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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

 

how safe is the cash management fund of america?

Run and hide the Dow is crashing -347.   Head for the bank and broker cash out.

Donald, no fund is safe at this point.    Until we purge the markets of greed and nonsense it will not recover.

who knew my old 14k class ring would someday be the most stable investment I own?  I think I'll put it in a safe.  

Oh my God!  What a mess we are in today.  The tidal wave has knocked everyone of their feet and the sunami effect continues to sweep away everything in its path and there is no end in sight.  Are we heading into a Great Depression at an accelerated rate?  I hope not, but it is a scary thought.  Unfortunately, the federal government will not be able to keep pumping money into the economy and will not be able to keep baling the ailing financial institutions for ever.  The continued denial on part of the Bush administration will not make the country's financial woes go away.  They have misled this nation on every front and only solace one can find is the fact that their days are numbered.  We cannot revive the economy with failed policies and failed leadership.  We need new leadership, new administration, fresh ideas to chart a new course for this country.  Let's start with ending the senseless war in Iraq and pump that money into the economy and take care of the country's needs first.  We must set our priorities straight and formulate a plan to put his country back on track of economic gowth and financial responsibility.  Get rid of the tax loopholes and increase the revenue base to fund the new projects and reserach and development.  American corporations must pay their fair share of taxes and maintain the bulk of their operation in this country.  Let's get rid of the esoteric financial instruments which have created a gambler's mentality and have turned Wall Street into Las Vegas.  Unfortunately greed rules and its consequences are obvious.  We must start with a conservative fiscal policy and a stringent regulatory environment to ensure the safety of capital and a sustained growth.  The excesses of financial markets have gone unchecked for too long and something must be done to stop the abuses which have ruined the financial sector and the economy.  We simply cannot afford to stay on the current course with the same crew.  Americans will have a choice in November and I hope they will exercise their right to vote objectively and above the partisan politics.  

It is going to get scarier unfortunately.  I believe we have passed the point of no return on stock market - fundamentals are bad everywhere and have been for a long time.  When p/e ratios are our of whack and the market is being played by all the big boys and fluctuates on their whims we are all in for a ride.  There is no basis for it going up right now when all economic numbers/earnings etc are in a downward trend.  We have broken the 10,000 barrier and I can see it go down to 8,000.  The tin can sounds like a good idea, but the more we run to this the worse it will get; they - the banks, the investment houses, the insurance co's and the economy need our money - yes, little ol' individual people - to make this country's economy work and if we run, the economy and the country is in the toilet.  Can anyone say depression?

Beleve it or not, Japan will be the one that cleans this mess up. they lost 700 billion in u.s. sales.

Well, des moines, then Fidelity should be going down the tubes too---can't escape a 401K, now can we!!!  You just lost money at the last quarter of 1999---you are lucky it was Clinton then, just 1 quarter, not a big deal---times must have been more like it should be in 1999----regular up's and down's. As I recall, I got a bounce back then. This is not the regular by any means.  I have lost more money in the last 7 years of down's with not enough time for recovery,  than I have in the past 30 years of any down's---I should have clarified that for understanding.

I have been in it for the "long run" for so long I am delerious from the massive ups and downs.  For the last ten years my investments have been virtually motionless, considering my present balance is what I started with ten years ago, having no appreciable growth, what is it all worth?  I am tired of being told to wait it out so someone can continue to lose my money on their foolish schemes.  There has to be a better answer than investing in a failed system.  Unfortunatley with inflation on the rise and the cost of everything becoming disproportionate to it's value, how do you make more money for yourself other than through sweat equity?

Fanny and Freddie worked well until the Republicans, led by Phil Gram et al, "reformed banking..." The GOP loves to have a "money orgy" for the rich from time to time..they brought us the savings and loan scandal, and now this...and of course the great depression of the 1930s...Our dollar is now worthless overseas...the Fed can only cut rates a few points, as they are already low, and we WILL see inflation. Inflation, of course, hurts the rich the least!  When the price of milk goes up 50%, or gas goes up 33%, the middle class suffers--not presidential candidates who DON'T KNOW HOW MANY HOUSES THEY OWN!  We need to all vote Democrat, people...Bush, Cheney, and their Republican Halliburton buddies have gotten very rich at our expense. BTW, do you think John McCain's wife made him sign a prenuptuial agreement?  

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