Goldman Sachs Group Inc injected over $ 1 billion into two of its prime money-market portfolios last week due to heavy investor withdrawals, filing with the US securities regulator reports.
The Wall Street bank bought $722.4 million assets from its Goldman Sachs Financial Square Money Market Fund and $301.2 million from its Goldman Sachs Fund Square Prime Obligations Fund. The bank repurchased securities from the two funds after investors withdrew a net $8.1 billion from them last week during a four-day stretch. The weekly liquidity levels Goldman Sachs Fund Square Money Market Fund dropped from 43% on Monday last week to 34% on Thursday as investors made $6.84 billion in net withdrawals. Funds need to keep at least 30% of their portfolio in securities that can be converted to cash in five business days, SEC regulation on weekly liquidity states.
The assistance came as an extraordinary move in the staid money-market fund industry after another week of volatile markets. Goldman’s plans were disclosed to the US Securities and Exchange Commission last Friday.
Investors in the US withdrew tens of billions of dollars from prime money-market funds, which buy top-rated corporate debt. Usually, the are tame investments, however, they can be riskier than portfolios that rely more on US government bonds.
The US Federal Reserve introduced three emergency credit programs to combat the global economic shutdown that disturbed the money-market mutual fund industry. Banks are encouraged to buy assets from those funds, to protect them from selling assets at discount.
Goldman’s support is unusual but not unique in the coronavirus outbreak driven panic. Bank of New York Mellon Corp supported Dreyfus Cash Management twice last week with $2.1 billion. The $10.5 billion portfolio also took a hit by heavy investor withdrawals. BNY purchased $1.2 billion from the prime money-market fund and $949 million in two consecutive days last week.
SEC regulation dictates that if a prime fund’s weekly liquidity falls below 30%, its board can introduce redemption fees of up to 2% to slow down the withdrawals. They can also close it for up to 10 business days. However, this would not be great by investors. And this is where sponsors like Goldman and BNY Mellon come in with their capital support so liquidity levels do not fall below the threshold.
Goldman Sachs stated today that it expects worldwide real gross domestic product to contract by about 1% this year. This is a sharper economic decline than the one following 2008’s global financial crisis. Governments have been taking extraordinary measures to contain the Covid-19 outbreak which has put the global economy of risk of contraction.
The investment bank said in a note to its clients late on Sunday:
The coronacrisis — or more precisely, the response to that crisis — represents a physical (as opposed to financial) constraint on economic activity that is unprecedented in postwar history.
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