Have never lost money on your money market account, and never expect to? Better think again. I am not suggesting you will lose money on your money market account, but you should be aware of recent developments concerning what financial institutions are doing in hope your money market account will not lose money, and probably more importantly, doing to contain possible panic if not outright rebellion along main street America should a money market fund's value go below the usual $1.00 per share price/value.
Join me below the fold for more.
In an article appearing in yesterday's New York Times by Eric Dash, entitled "Investor Safe Haven Becomes a Concern", Mr. Dash states:
In another sign of turmoil in the credit markets, large investment firms, having sought out the high yields for their money market funds, are being forced to protect the funds from losses brought on by investments that no longer seem safe.
The moves have cost the firms hundreds of millions of dollars, a price that could climb if credit market problems worsen.
The bailouts reflect the fact that while the managers of money market funds have no legal obligation to assure the funds do not lose money, they fear that losses might lead investors to flee the fund and perhaps take money out of other funds managed by the company. Such losses could also damage a firm’s reputation. New York Times Link
Mr. Dash is not the only one reporting on this phenomenon. Again yesterday, November 14, 2007, the Washington Post ran an article on the same topic, i.e., "Firms prop up money-market funds".
Some financial firms are shoveling cash into their money-market funds to prop them up as the nation's credit crisis continues to spread, but account holders don't need to panic just yet, analysts said yesterday.
Legg Mason, a Baltimore money manager, recently announced it would inject $100 million into a money-market mutual fund and another $238 million into two other funds that could be in danger of falling below the standard $1 per share. WPO Link
And when the financial institutions move to prop up their money market funds, what is the impact? Well they post loses, to wit:
U.S. Bancorp said its fourth-quarter earnings were at risk of being reduced by a "few cents" a share because some of its money market funds hold asset-based securities that have lost value.
The Minneapolis-based bank has "a good handle on the exposure" and will support the affected funds, Chief Executive Richard Davis said Wednesday at an investor conference in New York.
U.S. Bancorp owns First American Funds, which had more than $70 billion in assets under management as of June 30. The bank said on Aug. 15 it was "committed to maintaining the credit ratings of all rated funds and ensuring preservations of capital in the funds. Link
And all of this is happening at a time when there is a mass exodus out of equities into cash/money market accounts. And when you think it is safe to get back into the water, read this Even 'safe' funds play with fire
So what is person to do? Well forewarned is forearmed. I do not claim to be an expert, but with respect to money market funds, attempt to stick with funds that invest solely or mostly, i.e., 95%+ in U.S. Treasury obligations. Your fund should be able to inform you whether the money market fund has asset-based securities or similar collateralized debt exposure.