GE Cash Management Fund Breaks the Buck

A $5 billion General Electric institutional cash management fund is now offering investors only 96 cents on the dollar. Note, as discussed in the CNBC article below (hat tip pjfny), this was NOT a money market fund. However, this news, which appeared first on Barrons, was one of the reasons the stock market retreated into negative territory late in session.

From CNBC:
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….a short-term cash management fund, which attempts to keep the value of each share at one dollar … and offer enhanced returns above money market rates, is instead offering investors just 96 cents on the dollar.

The fund is not a money market fund, which is subject to much more stringent regulations than a cash management fund.

A spokesmen for General Electric, the parent company of CNBC, says no other GE cash management funds are offering investors less than a dollar.

The story first appeared earlier today in Barron’s online and traders say it was a major reason for the sharp late-day selloff.

In recent days, several asset managers, whose funds were infected by bad subprime paper, have injected cash into their money funds to avoid breaking the buck……

The GE spokesman said the company had no plans to inject cash into the fund, called the GE Asset Management Enhanced Cash Trust.

The fund holds cash from outside investors, the General Electric pension fund and other GE employee benefit plans.

Barron’s says that as of June 30, the fund has about one-third of its assets in home-equity asset-backed securities and about a quarter in residential mortgage securities.

Barron’s reported that the fund was an “enhanced yield” product. Guess GE has decided investors should have known that there is no such thing as a free lunch. And it gets better:

In a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited “extreme conditions in the credit markets” and told investors that “it will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund’s yield to zero.”

In the e-mail, GE Asset Management said the fund has “sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) …”

So the “GE subscribers” get taken out at par? If so, there has to be language that permits preferring GE-related holders somewhere in the fund documentation. Nevertheless, the quality of the disclosure could be the basis for a lawsuit.

Update, 11/15, 12:30 AM: The Financial Times provides some badly-needed clarification of what is happening with the GE funds, and my original suspicion, per above, was incorrect (my alternate theory, in a comment below, was closer to the mark).

GE is liquidating the funds and let outside investors exit first. However, as a reader pointed out, since some of the GE investors were various GE retirement funds, that would seem to raise ERISA problems. The article notes that GE’s pension fund is overfunded and they raised their payout to retirees, the implication being it can absorb the loss. That probably means no one will bother suing, but technically, I wonder whether the way GE handled this is correct.

From the Financial Times:

General Electric said on Wednesday its short-term bond fund ran into trouble amid losses on asset-backed securities and that all its outside investors have liquidated their holdings.

GEAM, the diversified manufacturing company’s money management arm that oversees the $5bn GEAM Trust Enhanced Cash Fund, is still invested in the fund, but GE warned last week that it would sell holdings amid tough market conditions.

It allowed the handful of institutional investors who put money alongside GE’s assets to get out first, letting them redeem at 96 cents on the dollar.

GE’s woes mark the latest in a string of problems at short-term investment funds, which are generally considered safe and have become hugely popular with investors since credit market turmoil made many exit other stock and bond funds.

Industry analysts worried that news of more money market fund trouble could unnerve already-anxious investors, leaving them with few options on where to put their money.

GE warned it would soon pull $250m out of the fund and planned to “begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund’s yield to zero”.

The company sent an e-mail to outside investors last week. The fund does not own structured investment vehicles or collateralised debt obligations, but does own mortgage-backed and asset-backed debt, a GE spokesman said.

While GEAM said it expected the fund’s net asset value would always be fairly determined, “any significant future redemption could adversely affect” the fund’s net asset value.

Recently Legg Mason, Wachovia and Bank of America have all shored up ailing money market funds with their own funds to prevent them from sliding below the dollar-per-dollar-invested level they promise to preserve.

GE’s fund is slightly different because it is an enhanced cash fund and therefore took on more risk and did not promise to preserve what was invested, the company said.

Still the announcement made investors nervous.

All outsiders immediately pulled out, the company said, declining to say how much money they took with them.

GE’s $60bn pension fund is overfunded and this month the company said it would raise the pensions of more than 130,000 retirees on December 1.