Wednesday, September 17, 2008

Money market breaks the buck

Reserve Primary Fund on Tuesday became the first money market fund in 14 years to expose investors to losses as the fallout from Lehman Brothers’ bankruptcy spread to an investment class considered to be among the safest.

The Primary Fund, which had invested about $785m in debt securities issued by Lehman Brothers, suffered losses that forced the net value of its assets below $1 a share to 97 cents, according to Reserve Management Company, which manages the fund.

But this also made the USA today. And why shouldn't it? It had $64.8 billion of assets before $20 billion was yanked out the last week!

Money market funds have been the fund industry's haven for more than three decades, and investors often view them the same way they do bank checking accounts. The funds' safety record has attracted more than $3.5 trillion in assets.

Until now, no money fund open to the general public has ever allowed its share price to dip below a dollar — "breaking the buck," as it's called. (A small institutional money fund, Community Bankers Money fund, broke the buck in 1994.)

Money market funds have long feared that if they broke the buck, thereby shrinking investors' principal, people would shift their money into bank money market accounts or ultrasafe Treasury securities. The question now is whether other money funds will follow the Reserve fund in dipping below $1.

The $64.8 billion fund held $785 million in short-term IOUs, called commercial paper, issued by Lehman Bros., which filed for bankruptcy protection Monday.

Here's the Bloomberg story:

I reitereate my Bailout math=Oil up, and the dollar down.

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