Via Financial Times

Goldman Sachs spent more than $1bn to shore up liquidity in two of its “prime” money market funds after a rush of outflows, in the second case of a big bank seizing on new Fed measures to stave off a liquidity crunch in its funds.

A regulatory filing, first reported by Reuters, shows Goldman paid $772m to buy securities from its Square Money Market Fund (SMMF) last week, and another $301m to buy assets from its Square Prime Obligations Fund (SPOF).

The SMMF shrunk by $7.1bn in the week to Thursday, leaving it with assets of $9.6bn, according to industry monitor Crane Data, while the SPOF’s assets declined by $1.7bn to $5.5bn over the same period.

Since both funds trade less than 1 per cent below their net asset value, the reduction in asset value overwhelmingly represents outflows.

Prime money market funds invest in short-term debt, including commercial paper and certificates of deposit. These funds suffered $85bn in outflows for the week ending Wednesday, according to data from the Investment Company Institute. Money market funds that invest in short-term government debt, meanwhile, gained $249bn, as investors rushed into the funds, which are popular proxies for cash.

This is the first time Goldman has acted in this way to protect a fund in its asset management division, a part of the group that chief executive David Solomon promised to turbocharge under the strategic plan he unveiled in January.

Goldman acted in response to an “exceptional climate” for money market funds in the past week, said three people familiar with the situation. The coronavirus crisis has triggered a rush of selling by institutional investors fearing grave economic consequences from the pandemic.

Column chart of Daily net flows ending March 19 ($bn) showing Goldman Sachs Financial Square Money Market Fund suffers outflows

Money market funds were forced to come up with cash to meet these redemptions. That cash came from their most liquid assets, which in turn pushed a key liquidity measure that only applies to prime funds towards levels that could impose extra fees on investors.

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If prime money market funds’ so-called weekly liquid assets (WLA) fall below 30 per cent, they are allowed to impose restrictions on investors withdrawing funds, including added fees — something that limits the fund’s attractiveness to investors.

Last week, the WLA of Goldman’s SMMF fell to 34 per cent while its SPOF had a WLA of 44 per cent. Goldman had a “very high awareness” of needing to meet potential liquidity demands and began evaluating options, said people familiar with the situation.

The funds sold the assets to Goldman’s bank, taking advantage of guidance from the Federal Reserve, which explicitly blessed similar transactions between funds and banks last week in an attempt to improve money market funds’ liquidity.

“This was done at scale . . . (and) in a manner that we felt we could do more quickly (internally) than with another counterparty,” one of the people said, while the second described the assets as “desirable” and said Goldman has “excess cash”.

After Goldman’s actions, the WLAs rose to 46 per cent for the SMMF and 50 per cent for the SPOF.

Trust bank BNY Mellon acted in a similar manner last week, spending $1.2bn to buy assets from one of its funds so the fund would be able to cover redemptions. Goldman has one other prime fund, which is targeted at retail investors. Its WLA is “in the 40s”. Whether the bank would intervene in that fund as well depends on “facts and circumstances” one of the people said.

Additional reporting by Jennifer Ablan and Richard Henderson