The Reserve Fund’s PR gaffe

Let me preface my column below, which was posted on Wednesday, Oct. 29, with an update posted on the Reserve website Thursday night. The fund company said it began an initial $26 billion distribution to Primary Fund shareholders Thursday by mailing checks to its retail direct shareholders. It said it would wire the initial payment to all other shareholders today. The distribution “represents approximately 50% of the total assets of the Fund as of the close of business on Sept. 15. Approximately $25 bilion in total assets remain in the Fund,” it said. “Each investor is receiving approximately 50% of their current account balance.” It continued: “In the next several days, we expect to be posting a plan for the total liquidation of the Fund on our website.”

A story in the Oct. 29 edition of The New York Times by Diana Henriques, one of the best reporters in financial journalism, focuses on the continuing problems of customers of The Reserve.
It seems that the New York-based Reserve, whose Primary Fund “broke the buck” on Sept. 16, has delayed redemptions on both the Primary Fund and its U.S. Government Fund indefinitely.
Since no one from The Reserve would comment, the Times story focused largely on the plight of investors who are waiting to get access to their money.
The Reserve’s problems strike a special chord with me. I’ve known its chairman, Bruce Bent, co-creator of the money market fund, for years and I consider him one of the most influential figures of modern finance.
His creation, after all, changed the face of banking and the securities business. We’ve spoken many times over the years and I often see him on my commuter train on his way to and from The Reserve’s offices near Penn Station. I also know other executives at The Reserve and hold them in high regard as well.
That’s why criticizing the firm is so painful. I’m in no position to judge how The Reserve’s handling of its investment processes led to the current mess. The firm, which prided itself on avoiding risky credits, held notes backed by Lehman Brothers Holdings Inc. of New York. The unraveling of Lehman, now in bankruptcy protection, led to Reserve’s liquidity problems.
But The Reserve’s handling of its communications surrounding the financial problems is another matter. In this area, unfortunately, it earns a grade of less than a gentleman’s “C.”
Lawyers apparently are running the communications show at The Reserve and their extreme caution and deaf ear to public opinion are evident.
On one hand, they are right to be cautious, given the flurry of litigation the crisis has spawned. Anything The Reserve’s management says or does in public can be hurled back at the firm by attorneys for clients and broker-dealers who are itching to get their money back and more.
Still, the future of The Reserve will be decided by the court of public opinion as well as by courts of law. And on that front, the firm hasn’t defended itself very well.
It has been limiting its comments to postings on its website, and on Monday it posted a notice saying that its operations group has made “substantial progress in the trade reconciliation process for the Primary Fund” in “preparation for the distribution later this week.”
Let’s hope for the sake of The Reserve’s shareholders, who haven’t heard or seen anything more than what’s been posted on the website, that the distribution takes place.
For the sake of The Reserve itself, I hope the distribution takes place as well. I also hope that the freeing up of the fund frees the firm’se management to talk to shareholders and the public in a credible, person-to-person way. Having someone from the firm explain what happened, how it happened and how the firm has worked to resolve the problem won’t erase all the damage. But it will go a long way to defusing shareholder anger and to restoring the trustworthiness of The Reserve’s name.
And that, after all, is any financial company’s principal asset.

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