funds. Usually such holdings are for convenience as conduits for transactions and for managing cash.

Is this a tempest in a teapot?
Conduit, or SIV, has a very specific crash-specific financial meaning.

In a sense, the 2008 crash began with conduit meltdowns, which began in 2007 (it was all to do with the Asset Backed Commercial Paper meltdown).
Well, I am certainly not talking about that, obviously. I'm just talking about a guy with a few hundred thousand dollars invested who has a money market fund and a checking account with half to a few ten thousand dollars in them from time to time because it is the place cash goes when buying and selling things to fund withdrawals or to tax loss harvest or to rebalance or to receive distributions from funds or a pension or Social Security or to take an RMD. I can use the word conduit in an ordinary sense for that if I want to.

The distinction is between that and someone with the same few hundred thousand dollars who has half of that in a MM fund for the long run as a deliberate choice to keep the principal safe and earn a good yield.

The latter would be an example of something that wouldn't very often be a choice people would make. I bet almost everyone has a money market fund as in the former case, or a functional equivalent to it.

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Post by Valuethinker » Tue Jun 28, 2011 12:31 pm

dbr wrote:
Valuethinker wrote:
dbr wrote:It strikes me as unusual that an investor would have large fractions of a portfolio in MM funds. Usually such holdings are for convenience as conduits for transactions and for managing cash.

Is this a tempest in a teapot?
Conduit, or SIV, has a very specific crash-specific financial meaning.

In a sense, the 2008 crash began with conduit meltdowns, which began in 2007 (it was all to do with the Asset Backed Commercial Paper meltdown).
Well, I am certainly not talking about that, obviously. I'm just talking about a guy with a few hundred thousand dollars invested who has a money market fund and a checking account with half to a few ten thousand dollars in them from time to time because it is the place cash goes when buying and selling things to fund withdrawals or to tax loss harvest or to rebalance or to receive distributions from funds or a pension or Social Security or to take an RMD. I can use the word conduit in an ordinary sense for that if I want to.

The distinction is between that and someone with the same few hundred thousand dollars who has half of that in a MM fund for the long run as a deliberate choice to keep the principal safe and earn a good yield.

The latter would be an example of something that wouldn't very often be a choice people would make. I bet almost everyone has a money market fund as in the former case, or a functional equivalent to it.
When I saw the term conduit I briefly wondered what you meant.

I did understand your point, but I just wanted you to be aware that 'conduit' has a specific meaning in finance and one central to part of the Credit Crisis.

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Post by FabLab » Tue Jun 28, 2011 12:33 pm

dbr wrote: I bet almost everyone has a money market fund as in the former case, or a functional equivalent to it.
Yes. And, it was obvious from the context that's what you intended.
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Re: money market funds have big europe debt exposure

Post by nisiprius » Tue Jun 28, 2011 5:43 pm

Valuethinker wrote:Which banks and what paper?
Well, I'd love to have someone who has a clue look at the VMMXX semiannual report. Although it's just idle curiosity, I have, let's see, a couple of thousand dollars there, moved most of it to ING Direct savings accounts some time ago. I wonder who the people have $110 billion in the fund are and why they have it there? Well, anyway. Just mentioning a few bigger chunks:

U.S. Government and Agency Obligations (41.9%)

Commercial Paper (17.0%) (that's what I thought money market funds were, but obviously I'm a few decades out of date)

Foreign Banks (5.5%), Australia and "Westpac Banking Corp," click, click, ah, that's Australia too.

Eurodollar Certificates of Deposit (10.2%), held in: Australia, London, Australia, some RBS, Canada.

Yankee Certificates of Deposit (21.3%)-- Abbey National, U. S. Branch... I'm confused, should that count as U.S. or UK or Spain--Canada, Canada, Finland, Netherlands, Royal Bank of Canada, Sweden, Canada, Australia. A lot of these mention that they're held in U.S. "branches," what does THAT mean?

Repurchase Agreements (6.6%) with Barclay's and Royal Bank of Scotland.

So, I seriously haven't got a clue, I see maybe 40% foreign stuff but it doesn't look terribly European to me--a dab here and there, but not "45% European debt." I haven't tried to add up percentages, but looks like mostly Australia and Canada.

People with a clue: what is this stuff?
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Post by Bongleur » Tue Jun 28, 2011 6:30 pm

>
someone with the same few hundred thousand dollars who has half of that in a MM fund for the long run as a deliberate choice to keep the principal safe and earn a good yield.
>

That's me...until I decide on my mix of Treasury durations.

And what is this FDIC assessment thing referred to below?:

"FDIC assessment rates are driving effective rates on short term repurchase agreements, a key risk management tool for money market funds, Beelow zero. Forces them go longer out the scale in search of a brake even (embracing more risk), or "break the buck" (let their share prices drop below $1)."
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Re: money market funds have big europe debt exposure

Post by grabiner » Tue Jun 28, 2011 6:37 pm

nisiprius wrote:Yankee Certificates of Deposit (21.3%)-- Abbey National, U. S. Branch... I'm confused, should that count as U.S. or UK or Spain--Canada, Canada, Finland, Netherlands, Royal Bank of Canada, Sweden, Canada, Australia. A lot of these mention that they're held in U.S. "branches," what does THAT mean?
A Yankee CD is an account at a US branch of a foreign bank, in contrast to a Euro Dollar CD, which is an account in a foreign country (at either a foreign or US bank, not necessarily in Europe). The risks are similar; a foreign bank operating in the US is subject to some US banking regulations, but it is still ultimately regulated by the foreign country (for example, it is subject to the foreign country's capital requirements and tax laws).
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Post by jmzf1958 » Tue Jun 28, 2011 7:15 pm

I just talked to a vanguard representative. Apparently, you cannot transfer your money from vmmxx to a cash account because vanguard has no cash account to put it in. So if this could be at risk, where should I put my money? The representative told me they are invested in are not invested in greece, portugal or spain, but mainly in england, germany, and luxomburg.

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Post by grabiner » Tue Jun 28, 2011 7:33 pm

jmzf1958 wrote:I just talked to a vanguard representative. Apparently, you cannot transfer your money from vmmxx to a cash account because vanguard has no cash account to put it in. So if this could be at risk, where should I put my money? The representative told me they are invested in are not invested in greece, portugal or spain, but mainly in england, germany, and luxomburg.
The risks in a well-diversified money-market account are trivial; if Vanguard Prime Money Market breaks the buck (and liquidates at 99% of its value), you'll have a lot more to worry about than losing 1% of your money, because that would require major defaults by banks all over the world.

However, given the current yield, you probably don't want to leave a lot of cash in the money-market fund. If you have a lot of cash for some reason (such as saving for a house down payment), you can put it in a bank or credit union savings account and earn a bit more, and the FDIC or NCUA insurance is just a bonus.
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Re: money market funds have big europe debt exposure

Post by Valuethinker » Wed Jun 29, 2011 2:06 am

nisiprius wrote:
Valuethinker wrote:Which banks and what paper?
Well, I'd love to have someone who has a clue look at the VMMXX semiannual report. Although it's just idle curiosity, I have, let's see, a couple of thousand dollars there, moved most of it to ING Direct savings accounts some time ago. I wonder who the people have $110 billion in the fund are and why they have it there? Well, anyway. Just mentioning a few bigger chunks:

U.S. Government and Agency Obligations (41.9%)

Commercial Paper (17.0%) (that's what I thought money market funds were, but obviously I'm a few decades out of date)

Foreign Banks (5.5%), Australia and "Westpac Banking Corp," click, click, ah, that's Australia too.

Eurodollar Certificates of Deposit (10.2%), held in: Australia, London, Australia, some RBS, Canada.

Yankee Certificates of Deposit (21.3%)-- Abbey National, U. S. Branch... I'm confused, should that count as U.S. or UK or Spain--Canada, Canada, Finland, Netherlands, Royal Bank of Canada, Sweden, Canada, Australia. A lot of these mention that they're held in U.S. "branches," what does THAT mean?

Repurchase Agreements (6.6%) with Barclay's and Royal Bank of Scotland.

So, I seriously haven't got a clue, I see maybe 40% foreign stuff but it doesn't look terribly European to me--a dab here and there, but not "45% European debt." I haven't tried to add up percentages, but looks like mostly Australia and Canada.

People with a clue: what is this stuff?
OK a 'Eurodollar' is a foreign issuer in a foreign currency, in a foreign country (nothing to do with Europe, or the dollar: the story is President Kennedy introduced an interest withholding tax of 15% on foreign investors, so the market moved to Europe from New York-- Siegmund Warburg launched the first Eurobond, the Italian Autostrade (in dollars) in 1963, selling to international investors).

So Canadian and Australian banks borrowing in USD are 'Eurodollars' (technically they are actually 'Yankees': borrowing abroad, in the home currency of the country in which they are borrowing. So if they borrowed in sterling they would be Bulldogs, in Yen Samurai etc.).

What you have here is foreign financial institutions borrowing in the US in dollars.

That list doesn't cause me much concern:

- the banks most exposed to Greece are largely French, German and Greek
- Spain is a worry, but it's such a huge part of the Euro zone that a bailout of its financial institutions would be inevitable
- Finland, Sweden are not in serious banking crises -- there is exposure to the Baltic countries, but we have had that crisis, I think, and are through it
- Australia and Canada have overvalued housing markets, but are in pretty good shape otherwise, with strong regulation and independent central banks capable of conducting bailouts. And in terms of their economies, a handful of banks and therefore 'too big to fail' from the point of the view of their authorities

- Abbey is owned by Santander, the strongest Spanish bank. It is a huge UK mortgage lender, but not a particularly dodgy one (first mortgages, mostly at least 10 or 20% down, no subprime etc.)

- Barclays one always wonders (big exposure to Spain) but they avoided the government bailout -- some underlying strength there

- Netherlands banks in good shape AFAIK. Economy in good shape on back of Germany

- RBS is 80% owned by the UK taxpayer. It's a bad storm where we do not pay

Conclusion

It doesn't look like VG MMF is 1). imprudent 2). highly exposed to risks.

However for a US individual investor, there are probably better ways to hold your cash (bank CDs, within FDIC limits).

If the Euro goes and we have mass chaos, then all bets are, of course, off, but even so, in that case, a VG MMF investor is likely to get back the vast majority of their investments. However it could become illiquid as the Primary Reserve fund did.

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Re: money market funds have big europe debt exposure

Post by Grt2bOutdoors » Wed Jun 29, 2011 8:05 am

Valuethinker wrote:That list doesn't cause me much concern:

- the banks most exposed to Greece are largely French, German and Greek
- Spain is a worry, but it's such a huge part of the Euro zone that a bailout of its financial institutions would be inevitable
- Finland, Sweden are not in serious banking crises -- there is exposure to the Baltic countries, but we have had that crisis, I think, and are through it
- Australia and Canada have overvalued housing markets, but are in pretty good shape otherwise, with strong regulation and independent central banks capable of conducting bailouts. And in terms of their economies, a handful of banks and therefore 'too big to fail' from the point of the view of their authorities

- Abbey is owned by Santander, the strongest Spanish bank. It is a huge UK mortgage lender, but not a particularly dodgy one (first mortgages, mostly at least 10 or 20% down, no subprime etc.)

- Barclays one always wonders (big exposure to Spain) but they avoided the government bailout -- some underlying strength there

- Netherlands banks in good shape AFAIK. Economy in good shape on back of Germany

- RBS is 80% owned by the UK taxpayer. It's a bad storm where we do not pay

Conclusion

It doesn't look like VG MMF is 1). imprudent 2). highly exposed to risks.

However for a US individual investor, there are probably better ways to hold your cash (bank CDs, within FDIC limits).

If the Euro goes and we have mass chaos, then all bets are, of course, off, but even so, in that case, a VG MMF investor is likely to get back the vast majority of their investments. However it could become illiquid as the Primary Reserve fund did.

The question no one has asked - how much cross-exposure do any of the institutions we deal with have - the domino effect. We have no direct exposure to Greece - that is mainly French, German and Greek banks. That's the canary. What kind of exposure do we have to French, German and Greek banks? You are making the assumption of too big to fail - what happens if the black swan appears and the governments just let the institutions go, what then? At some point, harsh medicine will need to be doled out - it's obvious no one has learned from the past.

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Post by Bongleur » Wed Jun 29, 2011 7:06 pm

grabiner wrote:
jmzf1958 wrote: The risks in a well-diversified money-market account are trivial; if Vanguard Prime Money Market breaks the buck (and liquidates at 99% of its value), you'll have a lot more to worry about than losing 1% of your money, because that would require major defaults by banks all over the world.
The risk is not having access to your cash for a long long time while regulators work things out.

If something really bad happens and cash is Emperor, imagine not being able to buy those once in a generation bargains?
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Post by scubadiver » Wed Jun 29, 2011 8:34 pm

jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
These are the holdings in the VMMXX fund based upon the information provided in the 31 August 2010 annual report:

Prime Money Market Fund
Ticker Symbol VMMXX VMRXX

Sector Diversification (% of portfolio)
Commercial Paper 17.2%
Certificates of Deposit 35.9
U.S. Treasury Bills 16.4
U.S. Government Agency Obligations 22.8
Repurchase Agreements 5.1
Other 2.6

Distribution by Credit Quality (% of portfolio)
Aaa 46.8%
Aa 45.5
A 7.7

Seems like the fund is pretty well isolated from direct impacts due to a Greek default. Hard to say how this might affect the Commercial Paper market though an what are "Repurchase Agreements" anyway? I have this same fund and don't see too much to be concerned about. Am I misisng something (at least as far as a Greek default is concerned)?

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Post by Bongleur » Wed Jun 29, 2011 9:47 pm

Prime Money Market Fund
Ticker Symbol VMMXX VMRXX
>

2 ticker symbols ???
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Post by Alan S. » Wed Jun 29, 2011 10:25 pm

I wouldn't bet against MM funds facing contagion and threats to break the buck, but these funds will be bailed out just like they were in 2008. To allow the buck to be broken would be immensely de stabilizing just like we saw in 2008.

And if we can't guarantee the dollar, then the other problems in the markets would be much more serious than MM fund haircuts.

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Post by Grt2bOutdoors » Wed Jun 29, 2011 10:32 pm

scubadiver wrote:
jmzf1958 wrote:I have my money in VMMXX. Is this at risk? Thanks. Judy
These are the holdings in the VMMXX fund based upon the information provided in the 31 August 2010 annual report:

Prime Money Market Fund
Ticker Symbol VMMXX VMRXX

Sector Diversification (% of portfolio)
Commercial Paper 17.2%
Certificates of Deposit 35.9
U.S. Treasury Bills 16.4
U.S. Government Agency Obligations 22.8
Repurchase Agreements 5.1
Other 2.6

Distribution by Credit Quality (% of portfolio)
Aaa 46.8%
Aa 45.5
A 7.7

Seems like the fund is pretty well isolated from direct impacts due to a Greek default. Hard to say how this might affect the Commercial Paper market though an what are "Repurchase Agreements" anyway? I have this same fund and don't see too much to be concerned about. Am I misisng something (at least as far as a Greek default is concerned)?
Repurchase Agreements: The investor (money market fund) lends cash to borrowers who post independent collateral in the form of investment grade securities and issues a repurchase agreement to the investor "I promise to pay 1 million plus some agreed upon rate of interest 65 days from today" and in essence buy back their securities upon the repayment of cash + interest. If they default on repayment, investor has collateral to fall back on.

Who issued the Certificate of Deposits? Also, chances are the CD's are not issued in max increments of 250K, rather they are in the millions and hence are not FDIC insured or backed by a governmental entity. The ability to recoup investment is only as good as the bank is - place your money with the wrong bank and you will soon find out just how insecure your investment is.

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Post by Grt2bOutdoors » Wed Jun 29, 2011 10:33 pm

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Last edited by Grt2bOutdoors on Wed Jun 29, 2011 10:45 pm, edited 1 time in total.

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Post by Grt2bOutdoors » Wed Jun 29, 2011 10:39 pm

Alan S. wrote:I wouldn't bet against MM funds facing contagion and threats to break the buck, but these funds will be bailed out just like they were in 2008. To allow the buck to be broken would be immensely de stabilizing just like we saw in 2008.

And if we can't guarantee the dollar, then the other problems in the markets would be much more serious than MM fund haircuts.
It is the job of the investment manager to mitigate risk. It is not the job of the "people" to guarantee your investment. Read the prospectus - "there is no guarantee the fund will be able to maintain a stable $1 NAV"
- you as the investor should be fully cognizant of the potential for loss.

We had a wake-up call back in '07, people ignored it, it rose again in '08 and '09, guess what? It hasn't gone away. I would not rely on bumbling bumbleheads for a bail out.

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Post by Bongleur » Wed Jun 29, 2011 10:58 pm

>If they default on repayment, investor has collateral to fall back on.
>

And the value of that collateral will be ???
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Post by Grt2bOutdoors » Wed Jun 29, 2011 11:18 pm

Bongleur wrote:>If they default on repayment, investor has collateral to fall back on.
>

And the value of that collateral will be ???
^^^^^^Is that a serious question?

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Post by Bongleur » Wed Jun 29, 2011 11:47 pm

GRT2BOUTDOORS wrote:
Bongleur wrote:>If they default on repayment, investor has collateral to fall back on.
>

And the value of that collateral will be ???
^^^^^^Is that a serious question?
If you don't eat up all your MBS tranches you won't get a bailout...
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Post by Bongleur » Tue Jul 26, 2011 6:53 pm

So its been a month... anyone keeping up with the exposure of the Vanguard money markets to the various messes still percolating?

Its time to get out of my junk bond funds, and I'm just going to park the money for a month or so until things work out one way or the other.

I wish Vanguard had a truly short 100% Treasury fund/etf.

Looking at under 1 year choices here:

http://www.bogleheads.org/forum/viewtop ... 47#1126547
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Post by stratton » Fri Jul 29, 2011 5:47 pm

An article in last weeks Financial Times mentioned in the last two months US MMFs had shortened all their European holdings to mostly overnight with a few going as long as a week. Evidently this has caused some liquidity problems in the Eurozone.

Paul
...and then Buffy staked Edward. The end.

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