From: Reuters
Published November 30, 2007 08:36 PM

PayPal customers' cash exposed to illiquid assets

By Tim McLaughlin

NEW YORK (Reuters) - Illiquid assets in a portfolio investing the cash of eBay Inc <EBAY.O> customers surged 39 percent in the third quarter, exposing them to a larger chunk of troubled corporate debt, U.S. regulatory filings show.

The money market fund of PayPal, eBay's online pay service, invests cash parked by Internet shoppers in a portfolio that holds $1.63 billion in illiquid assets, or 5.5 percent of total holdings, according to the filings. That's up from $1.17 billion, or 4.6 percent of holdings, in the second quarter.

The illiquid tag means the named assets, or some of them, can't be sold for the value they carry in the portfolio. Besides illiquid assets, the PayPal fund is invested in a portfolio that includes short- and medium-term paper issued by corporate debt vehicles.

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Those vehicles, known as structured investment vehicles (SIVs), have been targeted for emergency multibillion-dollar bailouts by some of the world's largest banks, namely HSBC Holdings Plc <HSBA.L> and Citigroup Inc <C.N>.

PayPal, which allows consumers to send and receive payments online, said it is confident in the quality of the portfolio's investments.

Its money market fund is popular with customers seeking better returns on cash idled between transactions.

Customers can either sweep the cash into the fund or a federally insured bank account. To attract money to the fund, PayPal said it pays some fund-related costs to help boost yields for customers.

Money market funds are seen as safe because of their long track record of keeping their shares' net asset value at $1.

BARCLAYS MASTER FUND

While it's rare for any money market fund to "break the buck," investors are learning that some of them have strong ties to the subprime mortgage crisis gripping credit markets.

Florida officials on Thursday suspended withdrawals from a state-run, short-term investment fund that has shrunk to $15 billion from $26 billion in two weeks. They made the move to delay panicked local government investors yanking money.

The nearly $1 billion PayPal money market fund invests substantially all of its assets in a $29.4 billion master portfolio run by Barclays Global Fund Advisors, a unit of Britain's third-largest bank, Barclays Plc <BARC.L>.

That portfolio's illiquid assets include the commercial paper and medium-term notes of troubled SIVs. Barclays declined to comment.

In a statement, PayPal spokeswoman Amanda Pires said the PayPal fund "invests in a well-diversified portfolio of high-quality, short-term money market instruments."

"The assets deemed illiquid are well within the regulatory guidelines of 10 percent," she said. "We are confident in the quality of these investments and continue to be confident in the managers' abilities to manage the fund going forward."

SIVs sell commercial paper to buy long-term assets such as bonds backed by risky subprime mortgages, whose escalating defaults in the United States have roiled markets worldwide. Investors worry that SIVs will lose access to funding, forcing the debt vehicles to unload assets at deep discounts.

One investment deemed illiquid by the portfolio is $153.4 million in commercial paper issued by Harrier Finance Funding LLC, a SIV run by German state-owned lender WestLB AG <WDLG.UL>. Moody's Investors Service this month placed the Harrier SIV on review for possible downgrade, reflecting the deterioration of its assets.

The master portfolio also holds $1.5 billion in paper issued by SIVs sponsored by Citigroup and HSBC, U.S. regulatory filings show.

HSBC on Monday unveiled an emergency plan to fund its two SIVs -- Cullinan and Asscher - with up to $35 billion to avoid forced asset sales. That's good news for the portfolio holding PayPal money. At the end of September, the portfolio held $275 million in paper issued by the two HSBC SIVs, filings show.

The portfolio is also exposed to more than $1 billion in Citigroup-sponsored SIVs. Citigroup this month disclosed that it pumped $7.6 billion into the SIVs to shore up their assets.

(Editing by Braden Reddall)

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