Your money-market fund feels like cash. Under the hood it owns short IOUs called commercial paper. Some of that paper is arranged by a unit of Mark Walter's business empire. Walter is the billionaire who owns the Dodgers. Lately, buyers of that paper have been quietly stepping back.
Joe Wallace and Margot Patrick tell the story in Monday's Journal. Guggenheim Treasury Services connects investors who want a safe place for cash with banks that need short-term funding. It sets up vehicles that sell commercial paper to money-market funds and others. The cash finances the trading desks of big global investment banks. The vehicles had about $45.8 billion outstanding at the end of September, down from $53.1 billion at the end of the second quarter. That is a drop of about 14%, by DTCC data, and it kept falling the week before last. The biggest rival, Nearwater Capital, slipped about 1% to $86.1 billion. Most competitors did not see similar declines.
Market participants tie it to a headline, not a loss. The Justice Department is investigating whether Walter's insurers financed other parts of his group without proper disclosure. It has also looked at whistleblower claims about the asset-management arm. Walter and his holding company, TWG Global, deny any wrongdoing. The probe became public in July. In August the paper unit wrote to clients that repayment does not depend on its own performance. A spokesman said the business remains strong. He said third-quarter rate moves hit several players and called such swings normal in a markets-driven business. Some buyers left anyway. Nothing in the story says any of them lost a dime.
What that paper actually does
Here's the part worth remembering. Before the financial crisis, this kind of paper often funded auto loans and mortgages. It nearly collapsed then, and the market stagnated for a decade. It has grown since the pandemic, though it is still much smaller than before the crisis. Today the deals also often backstop securities trades for hedge-fund clients of the banks. Fees run from about 0.05 to about 0.25 percentage point. The paper mostly matures in under a year. Higher rates have made short-term paper pay better, so demand is strong, Fitch's Ian Rasmussen told the Journal. None of that is a scandal. It is just further from "cash" than the fund's name suggests.
Our read
This is a Fixed Income IN02 story, and a calm one. A prime money-market fund can own commercial paper like this. A government money-market fund sticks to Treasury bills and other government paper. Both aim to hold a steady $1 a share. Only the prime fund can have a hedge fund's trade or a billionaire's probe somewhere in its chain. The house's cash sits in Treasury bills (SGOV, 49 books) and floating-rate Treasurys (USFR, 14 books). We give up a sliver of yield for a holdings list we never have to worry about. Our verdict is hold.
Here's the connection to your own money. Open your money-market fund's fact sheet this week and look for one word, "prime" or "government." Then scan the top ten holdings. If you see bank names and asset-backed vehicles you have never heard of, you are earning a little extra for carrying a little extra. That may be fine. You just want to know it before a headline tells you. You don't wait for the first drop to find the umbrella. If the holdings list leaves you puzzled, bring it to a review and we'll read it with you.