Regional brokerage Ferris, Baker, Watts has moved to redeem its clients' money from what were once considered ultra-safe investments in money market funds and warned the investors not to seek to withdraw money or make trades from their accounts.
The notice on the company's Web site late Thursday comes a day after it warned clients who had money in the Reserve Fund's Primary Fund that their investments had lost value, an almost unprecedented occurrence for such a fund. A soured investment in Lehman Brothers Holdings Inc. had caused the Primary Fund, the largest of the Reserve's funds, and two others to "break the buck," meaning the fund no longer had assets of $1 for every dollar invested.
"Our objective is to move all funds from the Primary Fund as quickly as possible to preserve account values and avoid further redemption delays," the Ferris notice said .
The Reserve Fund had said it needed seven days to honor the high volume of redemption requests, and Ferris seemed to expect to meet that timeline for redemption requests already made.
Ferris said in its notice that it is working on redeeming all of its clients' assets in the Primary Fund, as well as a Government Fund and a Treasury Fund, though they did not break the buck. But officials said they could not make cash available until the Reserve sends the money. In some cases, Ferris officials said it would appear as though the money was in clients' accounts but it may not be, which is why requests for trades and cash withdrawals could not be honored.
The Reserve, Ferris' notice said, has not confirmed if it has honored checks and trades in the last few days, even though it had previously said it would.
Don Phillips, a managing director at Morningstar, said the Primary Fund, and even others that did not have investments in Lehman, would likely be liquidated to repay investors. But that could take a little time to get the best prices for holdings.
"The Reserve has frozen its funds for seven business days, so Ferris clients aren't alone here," he said. "No one can get money or make trades. It seems like there was something of a run on the money in many of the Reserve's funds, not just the Primary Fund, and they're waiting for dust to settle. ...They will liquify the main fund and pay out as close to the dollar as possible. It won't be a dollar for those in the Primary Fund."
Phillips said, however, investors should get most of their money. And those with investments in funds that did not break the buck should get all of their money - eventually.
The Reserve Fund itself, however, isn't likely to survive because the company likely has "failed" investment tests in investors' eyes, he said.
"This is really unprecedented," he said. "They can't say when people will get their money and how much they'll get."
