Inflation, Investing and Everything
Bank of America Corp. will liquidate a $12 billion cash fund for wealthy clients and institutions, the largest investment of its type to close because of losses tied to the collapse of the subprime-mortgage market.
The fund, Columbia Strategic Cash Portfolio, was sold as an alternative to money-market funds, offering a higher yield by taking more risk. It was the biggest so-called enhanced cash fund, with $33 billion in assets two weeks ago before an investor pulled more than $20 billion, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence. "This could be the death of enhanced cash funds," Crane said. Such funds hold about $850 billion in assets. Cash funds became popular in 2003 when interest rates plummeted to their lowest in almost five decades and the average net yield on money-market funds fell to less than 1 percent.
Some cash funds hold commercial paper or medium-term notes issued by structured investment vehicles, or SIVs, that have fallen in value as delinquencies on home loans rose to the highest in 20 years in the third quarter. SIVs use proceeds from the short-term debt to buy longer-term securities backed by assets including subprime mortgages and credit-card receivables. In August, investors started shunning the short-term debt sold by SIVs and other funds that, in some cases, invested in securities tied to subprime loans. Three SIVs have defaulted and Moody's Investors Service said this month it may cut the ratings on $105 billion in commercial paper and medium-term notes sold by the funds.
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