Goldman spends $1bn to shore up two money market funds

Goldman Sachs spent more than $ 1 billion to consolidate the liquidity of two of its “prime” money market funds after a wave of cash outflows, in the second case of a large bank seizing new Fed measures to avoid a liquidity crisis in his funds.

Regulatory case, first reported by Reuters, shows that Goldman paid $ 772 million to buy securities from its Square Money Market Fund (SMMF) last week, and an additional $ 301 million to buy sound assets Square Prime Obligations Fund (SPOF).

The SMMF fell $ 7.1 billion in the week to Thursday, leaving it with assets of $ 9.6 billion, according to industry monitor Crane Data, while SPOF assets fell by 1 .7 billion dollars to 5.5 billion dollars during the same period.

Since the two funds are trading at less than 1% below their net asset value, the reduction in net asset value represents a massive outflow of funds.

Preferred money market funds invest in short-term debt, including commercial paper and certificates of deposit. These funds suffered $ 85 billion in outflows for the week ending Wednesday, according to data from the Investment Company Institute. Money market funds that invest in short-term public debt have gained $ 249 billion, with investors rushing into funds, which are popular proxies for cash.

It is the first time that Goldman has acted in this way to protect a fund in its asset management division, part of the group that CEO David Solomon has promised to turbocharger as part of the strategic plan he unveiled in January.

Goldman reacted to an “exceptional climate” for money market funds last week, said three people familiar with the situation. The coronavirus crisis has triggered a wave of sales by institutional investors fearing serious economic consequences from the pandemic.

Money market funds were forced to find cash to deal with these redemptions. This liquidity came from their most liquid assets, which, in turn, pushed a key liquidity measure that only applies to core funds to levels that could impose additional fees on investors.

If the so-called weekly liquidity (WLA) first-rate money market funds fall below 30%, they are allowed to impose restrictions on investors who withdraw funds, including additional fees – which limits the attractiveness of the fund for investors.

Last week, Goldman’s SMMF WLA fell to 34% while his SPOF had a WLA of 44%. Goldman was “very aware” of the need to meet potential liquidity demands and began to assess options, said people familiar with the situation.

The funds sold the assets to Goldman Bank, taking advantage of advice from the Federal Reserve, which explicitly blessed similar transactions between the funds and the banks last week in an effort to improve the liquidity of money market funds.

“It was done on a large scale. . . (and) in a way that we thought we could do faster (internally) than with another counterparty, “said one of the people, while the second described the assets as” desirable “and said that Goldman had “excess cash”.

After Goldman’s actions, the WLA rose to 46% for the SMMF and to 50% for the SPOF.

Trust bank BNY Mellon acted similarly last week, spending $ 1.2 billion to buy assets from one of its funds so the fund can cover redemptions. Goldman has another main fund, aimed at retail investors. His WLA is “in the 1940s”. Whether the bank would also be involved in the fund depends on “the facts and circumstances,” said one of the people.

Additional reporting by Jennifer Ablan and Richard Henderson

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