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Reserve Fund’s Investors Still Await Their Cash

The national “bank holiday” that ushered in the New Deal in 1933 locked up the public’s cash for four days. The crisis that hit last month at the Reserve Fund, the nation’s oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.

At least 400,000 people, and perhaps as many as a million, can’t get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.

Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.

“Longer term, I just don’t know how we’ll deal with it,” said John Oakes, a retired engineer in Austin, Tex., who can’t tap $20,000 in a Reserve account to pay his mother’s nursing home bill. “They say we may get some money this week, but we don’t know if we’ll get 100 percent, 90 percent or 30 percent.”

Sandra and Lawton Dews, a retired couple in North Myrtle Beach, S.C., had more than $250,000 — 35 percent of their retirement assets —invested in the Reserve US Government Fund.

“They even bragged that you could sleep at night if you invested in their funds,” Mrs. Dews said. “In the past month and a half, we don’t sleep at all.”

Her insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.

The next day, its $62 billion Primary Fund and two small offshore funds “broke the buck,” incurring losses that pushed their per-share price below a dollar.

Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.

And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.

Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.

The news occasionally posted on the fund’s Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.

Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.

Several requests for comment from management of the Reserve Fund have been declined. “I have no confidence at all in what it says,” said Mrs. Dews.

Mrs. Dews and Mr. Oakes are among the plaintiffs in a lawsuit filed against the Primary Fund and the Reserve Fund management by Girard Gibbs, a law firm in San Francisco.

It is one of eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied.

Many Reserve investors say their issue has become the forgotten crisis. “The government is focused on the banks and the big problems,” said Sherry Bryan, a retired industrial photographer in Atlanta. “But this is happening right now to real people.”

Ms. Bryan, 58, said she thought of her Reserve Fund investment as “very safe — an ‘old-granny’ investment.” She added, “We really never expected to lose money on this.”

Ms. Bryan has tried to keep a sense of humor about having to “tighten my belt and tighten it again.” Selling other nest-egg securities in a bad market to pay her bills was “like I’d gone out and bought a speedboat and a Mercedes and traveled all around Europe,” she added. “It’s cost me the same amount of money, but I didn’t have any of the fun.”

The Reserve has posted updates on its Web site, www.ther.com. In those reports, it has asked customers to be patient as it tries to cope with “these unprecedented events.”

Not typical of money market funds

Regulators have had to be patient, too. Despite all their efforts to restore liquidity and confidence in all money funds, they don’t have any good options in this case other than to monitor the liquidations carefully.

“The staff has been actively involved in the entire process, intervening to protect all shareholders,” said John Heine, a spokesman for the Securities and Exchange Commission.

But it can intervene only so much. The Reserve has proprietary computer systems, so taking over the process at this point could delay the redemptions even further, current and former regulators said.

The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.

The biggest mystery is why redemptions from that government fund have not been handled more promptly, said James Cracchiolo, chief executive of Ameriprise Financial Services in Minneapolis.

Ameriprise is among those suing the Reserve Fund over the Primary Fund’s losses — it is the company that contends management tipped off big investors . But that lawsuit does not name the US Government Fund, Mr. Cracchiolo said.

“This is good government paper — even the government itself could take it from this fund and not lose a penny,” he said. “We are all very frustrated at the lack of responsiveness from that fund’s trustees. For heaven’s sake, if they can’t find a white knight to take the paper, we’ll take some of it.”

Ameriprise alone has about 400,000 clients caught in the freeze, he said, and his rough calculations indicate that “as many as a million, a million-plus people” could be affected. Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.

Mr. Cracchiolo’s firm, like some others, is temporarily offering customers very low-interest loans to help them cope while they wait for a resolution.

The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. “I can’t emphasize too strongly that this absolutely is not typical of money funds,” he added.

He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer’s access to their money.

The Reserve Fund’s prolonged crisis is particularly baffling to Michael Brunner, a research scientist in Columbus, N.J., who has been a customer since the fund first opened its doors in 1970. He knew the money fund was not insured, as bank deposits are. “But after 30 years, one doesn’t think it will go bad,” he said.

He can manage without his frozen assets, he added — but he is furious that he still has to, after so much time.

“People talk about this like it’s something that happened,” he said. “But this isn’t something that ‘happened.’ This is still happening. I still don’t have my money and I still don’t know what’s going to happen to it.”

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