Magazine article American Banker

BankAmerica Exec Explains What Happened with Its $68M Fund Bailout

Magazine article American Banker

BankAmerica Exec Explains What Happened with Its $68M Fund Bailout

Article excerpt

In a year of spectacular losses in mutual funds, few fund bailouts have caused more of a sat than the $67.9 million BankAmerica Corp. injected into two of its money market funds. In congressional testimony earlier this month, BankAmerica risk-management executive Lewis Teel explained what happened. Excerpts follow.

At various points from 1992 to October 1993, the [Pacific Horizon] Prime and Government Funds acquired variable and floating rate notes issued by U.S. government agencies. These notes met all objective purchase criteria and were permissible investments. The notes did not amount to more than 10% of each of the fund's respective portfolios at the time they were purchased.

Assets in the funds fluctuated from month to month. But when the Federal Reserve instituted a series of interest rate increases, [assets] began to decline sharply. Within a 90-day period the Prime Fund experienced redemptions of over $7 billion.

Rather than permit the net asset value of the fund's shares to fall, BankAmerica elected to make a capital addition to the [Prime] Fund of $17.4 million on May 6.

In June, [Securities and Exchange Commission] warnings about the use of structured notes by money market funds, and the continuing references to these instruments as "derivatives," led to an increase in redemptions.

During the third week of June, these problems also began to spill over into the Government Fund.

In light of market conditions and concerns, Bank of America proceeded to sell the structured notes. The losses amounted to 2% to 4% of the face value of the securities.

BankAmerica had no legal obligation to maintain the net asset value of the funds

[But] in the end, we felt that the bank's clients had invested in part due to the bank's respected reputation.

This experience has led us to improve our policies and procedures, with an emphasis of risk control. …

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