03 December 2022

Sounds Like When Reserve Primary Fund Broke the Buck and Had to Be Liquidated in 2008

A bit of history for my reader(s).  Reserve Primary Fund was the first money market fund, founded in 1970, created in the United States.

It was supposed to work like a savings account, you put in a dollar, and you get out a dollar, and have.

Because of its structure, it was not subject to FDIC regulations, and it was not covered by FDIC limits on the interest rates that it paid to depositors.

In the run up to the 2008 financial crisis, they went large into, "Commercial Paper," short term business loans, typically made by investors and money market firms.

When the crisis hit, they suddenly had their hands on a lot of bad paper, and could no longer support redemptions at $1 per share, it's called, "Breaking the Buck," and they had to be liquidated.

Well now, Private Equity firm Blackstone is limiting redemptions from their Blackstone Real Estate Income Trust because of a surge.

It's called a bank run:

Blackstone Inc. shares took a big hit after the investing giant’s real-estate fund aimed at wealthy individuals said it would limit redemptions.

Blackstone Real Estate Income Trust Inc., more commonly known as BREIT, said Thursday in a letter posted to its website that the amount of withdrawals requested in October exceeded its monthly limit of 2% of its net-asset value and its quarterly threshold of 5%.

That spooked Blackstone shareholders, who sent the company’s stock down nearly 10% at one point Thursday morning. More recently, they were down 7.1% Thursday, giving the company a market value of more than $100 billion.

BREIT, a nontraded real-estate investment trust whose net-asset value now totals $69 billion, has been one of Blackstone’s biggest growth engines in recent years. It has helped the private-equity firm attract a new class of investors who might not be wealthy enough to invest in its traditional funds but want access to private assets.

BREIT is designed to generate steady cash flows for its investors. It has delivered net returns of 9.3% year-to-date and 13.1% annually since inception, with an annualized distribution rate of 4.4%, according to its website. Despite those healthy returns, the vehicle has had an increase in redemption requests from investors in recent months.

………

Blackstone executives have said BREIT’s withdrawal thresholds were designed to prevent it from having to become a forced seller. The firm said the vehicle has $9.3 billion of immediate liquidity and $9 billion of debt securities it could sell if needed. 

The time between the 1929 crash and the 2008 financial crisis was almost 80 years.

Now we seem to be on the cusp of repeating the 2008 financial crisis just 14 years later.

Unfortunately, no real effort was taken to correct the speculative excesses, and the regulatory inadequacy, that led to 2008, so we are seeing a repeat hurtling down the tracks toward us.  (Thanks, Obama)

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