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Document Type

Case Study

Case Series

Bank Holidays & Other Suspensions

Abstract

In 2008, the Reserve Primary Fund was the world’s third-largest money market fund with $62.5 billion in assets. Following Lehman Brothers’ bankruptcy filing on September 15, the Primary Fund’s $785 million position in Lehman debt securities was underwater, and the fund faced severe redemption pressures from investors. In just two days, redemption requests surpassed $40 billion. Owing to the fund’s inability to liquidate assets at or above par value in the frozen markets and the inability of its sponsor, the Reserve Management Company, Inc. (RMCI), to support investors, the Reserve announced on September 16 that the Primary Fund had “broken the buck” at 4pm that day, meaning that its net asset value per share had fallen under $0.995. Following RMCI’s recommendation, the Primary Fund delayed payments by seven days for redemptions of more than $10,000, and the Reserve requested the Securities and Exchange Commission (SEC) to allow the Primary Fund to suspend redemption rights for outstanding redeemable securities. On September 22, the SEC issued an order permitting the Primary Fund to temporarily suspend redemption rights with effect as of September 17. Following the suspension, the fund’s management company began liquidating the Primary Fund on September 29; however, the liquidation was marked by several legal challenges. The Primary Fund’s investors recovered about half their funds at the end of October 2008 and 79 cents for every dollar in early December; they waited two years for recoveries to reach 99 cents on the dollar and received a final distribution in December 2014 when recoveries ultimately reached 99.1 cents.

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