|Even if we assume that MMMF shareholders demand redemption such that the remaining underlying assets must be sold at fire sale prices - those assets still exist and still provide the same services. Assuming no impairment in those assets, all that has occurred is a transfer of ownership. Appreciate also, that as the price of fixed income securities falls the yield rises - so at some point smart money will reverse the redemption trend. |
See this post on the realestate thread:
Somebody has invested five billion in her employer, and they are now going around buying up the mortgages of failed subprime companies for less than $.30 on the dollar.
They then are picking out those borrowers who are up to date on their mortgages even though the mortgages are now clearly at greater than 100% loan to value. Next they put these borrowers through a full doc loan process and making sure a reliable and realistic appraisal gets down. They are then writing down the mortgage to less than the current appraisal.
So the borrower gets a lower loan principal value and lower payments so they would have to be crazy not to accept. Again these are people who obviously are trying to keep up with their payments.
Then her company goes out and sells these now full doc and no longer subprime loans for 100% of the new and lower loan balance. They did write the loan balance down some, but remember that they only paid less than 30 cents on the dollar of the original principal balance.
Not an MMF, but the same principle applies. If the price of the underlying asset falls without impairment of services, yield increases. In this particular case, the price has fallen more than the impairment such that it becomes profitable to recognize both the price drop and impairment.