Signs Of The Apocalypse: Even Money Market Funds Are Losing Money

In the history of money market funds, says the NYT, only one had ever “broken the buck” or actually lost money… before yesterday. On Tuesday, the managers of a multi-billion dollar money market fund announced that their customers might lose money in the fund– a type of investment that is considered as safe as a savings account.

From the NYT:

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.

This is only the second time in history that a money market fund has “broken the buck” — that is, reported a share’s value was less than a dollar.

How could this happen? The NYT says that in this year alone banks have poured billions of dollars into shoring up money market funds that were caught holding questionable mortgage backed securities — leading millions of investors to pull their money out of other investments and place it into money market funds.

The trouble came when The Primary Fund realized that its stake in now-bankrupt Lehman Brothers was essentially worthless, causing the fund’s value to drop to 97 cents per share. For now, the fund will rely its right to delay redemption for seven days:

But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors’ shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.

Those facts would probably surprise most money fund investors, who have come to think of money funds as being “just like cash, just like a checking account,” a fund industry lawyer, Jay Baris, said.

The Investment Company Institute tried to reassure investors in a statement Tuesday. Here it is:

“Today, Reserve Management Corporation announced that one of its money market mutual funds is unable to maintain a $1.00 net asset value (NAV), an event triggered by unprecedented market conditions that have affected a wide range of financial firms. This type of event–known as “breaking the buck”–is extremely rare.

“Money market mutual funds have been a successful financial product for millions of investors. Although money market funds are not guaranteed, investors have benefited from the security, liquidity, and diversification that these funds provide under stringent and effective regulation. Today, money market funds hold $3.5 trillion in assets for a wide range of individual and institutional investors.

“ICI is working closely with its members and with regulators, including the U.S. Securities and Exchange Commission and the Federal Reserve, to maintain open communications about market conditions and their impact on funds.

“The fundamental structure of money market funds remains sound. These funds are subject to strict regulation governing credit quality, liquidity, diversification, and transparency. Rule 2a-7, administered by the SEC, strictly limits the types of securities in which money market funds can invest. Securities held by money market funds must be judged highly credit-worthy by both objective and subjective tests, and Rule 2a-7 imposes strict requirements for diversification of assets. The provisions of Rule 2a-7 have operated to help money market funds maintain a stable NAV of $1.00 per share. While not obligated to do so, fund sponsors have voluntarily lent support to their money market funds with credit lines or cash infusions in a number of recent instances.

“In the only previous instance of a money market fund breaking the buck, Community Bancshares, a small institutional money market fund, paid investors 96 percent of their principal.”

Money Market Fund Says Customers Could Lose Money [NYT]
ICI Statement on Money Market Mutual Funds [ICI]
(Photo: atbartlett )

Comments

Edit Your Comment

  1. Bladefist says:

    My fund is at 2.35%, which is more then half of what it was when this all started. I would say most money market funds are fine, they are so diversified in so many markets. I hope we don’t go through the doom/gloom and recession stuff again. It just ain’t gonna happen.

    On a positive note, oil is less then $100 per barrel.

    • Oranges w/ Cheese says:

      @Bladefist: Yeah, but gas is still almost $4. How is that possible?

    • johnva says:

      @Bladefist: But do you actually know that that is true that they’re safe? The bottom line is, like with any other uninsured investment, is to know what you are investing in. KNOW, don’t assume or guess, what underlying securities your money market fund is invested in. Be wary of “mortgage-backed securities”, in many cases, and be careful even with commercial paper. Make sure they’re investing only in high-quality stuff, although even that isn’t a guarantee since a lot of the subprime problems supposedly came from securities that contained risky loans and yet somehow were rated as very high quality credit risks.

      I’m pretty happy with the Vanguard one because they seem to have anticipated this crap and steered clear of all the toxic paper out there by actually researching in depth what they were investing in.

    • Techguy1138 says:

      @Bladefist:
      “I hope we don’t go through the doom/gloom and recession stuff again. It just ain’t gonna happen.”

      Are you oblivious to reality? Economics happen in cycles. When is the last time we had a serious down turn or a recession?

      This kind of news necessitates a cyclic shrinking of the economy to make the markets reflect the reality of the value of investments.

      • mackjaz says:

        @Techguy1138: Are you saying that since it hasn’t happened in the past, that it can’t happen in the future?

      • Bladefist says:

        @Techguy1138: Until I see a negative GDP, rationing, or soup lines, I’ll enjoy my obliviousness. I guess I’ll ignore the other markets that are doing fine, and I’ll ignore that my stocks are doing better then ever, and that I, and everyone I know is doing better then ever. I’ll ignore that though, because I’m sure the media wouldn’t create hype.

        I’m also 100% sure that there is no spin being put on our problems, to make them seam worse, to put one person in the white house over another. Nope. Wouldn’t happen.

        • Techguy1138 says:

          @Bladefist:
          Unless you think the federal government is also part of this spin your more than a little foolish.

          The United Sates government has now had to federally fund MANY large financial institutions over the past 2 months.

          This IS bad news. Given that the country is currently running a large budget deficit the government is loaning out money to prop up private institutions at a loss.

          The effects have not hit yet because it takes some time for this to work out.

          You may not see soup kitchens and extra homeless, but the economy MUST go through a contraction unless we want to end up like Zimbabwe.

          Btw, Zimbabwe is not in a recession either.

          • czarandy says:

            @Techguy1138: There is reason to think that the government will actually make money on the loans they gave to AIG. So it’s not really as bad as it may seem.

            • Techguy1138 says:

              @czarandy: There is also reason to think that they will not.
              AIG is an insurance company and there seems to be a lot of disasters happening financial and natural.

              Also you have to remember that the US government is paying interest on the funds it lends. So AIG will need to not only pay back but pay back with enough interest to cover what the us government is paying on it’s loans.

              It’s no sure bet that we won’t end up net losers when all is said an done

              • hapless says:

                @Techguy1138:

                @czarandy:

                AIG has roughly 15 billion in assets, potentially 360 billion in obligations, and an 85 billion dollar loan from taxpayers.

                What makes you think that we’re getting any of those dollars back?

                The purpose of the loan was primarily to liquidate AIG in an orderly fashion.

  2. blackmage439 says:

    Wow, I cannot be happier I just moved my funds out of a Countrywide Money Market account into HSBC’s 3.5% online savings.

    On a side note, is it that time yet when the rich bastards who brought about this neigh-apocalypse “trickle-down” some of their outrageous salaries to the people who need the cash to survive? They abused the free market; they should have to answer for that.

    • litbruin says:

      @blackmage439:

      Rich bastards abusing deregulated markets? Imagine that.

    • mike says:

      @blackmage439: I’m always confused by the philosophy that rich people should give away their money to people who should have known better.

      Yes, there are some rich people who took advantage of the system. But most rich people I know didn’t get rich by giving money away; they did it by saving and spending wisely.

      I’m in the lower-middle class and not a rich bastard. But I’m smart enough to know that I should save money instead of spend it, even when times are tight.

      I would refuse any tax on the uber-rich just because they have a lot of money. Why should they be punished for doing the right thing?

      • RandomHookup says:

        @linus: True, smart people shouldn’t be punished just for being smart, but they do need to pay their fair share. A couple of years ago, Warren Buffett discovered that he was paying 17% of his income in fed taxes and his secretary was paying 31%. The people who set the rules at the top end up enriching themselves at the expense of others.

        • Toof_75_75 says:

          @RandomHookup:
          What would be his “fair share” and who would decide it? Even at 17%, you can be sure he was paying a lot more in taxes than his secretary. Your argument leads to an excellent point about why the fair tax would be superior to our current system.

        • Bladefist says:

          @RandomHookup: I agree that is not an ideal way to tax, however, the more you tax the markets, the less people invest. It’s very counter-productive for this country. Fair or not is debatable, but necessary, very.

          A secretary making 31% cant be right, unless she is the richest secretary in the world.

          • johnva says:

            @Bladefist: 31% is very possible, after deductions and credits, if she’s really more of an “executive assistant” and makes quite a bit of money on salary.

          • RandomHookup says:

            @Bladefist:

            According to these article, she’s only making $60k (I figured Buffett’s admin would make more than that):

            [www.timesonline.co.uk]

            The percentage seems a little high, but there may be some things she is paying taxes on that have a higher marginal rate (maybe she cashed in 1 share of Berkshire Hathaway).

            Anyway, WB thinks he doesn’t pay enough in taxes which works for me…Once upon a time we had marginal tax rates in the 90% range. While I don’t advocate that, there has to be something that mitigates unbridled greed.

    • mackjaz says:

      @blackmage439: No, sadly, it’s time for the executives who insider-traded their way to millionaire/billionairehood collect on their golden parachutes so they can land unscathed amongst the evaporating financial futures of millions of Americans.

    • revmatty says:

      @blackmage439: You seem to misunderstand US style capitalism: privatize profits, socialize risks.

  3. HIV 2 Elway says:

    Again, markets go through periods of greed and periods of fear. We exited the last period of greed last October. Take a look at the S&P since 1950, the savings and loan crisis is nearly impossible to find. Long term, this problem is nothing. 2009 will be a great year for people to plant the seeds that will make them a fortune.

  4. those pesky disclosures and risk assessments strike again. Money Markets Funds are NOT FDIC insured and CAN lose you money.

  5. Carso says:

    Unbelievable. MMFs, while legally not obligated to keep par with the dollar, are generally regarded as one of the safest possible investments. Looks like the only alternatives left are CDs at major international banks or money in your mattress.

  6. Norcross says:

    “Never invest money you can’t afford to lose” – my grandfather, in 1994.

    Wow, did he know his stuff.

  7. QUICK! Pull your money out of the accounts! That should keep things stable! :)

  8. Fist-o™ says:

    So far I am unaffected by:

    The Mortgage Crisis (Sold a house 3 months ago with no problem)

    The “High Price of Gas” (It will go much higher)

    The Freddie / Fannie Bailout (Who?)

    The AIG bailout (Some bank or another?)

    In fact, my life has improved significantly in the past 6 months.

    *Note: Yes, my retirement funds have shrunk, but markets grow and shrink all the time. No surprise there. I don’t consider this out of the ordinary.

    • Etoiles says:

      @Fist-o: Hey, look, it’s the exact kind of mentality that created this problem in the first place!

      Anyone got that Jimmy Stewart clip from It’s a Wonderful Life on hand? (“Your money isn’t here… it’s in his house! And his!”)

      You can have good fortune in a bad economy (I have — I got a new job and it pays 18% more than my previous, crap job) and bad fortune in a good economy (I have — couldn’t get a job with health insurance and had the unfortunate need to go to the ER one night…). That has nothing — I repeat, nothing — to do with how much the system does or doesn’t need fixing.

      If the grocery shrink ray doesn’t have an effect on your bottom line, if the increased cost of transportation and home heating energy doesn’t bother you, if you can do everything 100% for yourself and don’t mind your tax rate, bully for you. That does NOT make everything fine.

    • RichNixon says:

      @Fist-o: Huh? You’re not affected by higher gas prices because gas prices are going to go higher? If you buy gas, you’re affected by rising prices.

      As far as the Freddie and Fannie bailouts, this affects all taxpayers.

  9. Corporate_guy says:

    Slight correction needed?
    “Today, money market funds hold $3.395 trillion in assets for a wide range of individual and institutional investors.”

  10. Powerlurker says:

    I have some money invested in Vanguard’s Prime Money Market fund. I was planning on putting some more in, but since the yield has dropped, I’ll probably just leave the money in my ING Direct savings account for now or maybe look into a CD.

  11. mike says:

    Most money market accounts aren’t insured through FDIC. Banks (at least mine) warn you that your account may lose value.

    This is where I’m looking at the politicians and wondering why they are panicking. I think it’s because they think it looks nice for the cameras.

    In my eyes, this was a long-time coming. We as a society really need to learn to save and be frugal and live within our means.

    I’ve yet to be effected by the whole meltdown, outside of the fact that my bank interest keeps going down and my house has lost value.

    • zarex42 says:

      @linus:

      That’s not true at all. Almost all of the money market accounts are as safe as any other savings account. Very few have downside risk.

  12. Hoodooz says:

    Unaffected? So you somehow don’t pay taxes huh? We’ll all be affected by this meltdown in one way or another. Your head seems to be stuck in a dark place.

    • Fist-o™ says:

      @Hoodooz: So you think my taxes will go up because of this?

      Perhaps you’re right. Maybe my lack of “The Sky is Falling” syndrome is unwarranted and my head really is stuck up a dark place.

      What would you recommend I do about it?

  13. Bladefist says:

    Well, company/mutual fund

  14. KyleOrton says:

    I was under the impression that my money market account through the local bank was FDIC insured. Just checked and, indeed, it is. On the other hand, the IRA money in a MMF is not (also aware of that). There’s definitely a difference between an ACCOUNT and directly investing in a FUND.

  15. theblackdog says:

    I expect there will be people making a run on their money market accounts very shortly, thereby devaluing it even further.

    I wonder if banks are wishing they had that 7 day delay rule on all other accounts as well.

  16. mrgenius says:

    Make sure you are stashing your cash in an FDIC insured money market fund. And if your cash balance is above 100k, you should make sure that your brokerage uses several banks to take advantage of the FDIC insurance.

    That said, with yields at historic lows, you might as well buy a large suitcase and a shovel…

  17. SherwinSurveen says:

    At the root of this situation is a common misconception equating
    investments with savings.

    A money market fund is an investment. However low risk it may have
    looked, it remains that no investment is risk-proof. By now we are
    also acutely aware of how much any promise made by an investment firm
    or portfolio management firm is really worth.

    A case in point are those MM funds that invested in derivative
    products to edge that extra % return against the competition. I guess
    it looked like a fine idea at the time: After all, commercial papers
    were as risk proof as anything, right?

    Exactly right.

    I am contrarian by nature, and a firm believer in contingency plans.
    For every investor that gained wealth from the Internet bubble,
    thousands lost a substantial amount. Yet, those who bought AFTER the
    burst and sold before this one made out very well. There are now, and
    there will be for a while, great opportunities for those who still
    have money to invest – just ask China, among other nation currently
    scooping up American assets at fire-sale prices.

    Diversification also applies to savings: Split your funds between
    institutions to maximize FDIC coverage and minimize exposure. And
    consider stuffing a few gold dubloons in the mattress, just a few, as
    insurance against end-of-world catastrophic events: You’ll probably
    never need them, they may even get stolen, but they’ll be a life
    saver if ever the very worst comes to pass.

    But most of all: Understand that any investment, whatever they may be
    called, whatever promise of security you may receive, is NOT savings.

    Disclaimer: Because of legislation prohibiting cumulative business
    activities, I no longer hold any financial advisor licenses.