Money lost in money fund
For thirty years, people have treated money funds as being just as safe as a bank. On the rare occasions when money fund management made a bad investment, they've voluntarily coughed up enough money to make investors whole. Today, though, the money market mutual fund The Primary Fund (part of The Reserve Funds) announced that its shares, normally worth $1, were only worth 97 cents.
The fund held $785 million dollars in debt securities issued by Lehman Brothers, which the funds trustees have decided are probably worthless. In a press release dated today, the fund announced, along with the 97 cent share price, that they were also restricting withdrawals:
Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption. The seven-day redemption delay will not apply to debit card transactions, ACH transactions or checks written against the assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000.
Obviously, they concerned about their ability to sell their other investments (the ones that aren't worthless) fast enough to satisfy the customer's demands for cash.
Money market funds are invested in securities that are supposed to be not only extremely secure, but also extremely liquid, so that measure is almost as worrisome as letting the share price drop below $1.
As an ironic tidbit, the Reserve Fund is the company that invented the money market mutual fund.
What does this mean for your money market fund? I'm afraid it's impossible to guess. I expect over the next few days, all your banks and funds will be issuing press releases. Most of them will be talking about how your investments with them are completely safe. Perhaps a few others will have to admit that they lost significant amounts of money in investments with Lehman Brothers (or whatever firm is the next to go under).
Personally, I'm not yanking my money out of my money market funds. But part of the reason for that is that I've got that money divided up between a couple of different funds, and I also have chunk of cash in banks with FDIC insurance.
Update 19 September 2008: The Treasury announces a program to insure money market mutual funds.