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Is Your Money Market Fund the Next Subprime Mortgage Debacle?
Posted Sep 17, 2008 12:19pm EDT by Jonathan Kennedy in Investing, Recession, BankingFrom ClusterStock, Sept. 17, 2008:
The financial meltdown surpassed another dismal milestone today as the bankruptcy of Lehman Brothers forced one of the world's premiere money market funds to record a loss -- the first for such a fund in 14 years.
If you're scared that you, too, are going to get slammed, put your money in an FDIC-insured savings account and/or invest it in a money-market fund at a major firm that will be publicly humiliated if its funds drop. This is no guarantee, of course (the fund that lost money today is a big one), but it's better than investing in little money-market funds no one has ever heard of.
WSJ:
In a sign of how the financial crisis is hitting small investors, a huge money-market fund, the Reserve Primary Fund, announced Tuesday that it lost money as its net asset value fell below the hallowed $1-per-share level, the first time one of these conservative funds has had a loss in 14 years.
The culprit was debt securities it holds issued by Lehman Brothers Holdings Inc.
The news raised the prospect more losses might be in store for other money-market funds holding paper from Lehman, which collapsed Monday, and from other problem-ridden firms. As of Friday, the Reserve Fund had assets of around $62 billion, but they have fallen considerably since.
The development "is really, really bad," said Don Phillips, one of the founders of Morningstar Inc. "You talk about Lehman and Merrill having been stellar institutions but breaking the buck is sacred territory."
The Reserve is a New York cash-management firm that prides itself on creating the first money-market fund. It has dubbed itself "the world's most experienced money fund manager" with $125 billion in assets through June. It didn't return calls for comment.
The Reserve Primary Fund isn't the only money market fund that's struggling:
On the heels of the Primary Fund's announcement, Standard & Poor's cut its credit rating from the highest for money-market vehicles, AAAm, to Dm, the lowest.
One much smaller money fund under the Reserve's banner, the International Liquidity Fund Ltd, also dropped below the $1 standard. That fund is available only to offshore investors. Separately, a money-fund-like investment pool for municipalities not managed by the Reserve, Colorado Diversified Trust, also "broke the buck," but S&P reported that it will be folded into another Colorado entity. S&P downgraded both the International Liquidity and Colorado Diversifed funds as well, from AAAm to Dm.
In addition, S&P put nine other money funds sponsored by Reserve Management Corp. on credit watch for possible downgrade.
273 Comments
duh w - Wednesday September 17, 2008 12:35PM EDT
you better make clear you are talking about money market MUTUAL FUNDS !! NOT bank money market accounts !!!!! I don't think you did that.
JeanT - Wednesday September 17, 2008 12:44PM EDT
This is getting scary because the Bush Administration has no credibility left. In a situation like that it would be reassuring to hear the President.But there is nothing to expect from a Chimp who escaped a zoo.That the somber reality.
Reedersong - Wednesday September 17, 2008 12:47PM EDT
Many money market funds--bank account money market funds--had investments in AIG?
Rayster - Wednesday September 17, 2008 12:49PM EDT
Thats a nice and comforting picture for the article....your money = up in flames. CEO's money = deep in their pockets!!! Fight government corruption!!!
__A_YAHOO_USER__ - Wednesday September 17, 2008 12:49PM EDT
Investing is marathon.....It needs endurance patience but most of all to bear the burden..........There is no easy money there especially when we are hit by big long storm day by day or month after month.A marathon player has reserve in Energy to win and finished the line....Investing is not easy when time like this when thing are getting cheaper day by day but one thing is sure if you hold the fund it will recover after the end of this tornados........The question is when.....my answer I dont know too.....My advice if you can not stomach the head get=out the kitchen..Why there is a pension. There is stock market.Whatever happen this bad time will subside for better one.
Davitto Lammo - Wednesday September 17, 2008 12:51PM EDT
It seems that: while John McCain's poll numbers go up the Stock Market has been going down. Not sure if there is any correlation, but you have to agree it is happening, or your head is buried in the sand.
Yahoo! Finance User - Wednesday September 17, 2008 12:52PM EDT
Who the hell is Jonathan Kennedy? And why is he trying to start a paranoid frenzy?
__A_YAHOO_USER__ - Wednesday September 17, 2008 12:56PM EDT
If the market will not stop like getting burst.........I think it would be better the Federal will handle it........Call it Socialist or COMMUNIST..............WRONG THERE IS NO SUCH THING.......... I WILL TERN IT REDEEMER....MAY BE THE FEDERAL WILL BE THE REDEEMER WHO WILL TAKE IT OVER FOR A WHILE UNTIL WE LEARNED TO DO THE BUSINESS PROPERLY.
Douglas - Wednesday September 17, 2008 01:01PM EDT
Yes, a big difference between a money market and a money market fund. They didn't make that clear. A money market (not fund) at a financial institution is backed up by the FDIC
DavidO - Wednesday September 17, 2008 01:20PM EDT
Money market funds typically hold dozens of different issues of short term corporate notes. One default won't be seen in the share price, but will be taken from the current yield. If you see the yield drop significantly but that of other funds is unchanged, then you probably had a default in your MM portfolio.
Moxies - Wednesday September 17, 2008 01:24PM EDT
How does the government come up with all these billions and trillions, for bail out’s, or nationalization? It's amazing, I thought we were broke.
Owns Obama - Wednesday September 17, 2008 01:25PM EDT
Didn't any of these so called journalists learn anything from the stupidity of Charles Schumer? Why must we keep yelling fire in the theater?
Yahoo! Finance User - Wednesday September 17, 2008 01:27PM EDT
My IRA has plummeted 20% since July, 2007. My home has negative equity, and I'm contemplating walking away from it soon. I'm still 2 years away from Medicare. If I file for early SSS retirement benefits, it won't be enough to live on. I'm still working, but my income has plummeted by more 50%. I'm self-employed. Filing Chapter 7 would be next. But it would still be tough. Nobody can retire on a fixed income of $1,200.00 nowadays.
Yahoo! Finance User - Wednesday September 17, 2008 01:28PM EDT
This is a concern, I moved all a large chunk of my mm funds into cd's this morning which are fdic insured. As for the Republicans hailing McCain what we're seeing is the worst failure of economic governance since the days of Hoover and Mellon and it's largely due to the Republicans slavish adherence to cheap money and hands off regulatory policies. These are the facts. Although no doubt they will claim it's all Pelosi's fault or something to do with lipstick or pigs some such bs.
wizarda - Wednesday September 17, 2008 01:29PM EDT
Stupidity doesn't work... vote anybody but McCain/Palin
edwin g - Wednesday September 17, 2008 01:30PM EDT
All you idiotic republicans got us in this mess and now you want 4 more years of the same garbage. This shows how truly ignorant Americans are, if Bush was on the republican ticket I'm sure all these idiots would vote for him again. god bless America.
robert - Wednesday September 17, 2008 01:31PM EDT
FDIC is only as good as the government and when the government is broken as now , so is the FDIC . Lots of luck .
Yahoo! Finance User - Wednesday September 17, 2008 01:31PM EDT
Duh: Thanks so much for the clarification regarding money market funds (mutuals and banks). You're right; I don't think some of these so-called experts have done that.
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Thomas - Wednesday September 17, 2008 12:32PM EDT
This is getting scarry!!!