Nov. 13 (Bloomberg) -- Bank of America Corp., Legg Mason Inc. and at least two other companies are propping up their money-market funds to cushion them against possible losses on debt issued by structured investment vehicles.

Bank of America, the nation's second-largest bank, may provide as much as $600 million to funds that bought debt from SIVs, Chief Financial Officer Joe Price said at an investor conference today.

Legg Mason, SEI Investments Co. and SunTrust Banks Inc. have stepped in to make sure their funds don't fall below the $1 a share net asset value, known as ``breaking the buck.'' The 10 largest managers of U.S. money funds have about $50 billion in short term debt of SIVs, some of which has defaulted.

``This is the first real case'' of securities held by money-market funds defaulting, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter.

Legg Mason invested $100 million in one of its money funds and arranged $238 million in credit for two others, the Baltimore-based company said in a Nov. 9 regulatory filing. SunTrust Banks Inc. received approval from regulators last month to protect two money funds that bought debt from Cheyne Finance Plc if the SIV is unable to repay the Atlanta-based bank.

Loading Up

Money funds, considered among the safest investments, loaded up on asset-backed commercial paper with the hope of increasing returns. Asset-backed commercial paper maturing in 90 days yielded an average 5.3 percent this year, 0.6 percentage point more than U.S. Treasuries with similar maturities, data compiled by Bloomberg show.

``When you get involved in this contest for when you can make 3 basis points more here or 2 basis points more there, that's insane,'' said Bruce Bent, chairman of Reserve Funds, who in 1970 created the first money-market fund. ``It's not what I designed the money fund to do.''

Now, managers including Charlotte, North Carolina-based Bank of America, Federated Investors Inc. and Fidelity Investments are trying to limit losses by backing a plan coordinated by the Treasury Department for an $80 billion fund to keep SIVs afloat.

``It could be the impetus behind Treasury in this whole process,'' said William O'Donnell, head of U.S. rate strategy at UBS Securities LLC in Stamford, Connecticut. ``They're not talking about it. They don't want to say, `We're doing this to save the money funds.'''

Raising Questions

The SIV crisis has raised questions about whether the debt vehicles are appropriate investments for money-market funds. Vanguard Group, the fifth-largest U.S. manager of money funds, shunned them as too risky. New York-based Goldman Sachs Group Inc., the world's most profitable securities firm, dumped SIV debt on expectations the vehicles would be hurt by losses on subprime-mortgage securities.

``I'm sure, in hindsight, every manager wishes they hadn't'' bought SIV debt, said Robert Plaze, an associate director in the investment management division at the U.S. Securities and Exchange Commission in Washington.

Bank of America provided $300 million to a fund that bought SIV debt and will give ``a similar aggregate amount'' to other funds, Price said. The bank provided the support because of ``uncertainty around the value'' of the SIV debt, he said.

Cheyne Debt

SEI provided financial guarantees of as much as $129 million to two funds that own Cheyne debt, the Oaks, Pennsylvania-based money manager said in a Nov. 9 regulatory filing. Standard & Poor's said it would place ``any mutual fund'' with a top AAA rating that owned Cheyne debt on review for downgrade unless the fund was given credit support, SEI said in the filing.

S&P has had similar discussions with ``a handful'' of funds, telling them that holding defaulted securities ``is no longer consistent'' with guidelines for the top rating, analyst Peter Rizzo said today in an interview.

The most recent disclosures by the 10 largest money-market fund managers show that eight of them held a combined $49.8 billion in SIV commercial paper or medium-term notes. Their holdings were mostly limited to a few funds permitted to buy debt issued by the vehicles.

Legg Mason

Funds run by Legg Mason held about $10 billion of SIV debt, accounting for 6 percent of the company's money-market assets at the end of October, according to its filing with the SEC.

SIVs were set up by banks and investment firms to profit by borrowing money at low rates and owning securities that pay higher yields. They sell short-term debt including commercial paper, which matures in 270 days or less, and buy longer-dated assets such as bank bonds and mortgage-backed securities.

Investors started fleeing SIV debt in August as holdings of securities backed by subprime mortgages, home loans given to borrowers with weak credit histories, defaulted at record levels.

The boycott has caused the amount of asset-backed commercial paper to shrink 29 percent to $845.2 billion from a peak of $1.18 trillion on Aug. 8, according to the Federal Reserve in Washington. It also forced structured funds to sell at least $75 billion of assets to pay off investors, dropping SIV assets to about $320 billion since July, according to New York-based Moody's Investors Service.

Net Asset Value

Moody's said the average net asset value of SIVs fell to 71 percent at the beginning of November from 102 percent in June. SIV net asset value is a measure of the portfolio's value after repaying debt and is expressed as a percentage of capital.

Money funds are regulated in the U.S. by the SEC and are considered the safest investments outside of insured bank accounts and government debt. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short- term corporate debt ratings.

The only money-market fund to fail was run by Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives. The fund, which had more than 27 percent of its assets in the derivatives, paid investors 96 cents on the dollar, according to SEC records.

Fund Haven?

Investors so far have stuck with money funds as a haven amid the credit crisis. Assets rose to a record $2.97 trillion as of Nov. 6, according to the Money Fund Report.

SIV losses probably won't push a money-market fund's value below $1 a share, Crane said. If a fund did break the buck, the manager would almost certainly reimburse investors to protect its reputation, he said.

Bent said the worst case scenario would be if investors moved to pull money from funds invested in the debt, causing returns to drop.

Legg Mason didn't purchase any debt from the three money funds, which are sold to institutional investors, spokeswoman Mary Athridge said yesterday. She declined to identify the funds or the SIV investments.

The company also manages three retail money-market funds that have invested in SIV debt, including the $54.1 billion Citi Institutional Liquid Reserves fund. It holds $4.89 billion in SIV debt, of which $1.6 billion has been in default or downgraded. Athridge said Legg Mason hasn't sought to support those funds.

``We believe the current market situations should not affect the $1 share price going forward,'' Athridge said in an e-mail.

SunTrust Exemption

The SEC told SunTrust in an Oct. 26 letter that it won't object if the bank sets up credit for two of its funds. SunTrust, the seventh-largest U.S. bank by assets, asked for the exemption after buying $115 million in medium-term notes issued by Cheyne.

Wachovia Corp. of Charlotte, the fourth-largest U.S. bank, reported a $40 million loss on $1.1 billion of asset-backed commercial paper it purchased from its Boston-based Evergreen Investment Management Co. unit.

Evergreen's $7.2 billion Money Market Fund cut its holdings in asset-backed commercial paper to $1.76 billion as of Sept. 30 from $2.9 billion six months earlier, according to disclosures on the firm's Web site. The fund held $100 million in medium- term notes from London-based Gordian Knot Ltd.'s Sigma Finance Inc.

Federated, Fidelity

Ten funds run by Pittsburgh-based Federated had $5.75 billion in SIV debt, as of Sept. 28, or 8.6 percent of their assets, according to disclosures on the company's Web site. Of the four SIVs whose debt Federated owned, two of them have ``absolutely no subprime exposure,'' Deborah Cunningham, chief investment officer at the Pittsburgh-based company, said on a conference call with investors last month. The other two have less than 1 percent in subprime assets, she said.

Fidelity's money-market funds held $6.51 billion of commercial paper and medium-term notes sold by SIVs including Sigma Finance, according to disclosures on the Boston-based firm's Web site. That represented about 3.5 percent of six funds.

``We can state unequivocally that Fidelity's money-market funds have continued to provide safety and security for our clients' cash investments,'' spokesman Alexi Maravel said in an interview.

Vanguard Steered Clear

Vanguard of Valley Forge, Pennsylvania, steered clear of SIV debt because it has ``little or no'' backstop financing from banks, David Glocke, manager of the closely held firm's $97 billion Prime Money Market Fund, said in an e-mail.

``Without established bank lines that the SIVs can access to cover funding disruptions, they're at the mercy of the market,'' he said.

Goldman Sachs Asset Management said it sold ``a very small position'' in SIV debt earlier this year.

``SIVs are very sensitive to investor confidence,'' Elizabeth Anderson, co-chief investment officer for Goldman's Global Cash Business, said in an interview. ``We decided to sell over worries that things were going to get worse.''

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net

Last Updated: November 13, 2007 18:05 EST