Breaking a buck
Tess Vigeland: With all the sturm and drang over Facebook, you might've missed another battle on Wall Street and in Washington over money market mutual fund. The Securities and Exchange Commission is considering regulatory changes to these staples of the savings smorgasbord. Commentator Chris Farrell explains why.
Chris Farrell: When you think about adding to your emergency fund -- and who doesn't these days? -- you want to put that money in a safe place. A few years ago, I might have suggested a money market mutual fund. But not today.
The money market fund used to be a byword for "lock box." These funds were marketed with the pledge that every dollar you put in the fund would buy a share. And the value of each of those shares would never fall below a dollar. In other words, every dollar you put into the fund, you were guaranteed to get back, whenever you wanted.
But that pledge was broken during the financial crisis of 2008. A major money market mutual fund lost so much money that the value of its shares fell below a dollar. As they say in the business, the fund "broke a buck." Investors in the fund rushed to get their money back. Investors in other funds began to panic. And the U.S. Treasury -- tax payers, in other words -- had to step in and stabilize the market.
Regulators recognized the reality, that the pledge to never break the buck is an empty promise. Your money is not guaranteed safe in money market funds, and regulators want to protect your savings. They want funds to hold capital to buffer investors from future losses. They want limits on withdrawals by customers. They want to kill the one dollar pledge.
The fund industry is fighting back, of course. But the break-the-buck genie is out of the bottle. The last financial crisis proved that money markets funds aren't insulated from problems in the wider markets. And that means there's a lot more risk involved in putting your savings into a money fund than you've been led to believe.
So if you are thinking about topping up your emergency savings accounts, good for you.
But if you want your money to be really safe, don't go the money market fund route. Instead stick that money in federally insured savings accounts. Oh sure, consider money market funds for other kinds of investments. Think of them in the same category as short-term bonds funds. Low risk, but not no-risk. In other words, buyer beware.
Vigeland: Chris Farrell is the economics editor for Marketplace.