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Cash trashed: Money fund blows up

Posted Sep 16 2008, 08:46 PM by Jon Markman
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Extraordinary events are piling up on Wall Street so fast, it's hard to know where to focus. Forgetting the prospective bailout of AIG for a moment, since every media outlet is on that one, the most shocking development of the day for me is news that a $60 billion money market fund "broke the buck" on Monday due to losses in Lehman Brothers paper that it held. So much for the safety of "cash".

The Reserve Primary Money Fund (RPFXX) has become the first money-market fund in more than a decade to lose money because its board was forced to write down $785 million worth of LEH debt to zero. The fund reportedly has seen assets plunge by 60% to $23 billion in the past two days after holders got wind of the fact that it would have to cut its net asset value to less than its usual $1 per share.

Reserve Primary, which is one of the oldest money market funds in the country, is now trading at 97 cents, although it is showing up on the MSN Money site at $1. Its founder is considered the father of the money market fund, and he was one of the last holdouts against buying higher-yielding commercial paper rather than super-safe Treasuries. The company said in its that it would suspend redemptions for seven days while it tries to straighten things out. To review its most recent list of holdings, see its quarterly SEC filing here.

While the loss of 3 cents doesn't sound like much, you need to keep in mind that money market funds are where people put money when they don't want to lose anything. They are supposed to be the safest of the safe. Most pay interest of around 1% to 2.5%, depending on the type of paper that they hold.

Money market funds were the center of attention a year ago when it turned out that they were heavy buyers of a special type of paper from "structured investment vehicles" set up by banks like Citigroup. Those SIVs were issuing high-yield paper because they held CDOs loaded with subprime paper. As the subprime paper began to fail, the CDOs collapsed, leaving money market funds in danger. But their finances were shored up by their parent companies, and all was well until this week.

For more on the troubles with money market funds last winter, see my Dec. 31, 2007 column, "Your 'safe' money isn't so safe."

Related reading:

Fed to Wall Street: Drop dead

The death of value investing

3 more stocks for beating the bear

Comments

 

AIG should be left to crash and burn.  EVERYTHING will then become cheaper.

The gov't should not take an 80% stake of failure.

To DGE:

ANY, and I repeat ANY fund, money market or otherwise that invests solely in only one or two asset classes (especially mortgages) is not "safe". You need to proactively make sure that your "cash" is broadly diversified across asset classes, time horizions, and sectors.

With earnings and dividends and alternative min taxes on us and the large corporations like Wal-Mart, oil companies, GE, Intel, Microsft, Caterpiller, John Deere, Boeing, and big banking institutions....... private, profitable small business all paying rates of taxes as seen only in the USA.........not unlike Mexico 50% ownership, our country just takes 50% of the income in a form of taxes and gives it to those that have the clout......our Democrates and Republicans have long ago taken more than 50% ownership of our corporations income. Is that like Mexico too? Vote for lower taxes, vote for John McCain...O is a tax hog (pig) loser. Mightycline

What does a comment about John McCain by an Obama supporter have anything to do with this article unless the editors support O?

After McCain is caught saying 'the economy is OK' and 'I'm against regulatng banks'.... the American people are still dumb enough to have him tied with Obama.

No wonder we are in the shape we are in.  We deserve it... as we aren't the brightest people in the world... are we ?

I guess putting your money under the mattress is becoming more of a reality instead of a cliche.

Hey Meloke....Why would you blame this on McCain?  Isn't Congress controlled by

the Dems?  Don't they make the policies?  Blame Oprah's puppet if you want someone to blame.  I never claimed to be an expert on politics until I saw that Lindsey Lohan is suddenly a professor of Political Science.....Madonna, Lohan and Bill Clinton, the moral posterchildren of our time supporting the Dems.  If only Jeffrey Dahmers was still alive, Obama might get another vote.

It is just absolutely ridiculous that all Wall Street has managed in 16 years are 2 big bubbles. Why is anyone even giving them any money. All our economists and lawyers despise manufacturing and common sense economics in favor of Wall Street - no matter if Dems or Rebublicans are governing. Americans just have this floavor for the rich and bold. Banking used to be a serious business, now we have this young breed of Investors, who just careless speculate with other peoples money. Deregulation yes, special interest = personal interest = no

Bottom line:  our supposedly Republican Democracy is really only a Fascist government (definition of fascist:  a government run by corporations).  Will Barack Obama be our next Teddy Roosevelt, running as a Democrat but then shaking up the system after he gets in?  Let's hope so.  I think it's our only chance in getting our now Latin Americanisque country back to some semblance of what it used to be.  Teddy saw the industrialists were taking over in an era that closely resembles ours today.  He pretended to be one of the industrialists then when he got in, busted up trusts, abolished child labor laws, completely changed our government.  Let's hope Barack & Biden will do the same thing...and hope they aren't laid to rest by the powers that silenced JFK, Robert and ML King.  I say it's our only hope right now.  Speaking of politics, aren't the Republicans sooo clever in pretending to want to change the country just so the corporations in control of our country now can stay in control, maintaining the status quo of corporations in charge who are successfully creating a servant class of people which is basically what we're all becoming...unless we're connected to the top tier of earners in this country and those who get the biggest tax breaks.  

My gold and silver doesn't have any subprime paper attached to it...neither does my food, water and ammo.

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