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‘Breaking the Buck’

The San Diego County Regional Airport Authority, which manages Lindbergh Field, said it has not received all of the $12 million it invested in the Primary Reserve Fund, the money market fund that “broke the buck” in September.

Vernon Evans, the agency’s chief financial officer, told his board this month that $9.6 million of the $12 million invested has been returned in two distributions, leaving about $2 million remaining in the fund.

He said he had “no idea” when the rest of the money will be returned.

As it stands, the authority could lose as much as $364,000, or a tenth of 1 percent of the $248 million placed by the authority in various investments.

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Evans said he requested withdrawal right after the $62 billion fund told investors Sept. 16 that the net asset value, or NAV, would be priced at 97 cents instead of the historic standard of $1.

Pricing the NAV below $1 is called “breaking the buck,” which happened only one other time since money market funds were established in 1971.

Investors regard money market funds the same as checking accounts, and the funds have attracted $3.5 trillion in deposits.

The Reserve Fund said it took the action after Lehman Bros. Holdings, the New York investment bank, filed for bankruptcy in September.

Because of the bankruptcy, the Reserve Fund wrote off the value of $785 million in so-called commercial paper, or short-term notes, it held from Lehman.


Surprising Write-Down

“It didn’t surprise me that Lehman Bros. went bankrupt, but what surprised me was their writing down the value (on the commercial paper) to zero, and not writing it down by half or some part of it,” Evans said.

Apparently, no other government agency in the area invested in the controversial fund. Neither of the area’s two largest employee pension funds run by the city and county of San Diego invested in Primary Reserve, nor did the Port of San Diego, according to officials.

County Treasurer-Tax Collector Dan McAllister said the county’s investment pool hasn’t invested in the fund with the money market portion of its portfolio. The county fund was recently rated by Standard & Poor’s with the highest safety rating for the 10th consecutive year.

The pool serves 90 agencies, including cities, school districts and special districts, as their short-term investment vehicle. The focus of the pool is preservation of principal, and maintaining liquidity to enable investor agencies to withdraw funds fairly quickly.

Using a conservative strategy, the county pool invests 74 percent of its portfolio in AAA rated securities, primarily federal government bonds and notes. The annual return on the fund last year was 2.34 percent.

Evans said one reason he invested in the fund was the higher returns generated, between 4 percent and 6 percent annually. The average money market mutual fund was paying between 2 percent and 3 percent annually for most of last year.

As of Sept. 30, the authority had invested $20 million in money market funds, or 8 percent of its portfolio. Much of the portfolio, 46 percent, was invested in government grade securities such as bonds issued by the Federal Home Loan Bank.

For the prior fiscal year that ended June 30, the authority’s investment fund generated a return of $9.3 million, or 4.38 percent.

The fund’s actions have spawned at least 20 lawsuits from groups that lost far more than the airport authority, including the state of Massachusetts, which accused the fund’s management of lying and making early payments to larger clients. According to the suit, as of Sept. 15, businesses and individuals in that state held about $2 billion in the Reserve Primary Fund.

Evans said the authority has not filed a lawsuit against the fund.

Jim Desmond, the mayor of San Marcos and one of 12 board members who oversee the airport authority, said the agency was lucky it didn’t lose more money.

“It’s unfortunate, but we couldn’t have foreseen the Lehman Bros. debacle, and if we get back more than 80 percent of the investment, we’ll be happy,” Desmond said.

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