Back in September of 2008, money market funds made historic news by “breaking the buck”. These funds which were designed to offer slightly better returns than bank deposits or certificates were showing signs of weakness in the form of capital losses. From a September 17, 2008 marketwatch article:

Money market funds pride themselves on their liquidity and the safety of their investments. All money market shares are priced at $1 — a figure so important to the industry that fund companies take losses to keep the share price from dipping below $1, which is known as breaking the buck.


But with investment losses from repeated bank failures, firms found it to difficult to fight off the losses.  The result was that money markets across the nation were “breaking the buck”.

“They didn’t just break the buck, they shattered it,” said Don Phillips, managing director at investment research firm Morningstar Inc.  This is only the second time that a money market fund’s net asset value has dipped below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate.

With the scare of losing money in what was supposed to be safe, investors started withdrawing en masse.  It was then that the government stepped in to guarantee all capital investments in money market funds, but this was a temporary measure.  That temporary guarantee is now set to expire in just two weeks.

Check out this excerpt from the T. Rowe Price Prime Reserve Fund:

Notwithstanding the preceding statements, the T. Rowe Price money market funds are participating in the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds. The Program generally does not guarantee any new investments in the funds made after September 19, 2008, and is scheduled to expire on April 30, 2009.

If you think you are safe from an implosion in your money market, think again!  If you think you have no money market to worry about, think again!  If you have a brokerage account, then you probably have a money market.  Every brokerage treats uninvested cash balances different, but in general they are swept into a money market fund of the brokerage’s choosing.  In some cases, while the default behavior is to sweep the cash into a HIGH RISK MONEY MARKET, account holders can elect to choose only an FDIC insured sweep account instead.

If you are not worried about your cash balances, then you probably just don’t like cash.  If you are worried, then call your brokerage immediately, and demand that your cash be swept to only FDIC insured accounts.

Unless Obama-san passes another emergency money market insurance extention, then you can expect that the “breaking of the buck” will continue in May.  You have been warned!

April 17 update: One reader pointed out that the money market guarantees were recently extended through September 19th.  From the Treasury website:

The U.S. Treasury Department today announced an extension of its temporary Money Market Funds Guarantee Program through September 18, 2009, in order to support ongoing stability in financial markets.  The Program was scheduled to end on April 30, 2009.

As a result of this extension, the temporary guarantee program will continue to provide coverage to shareholders up to the amount held in participating money market funds as of the close of business on September 19, 2008. All money market funds that currently participate in the Program and meet the extension requirements under the Guarantee Agreements are eligible to continue to participate in the Program.  Funds that are not currently participating in the Program are not eligible to participate.

But take careful note of the last sentence above.  It does imply that some funds are not participating in the federal guarantees, so it is probably wise to double check with your broker anyway.  On another note, it does beg the question as to why these emergency guarantees are needed at all.  If the money markets were solvent and safe, there would be no need for emergenecy guarantees!

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