There are a lot of good articles around about money market funds possibly losing their peg to 1.00 dollar mark. Fellow blogger Rob from Qunatifiable Edges wrote about how his IRA is frozen due to his cash being affected by the 3% drop in the Reserve Primary Fund. One of the New York Times’ articles, ‘Money Market Fund Says Customers Could Lose Money‘, explains why Rob’s account is frozen:
The fundâ€™s financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.
If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fundâ€™s money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Fla.
The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.
That article also has an interesting part about how often funds “break the buck” and why they typically don’t do so:
This is only the second time in history that a money market fund has â€œbroken the buckâ€ â€” that is, reported a shareâ€™s value was less than a dollar.
This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.
The other NY Times article, ‘Money Market Funds Enter a World of Risk‘ delves into the details of different types money market funds and which ones are truly safe:
And thatâ€™s why, in this market, financial advisers agreed on Wednesday, consumers need to become their own chief investment officers, even when it comes to something as simple as finding a place to put their cash.
â€œOne by one, all of my safe havens arenâ€™t so safe anymore, and thatâ€™s a bad thing,â€ said Matthew Tuttle, a certified financial planner and president of Tuttle Wealth Management in Stamford, Conn.
â€œIt used to be O.K. to have money in a CD, but now you have to worry, â€˜Is my bank going to go under?â€™ â€ he added. â€œYou used to be able to buy a guaranteed annuity from an insurance company, but now you have to worry, â€˜Is my insurance company going to go under?â€™ Or, you can have auction-rate preferred securities, but now there is no market.â€
Before you pull your cash out of your money market fund, you need to understand what you own. There is a big difference between money market mutual funds and the money market deposit accounts at a bank (and banks sometimes sell both).
Folks would be wise to check the details of their money market funds…