Money Market Fund Breaks The Buck: What’s Safe Now??

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One of the largest and first money market mutual funds ever has broken the buck yesterday. The Primary Fund, run by The Reserve, with $65 Billion in assets, saw it’s per-share price drop from the standard $1 to 97 cents, due to it’s holdings of Lehman Bros. debt. They are also restricting withdrawals for up to 7 days. According to the NY Times, this is only the second time in history this has ever happened.

In the aptly titled Pride Goeth Before a Fall, NY Times blogger Floyd Norris points out how The Reserve actually made fun of other money market funds for being careless. This is from a letter from The Reserve to shareholders from earlier this year:

When we created the world’s first money fund in 1970, we clearly stipulated the tenets that define a money fund: sanctity of principal, immediate liquidity, a reasonable rate of return — all while living under the overarching rubric of boring investors into a sound sleep. Unfortunately, a number of firms that sponsor money funds, and a number of investors that selected them, have lost sight of the purpose of a money fund and the simple rules that guide them in their foolhardy quest for a few extra basis points. […] Thank you for your confidence in our Reserve. We never forget you have entrusted us with your reserve(s).

Yeah, you’re welcome. Can I have my money back now? 😛 If you trade with TD Ameritrade and have a money market sweep set up with them, I believe they use The Reserve.

Where Should I Put My Cash?

Consider sticking with an FDIC-insured bank account. Money market funds are not insured. If you want that, you should stick with an FDIC-insured bank and mind the FDIC insurance limits carefully.

Besides, it’s more profitable right now. You can get a savings account today with no fees or minimums that earns up to 3.75% APY. The fund that failed above was only yielding 1.19%, and I don’t know of any money market fund that yields higher than 3%. (Even if it does, be suspicious!). Why settle for less interest and more risk?

Invest in a Treasury money market fund. But many of us have brokerage accounts with an automatic sweep or “core” option. We have to pick some sort of money market fund. In this case, to get the most safety you should choose the “Treasury” money market option, because these only invest in Treasury securities which are backed by the U.S. Government. You often end up with a lower yield, but some of it is recovered if you live in a state with income taxes. Treasury interest is exempt from state income taxes.

For example, with Zecco Trading their taxable money market (CSAXX) is yielding 1.81% while their Treasury MM (ITRXX) is only at 1.16%.

Invest in big fund companies with lots of assets. You might be surprised to know that many other money market funds would have broken the buck this year, except that the fund companies stepped in with their own money to prop things up. The Wall Street Journal reports that “20 money-fund advisers have moved to support their funds within the past 13 months”. One recent example is the influx of money by Wachovia Corp. into the money market funds from Evergreen Investments, which they own.

Why do they do this? Not out of the goodness of their hearts. It is to protect the trust of their brand and to prevent a huge onslaught of withdrawals. I would certainly never invest in a company that I can’t even trust with my cash. Therefore, if you are going to invest in a money market fund, buy one in a company which would spend every last penny to protect it’s name brand. From Marketwatch:

Phillips speculated that because The Reserve is solely a money market shop, it didn’t have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp , would be able.

FYI for those who invest in Vanguard money market funds:

Vanguard Group’s money-market funds have no exposure to commercial paper from Lehman, Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Washington Mutual or AIG, according to a spokesman for the Valley Forge, Pa., asset manager.

As for Fidelity:

Fidelity’s taxable, general purpose money market funds have no exposure to any Lehman Brothers entity, Crowley said. The taxable money market funds do have “modest” exposure to two issuers that are subsidiaries of troubled American International Group.

Although most of my cash is in FDIC banks right now for the higher yield, I would personally still sleep well with money kept in a money market fund from Fidelity or Vanguard.

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  1. This is why I yanked my sweeps out of my brokerage accounts last year and moved them to online savings accounts. I realize if everyone did that, there would be more broken money market funds, but I figure: what’s the point of reading up so much on finance if I don’t take advantage of that to beat other people to the punch?

  2. TDA Customer says

    TDA had been switching its Reserve Fund to its own TD MM series fund a few months ago. Mine is definitely not the Reserve Fund as Sweep fund.

  3. Good point, Don. Of course, this same reasoning should be leading people to pull out of WaMu, too. I’m not particularly keen on making the FDIC spend my tax money on bailing me out. I’d rather not need bailed out.

  4. I feel differently about a bank. If the FDIC takes over my bank, I’m not going to lose money. I would not pull out of my bank just because it is on the rocks, unless it meant service was going down hill. The FDIC is going to spend your tax money to bail out the bank whether you pull your funds out or not (and more likely so if everyone does).

    I even looked up the strength of the various banks I do business with, and my primary bank was rated as the weakest. I haven’t changed anything because of it. I do wish their online banking system was more polished, but my wife banks at a different local bank and their system isn’t any better so I’ve stayed (except my former money market funds).

    The fact is, that I used to get a good rate from the money market at my local bank. I used to get a good rate from the money market sweeps in my brokerage accounts. But for the last 6-12 months, the online savings accounts have done better than both and they are FDIC insured. To me it is a no-brainer. You should be compensated for your risk, and money markets are not backed by FDIC.

  5. Gold…

  6. What about municipal bonds? I heard Suze Orman say she has her money in them and makes 5% guaranteed. In todadys market that sounds pretty good.

  7. Wow, nice not to have much money for a change. I know this affects everyone, but I never thought that being poor would be a benefit. Not as much stress as those people who even come close to FDIC insured limits.

  8. I thought Vanguard index fund lost big on Freddie Mac and Finnie Mae as they purchased large amount of shares in the past months…

  9. I also thought that the Vanguard Prime Money Market Fund is a good place for excess cash. But how would Vanguard’s unusual ownership structure affect things if the Fund were at risk of breaking the buck? Who could come to the rescue? With Vanguard’s coop ownership structure, where is there capital available to bail out the money market fund?

  10. trailmaster308 says

    I have money in GMACBank and ING Direct…are these money market funds or saving accounts?

    Are these considered safe?

  11. Vanguard Prime Money Market Fund is currently at 3.60% for 1 year returns.

  12. Looks like just about everybody decided to put their money into Gold and other precious metals today. People have lost faith in both the dollar and the stock market.

  13. People are paying for the privilege of lending the US govt money. That’s right – you pay to lend money to the government. I’m thinking about doing the same thing myself when I found out SPIC only has 1.4 Billion in reserves.

  14. I don’t know if anyone else noticed, but WAMU is one of the few CC companies offering me zero percent balance transfers… But today there they are trying to sell themselves ‘below market value’. I wonder how they got into that trouble? Hmm… let me see.

  15. Wealth for Investors says

    Is there anywhere to hide in this economy
    today i lost my shirt for the first time in a long time in the market.
    Even BCE.TO which is suppose to be bought out for 42.50 tanked to 30 bucks!
    i just stick with my real estate 😉 haha

  16. I hope that whichever company ends up buying WaMu’s retail banking business will play nice with the WaMu online interface. It’s easy to use for the simple stuff, it has a wide functionality without being confusing for the complicated stuff, and it let’s you modify scheduled transfers before they’re executed.

    Dear God, please let HSBC drop out of the running early on.

  17. Steve – Vanguard Prime IS at 3.6% for the past year, but what really matters at the moment is current yield, which is only 2.25%. You can do a full point higher with many of the online savings accounts, with more safety (probably not much more, because I think the Vanguard account is close to certainly safe).

  18. “If you trade with TD Ameritrade and have a money market sweep set up with them, I believe they use The Reserve.”

    The Reserve is (or was) just one choice. Last year I switched for some reason from the Reserve to one of the TD Ameritrade-brand money market sweeps. w00t!

  19. Update on Reserve Primary Fund: “As of Friday, September 12, 2008, the fund had approximately $62.6 billion in assets and by late Tuesday afternoon, the fund had taken a $40 billion hit, falling to approximately $23 billion in assets.”

  20. A $40B loss, that is a bad day.

    Two items…

    1. If everything is government insured, and it all tanks, and the goverment already owns every corporation out there, and needs more money to pay for the FDIC insured losses, and that money comes from taxes, then are we not just chasing our own tail?

    2. Its nice to have gold, but if we all find ourselves in caves, it will be hard to sell gold. I say buy guns and bullets – if chaos breaks out, you can hunt and protect yourself… you could even trade for food. If its you or me and I have a gun and you have an ounce of gold, I get your ounce of gold and only lose 1 or 2 bullets. Think anarchy here people 😉

    honestly, i just see it as a chance to buy undervalued stocks and play the waiting game.

  21. Help! I’m confused!

    I have my assets in 403B mutual funds. I have a good 10 years before retirement. Should I be doing anything right now? The common advice has always been that if you have a long window, it’s best to just ride it out.

    Any advice?


  22. what we should we do with our money kept in money market fund from edward jones. Any suggestions….Thanks

  23. I just checked my Fidelity acct where a majority of my holdings are. Just a small percent down, but nothing drastic. I’m sleeping well as well!

  24. Should have bought some gold and silver about 3 years ago when it was much less.

    This is where Jonathon’s financial perspective falls short. Everyone should have some in commodity funds and at least 10% of net worth in physical bullion.

  25. Every time the government borrows money from the Federal Reserve for bailouts, the FDIC and so forth, the interest owed on that money reduces the value of your dollar. So, even if you have it stuffed in your mattress, you are losing money!!!! Paper will not keep you safe… Only tangible assets can do that to some extent… And keep in mind, money is never lost. If you are losing it, someone else is or has gained it!

  26. I made the move today because I wanted to fully protect my cash funds I decided to move them from my Vanguard prime money market account to my online ING Direct savings account. This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil.

  27. Does anyone have any ADVICE? As you all know – the government is bailing us out to stabalize our markets – BUT – we must know inflation is right around the corner, yes? the dollar will be falling and failing in the near future..
    SO…what should I do?? my money is in a conservative money market account with AXA … should I keep it there or put it into gold or foreign currency?? Someone help!!!

  28. Earning money is not so important but keeping it safely really matters. And we know number of ways to secure it. Where to invest? Yet it surely needs tremendous effort to protect money. Explained situations make this issue even worst.

  29. Hi. Why would you make a large 401K contribution now? Wouldn’t it be better to dollar cost average considering current market conditions? Just looking out for you!

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