money market mutual funds

Update on money fund guarantee program

Philip Brewer — Mon, 29 Sep 2008 15:40:58 +0000

The key thing to know about the Temporary Guarantee Program for Money Market Funds that the Treasury announced 10 days ago is that it only guarantees the money that you had in the money fund on that date. Any money you have in the fund that exceeds your balance on September 19th is not guaranteed--those shares are only worth their net asset value.

I posted when the Treasury announced the guarantee plan. Now the Treasury has released the details, in the form of a press release and an FAQ.

The plan was created for a simple reason: Money funds are key buyers of commercial paper and jumbo bank CDs. If shareholders in money funds chose to switch to more secure assets, the money funds would have no choice but to sell those assets--and if that happened to all money funds at once, there'd be no buyers. The result would have been a sudden collapse in the value of what had previously been the safest non-government assets.

With that in mind, the odd structure of the guarantee plan makes a certain amount of sense. They don't want to get into the business of guaranteeing money funds. Doing that would have a pernicious effect on the incentives of money fund managers. (Currently they compete on safety and yield. If all funds were equally safe--guaranteed by the Treasury--they would only compete on yield, driving fund managers toward the riskiest allowed investments.)

Now, though, it is only old money that's equally secure in all money funds. Any new money will only be as secure as as the assets of the fund, meaning that anyone looking for a place to put their money still needs to focus on safety. That should work to keep the incentives of the fund managers properly aligned.

Two other points:

The plan is temporary, initially in place for just three months, it can be extended by the Secretary of the Treasury for up to one year.
The plan only applies to money market funds that choose to join and pay a fee. The Treasury says to contact your fund to learn if they're participating in the program. (Individual investors can't sign up for the program individually.)

Whatever money you had in a money fund 10 days ago is as safe as any investment can be in these troubled times (assuming your fund participates in the plan). For any new cash that you'd like to put away for the future, picking a money fund will require the sort of research you should have been doing right along.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Deposit insurance for money funds

Philip Brewer — Fri, 19 Sep 2008 12:12:23 +0000

Early this morning, the Treasury announced deposit insurance for money market mutual funds, provided that the fund pays a fee. The money to provide the insurance will come from the Exchange Stabilization Fund (the government account holding the profits that the federal government realized when they seized everyone's gold in 1934).

According to the Treasury's press release, the program is supposed to be temporary, lasting one year.

Personally, I think this is a terrible idea. Money funds complete on two issues:

Return
Security of principal

There's a certain tension between those two, with extra return always entailing extra risk to principal. If the principal is insured, the incentives will shift--all funds will be secure, so they'll only be competing on return. That will push fund managers to invest in the riskiest assets that are allowed, which is a sure strategy for trouble ahead.

[Update 29 September 2008: The Treasury has released details on the program.]

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Money lost in money fund

Philip Brewer — Wed, 17 Sep 2008 03:08:46 +0000

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.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: