Berk's Blog

Father of money market funds charged with fraud

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As many of you know my dad, William “Bill” Berkowitz, was right there along with Mr. Bent at the beginning of the money market mutual fund industry. In fact, my brothers and sister and I used to go around all the time telling people that my dad “invented” money funds when he was at Dreyfus. A little embellishment from proud children to be sure, but my dad certainly knew how to trade and manage a prudent money market portfolio.

6a0105367c6ad9970b011570714ee6970b-320wiBefore he died in 2004 he would remind me that the biggest risk to the banking system and the economy was not a run on a bank or a series of banks – it was a run on money funds. Little did I know that he would be right so soon. Chairman Bernanke often has said that the holding by the Reserve Fund of Lehman paper upon Lehman’s bankruptcy was the transmission mechanism that made the financial crisis a main street crisis because it blew up the commecial paper market.

Anyway, seeing his old rival for basis points being charged reminded me how smart, innovative, honest and genuinely paranoid my dad was. His prudence helped create the first shadow banking system caused by foolish government regulations – Dreyfus Liquid Assets…and, oh yeh, the Reserve Fund.

As my dad told ”Forbes” in 1980, ”…the savings public is becoming more sophisticated. It will not stand for this 5% rate on passbooks (savings accounts).” That’s when large depositors were getting double digit short-term interest rates as Volcker tried to stamp out inflation.

He fought against the regulation of the money market industry and welcomed competition from banks by testifying in favor of lifting Regulation Q–which prevented banks from paying prevailing high interest rates on savings accounts.

RIP Dad – we’ll all be alright (you were right there was way too much debt)

NEW YORK/WASHINGTON (Reuters) – The father of the money market mutual fund — investor Bruce Bent — was charged with fraud by U.S. regulators on Tuesday over accusations he deceived investors into believing his flagship fund was safe before it “broke the buck” last year.

The civil charges against the veteran money manager, his son and their investment company come eight months after the Reserve Primary Fund, loaded with Lehman Brothers debt, halted redemptions after the investment bank declared bankruptcy, sparking a run on money-market funds.

The fund’s net asset value fell below $1 after Lehman’s bankruptcy last September, meaning that investors who thought their funds were safe had lost money.

The fund is being liquidated and its collapse has spurred numerous lawsuits. Its demise has been a stunning turn for Bent, who regulators called “the public face” of the fund and “a longtime advocate of the safety and stability of money market funds.”