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Money lost in money fund

by Philip Brewer on 16 September 2008 6 comments
Photo: Philip Brewer

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.

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17 Sep. 2008 | 9:13 AM Rob Viglione

The US federal government is certainly battered, bloodied, and taking on lots more debt than is likely healthy. However, our system will not fail anytime soon and we will likely even become a beacon of relative safety in a world economy that is rapidly collapsing.

Money market funds taking losses and slowing liquidity is worrisome, and everyone should take steps to safeguard their holdings. The advice above is a good first step, but there are other things you should consider.

Depending on where you are in your life-career spectrum, the weightings for the following options varies:

- Bonds ... start with a solid holding of varied government (mainly federal, but also municipal) issues, then consider high quality corporate debt that is high yielding and realistically not all that high risk. if going the corporate bond route, stick with relatively safe sectors of the economy, don't load up on Lehman bonds!
- TIPS ... Treasury Inflation Protected Securities: these are government bonds that adjust returns for inflation. I broke these into a separate category due to their supreme importance for inclusion into your portfolio!
- Preferred stock for relatively secure companies can yield high single digit fixed returns with exposure to potential cap gains. Again, stick with stock for secure companies!
- Portfolio insurance ... for the savvy investor who knows how to pick up market insurance products or execute insurance strategies, this is a good time to do so. This includes various shorting, puts on index shares, puts on index futures, or writing calls on any of these. Visit my site if you want to learn any of these strategies.

Philip Brewer's picture
17 Sep. 2008 | 11:55 AM Philip Brewer

I don't disagree with most of that.  I would add a few caveats, though.

Municipal debt can be an excellent investment, but you need to be careful.  Many municpalities and states have large pension liabilities (for policemen, firemen, teachers, and other government workers) that are not properly funded.  (In many cases, even the governments have no idea how large the gap is between what they owe and how much they've put aside.)  Debt owed by those entities is not going to be paid in full--the money will simply not be there.

Debt of and shares in companies that are profitable make a good long-term investment, as long as you don't pay too much.  The trick is in spotting those companies that will continue to be profitable in the changing economic environment, and in knowing what's a good price.

Personally, I stay away from shorts, futures, options, and the like.  They have their place in certain circumstances--I simply arrange my life so that those circumstances are rarely my circumstances.  It's possible to use them to reduce risk and even to make money, but only if you're willing to commit to paying attention.  If, like me, you prefer to put your investments on hold for months at a time, they're simply inappropriate.

lghbob's picture
17 Sep. 2008 | 4:38 PM lghbob

We're in such a new financial world, that the lessons of the past, may not apply today.

The government is testing new ground, in supporting bad debts, bad debtors and bad debtees (?)

Do the old rules apply?

Phil's right... it will be difficult to spot the right place to keep your money. 

We went to IBonds and feel comfortable about that, but even the Government is at risk.

The larger question, I think is whether there is any safe haven except perhaps gold? 

Mentioning Pensions at risk (with investments in risky products like hedge funds and even derivatives) is just one of the many things that are and will be affected by the "bail out". 

The former "safe" money holding places have not yet addressed the real value of their assets, and in particular their liquid assets.

Pension funds, endowment funds, insurance funds, and even solid gold annuity funds are all at risk when the assets that back the funds are "marked to market".  

All are backed by the federal government, but this is the government that runs the Pension Benefit Guaranty Fund, FDIC, Medicare, Medicaid andSocial Security... not one of which is currently adequately funded to handle even a mild economic downturn. 

The nation may be the proverbial frog in the pot of water on the stove.  The change takes place below the "JND" the "just noticeable difference". 

We don't take our money out, because 1. we don't have a good place to put it, because  2. we don't want to pay taxes and fees, because 3. the value will come back... "It always does." because 4. we know that our neighbor or co-worker is in the same boat, and he's hanging in there.  

In the past when we didn't take our money out, it DID come back.  And for the past 55 years this has been true.  But... Katrina and Ike were once in a lifetime occurrences, and we're in a financial once in a lifetime experience.  When the Market crashed in 1929, it never regained it's value until 1954. 

Look for advice, and then look around and see what other advice is available.  Don't be taken in by the calm advisor, who is reasuring you that it will all come out right in the end... unless he is going to put his personal guarantee in writing... backed by a credit check and lien on his house. 

Yeah... ya have to trust someone... but it's better to spend a few anxious moments in checking out your investment decision, than to automatically let someone invest your money because its an easier thing to do.  

 

Our Ibonds are currently paying an APR of 6.4, and we sleep well... but even at that I'm not so sure that the money is safe even there.

 

This isn't helpful, I know... but if it gives pause to making decisions, then it'll be worth it.

 

 

 

my opinion only

Guest's picture
18 Sep. 2008 | 7:00 AM Kelja

I've been warning friends and family for a couple years that banks and mutual funds are at risk. Also advised people to think about taking money out of money markets and possibly putting it into savings accounts.

This is the storm I've seen on the horizon for years - wasn't hard to see it. But, of course I was labeled 'kook'. Eventually, I learned it was best to keep my opinions to myself.

We've entered into a different realm. When 2 guys, not congress, not the president, not any elected official, but 2, one a government bureaucrat, the other the head of a private consortium of banks (the FED) - Paulson & Bernacki - take 85 billion dollars of the taxpayers' money to essentially buy an insurance company, SOMETHINGS WRONG!

It's going to be tough sledding going forward. The FDIC has prepared itself by hiring and 'un-retiring' hundreds of auditors. They fully expect scores of banks to go under.

Protect yourselves and your families. Personally, I'm heavily invested in Gold, an excellent place to be in times like this. If you took note, yesterday gold had it's biggest one-day rise in history. One note of caution, it's not without risk. You must seek out quality companies (if you invest in miners) with little debt. And, prepare yourself for excessive, stomach-churning volatility. Use golds recent up and down moves as a guide.

Good luck to you all.

Guest's picture
18 Sep. 2008 | 5:46 PM Scott

Money market funds which invest exclusively in direct Treasury obligations should be immune from any NAV fluctuations

Guest's picture
17 Nov. 2008 | 11:00 PM Roy

I see people in the US talking of the percentage that they are earning but without worrying about the currency they are invested in. I have lived in Costa Rica for some 43 years and for day to day expenses I deal in the local colon but I'd never keep savings in that currency as it is too unstable. I used to save in dollars but I am now aware that it isn't all that much more stable. So most our savings are in gold and silver coin, and when I can't get that I will hold Euros in cash.

You see the US is looking for 700 billion for this bailout program. I doubt if any great part of that will become available to borrow so they probably will just print it. This will cause a considerable drop in the dollar's value. So why worry about 6% or 8% interest next year if the dollar is going to lose some 25% of its value. That's a lose/lose situation.

I might point out that no country on Earth still issues currency that is redeemable in real value. If the people of a few major countries begin to lose faith in their valueless currency it may all begin to collapse over the whole world. Then no investment, bond, stock or bank deposit will have much meaning. I'm not saying this will definitely happen but there's a darn good possibility. Then you either have gold, silver or some other commodity or you have nothing.