Quarterly Commentary

“Fear leads you directly into the path of that which you fear.” This anonymous quote, a more ominous cousin of Franklin Roosevelt’s famous statement on this emotion, was shown to have merit as the astounding market events of September, 2008 unfolded.

As the government took direct control of Fannie Mae and Freddie Mac, followed by the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, the government’s rescue of American International Group (AIG), JP Morgan Chase’s fire sale purchase of Washington Mutual, and the transformation of Goldman Sachs and Morgan Stanley from investment banks into bank holding companies, the escalating fear gripping the markets was more than understandable. These developments, each of them remarkable by themselves, add up to what best-selling author Nassim Nicholas Taleb might very well term “a black swan,” a highly improbable event that is unpredictable, carries a great impact, and will lead to many explanations that will make it seem less random and more predictable.

Another unlikely episode related to our sector of the market was the “breaking of the buck” by the Reserve’s Primary Money Market Fund, which was attributed to its Lehman holdings and large liquidations. This drove the market’s overall fear to a point where the viability of all money market funds was in doubt.

“While we could not foresee these specific events, we had become concerned about the mortgages tied to Asset Backed Commercial Paper (ABCP) almost two years ago, and had ended any direct investments in that sector by the end of 2007." In addition, “We have not had direct exposure to Lehman since 2004,” said Al Cherry, Senior Vice President and Head of Reich & Tang’s Credit Research Group. “We continue to shorten our portfolio maturities to help provide maximum liquidity,” said Rob Rickard, Senior Vice President and Head of our Portfolio Management Group.

Through it all, Reich & Tang continues to operate its money market business as it always has, focusing on safety of principal and liquidity.  Through our in-house credit research department, we have been able to steer clear of the pitfalls that have befallen other money funds. However, current and future portfolio holdings are subject to market risk.

To allay investor concerns, the U.S. Treasury announced an insurance program, the U.S. Treasury Department’s Temporary Guarantee Program, (“Guarantee Program”) for all domestic money market funds (taxable and tax-exempt) that comply with SEC Rule 2a-7. Reich & Tang has applied to participate in this program. 

Below are the essential aspects of the Guarantee Program:

• the guarantee is based upon the number of shares invested in the fund at the close of business on
  September 19, 2008;

• any increase in the number of shares held after the close of business on September 19, 2008 will not be guaranteed;

• if the number of shares fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008 or the current amount, whichever is less;

• in the event a customer closes their account with a fund or broker/dealer, any future investment in the fund will not be guaranteed;

• and the program expires on December 18, 2008, unless extended by the U.S. Treasury.