Money markets break the buck
A trader works on the floor of the New York Stock Exchange as the Federal Open Market Committee announced it will hold the federal funds rate at 2 percent, despite the recent turmoil among investment banks on Wall Street.
TEXT OF INTERVIEW
Tess Vigeland: Wild swings on Wall Street like the ones we saw this week often prompt what's referred to as a flight to safety or a flight to quality. People move their coin to what they think are sure things.
Gold is one of them and people poured money into the shiny stuff this week. U.S. Treasuries are another. And so are Money Market Mutual Funds. At least they were until one of the biggest, the Reserve Primary Fund, dipped below a dollar this week. Putnam Investments actually closed its prime money market fund. But by Friday the government announced it will insure all those deposits.
Marketplace's New York Bureau chief Amy Scott is here with some details, and Amy, what's the genesis of these funds?
Amy Scott: The first money market mutual fund was created back in 1970 by a guy named Bruce Bent, but basically it's a mutual fund that invests in what are considered low-risk securities -- until recently anyway -- and it's a way for investors to make a little interest with easy access to their money and they're very popular: they've since grown to around $3.5 trillion in assets.
Vigeland: And that's why we often hear them referred to as basically as good as cash, right?
Scott: That's right.
Vigeland: There is a difference between a money market mutual fund and a money market deposit account. Tell us what that is.
Scott: Right, and it's confusing, because sometimes the same bank may sell both. A money market deposit account is a type of savings account that typically pays a higher interest rate than a regular savings account in exchange for a larger balance and some restrictions on things like the number of transactions you can make. Money market accounts are insured by the FDIC for up to $100,000 per account holder or $250,000 for some retirement accounts. Now, money market funds are not FDIC-insured. That being said, as you said, investors have generally thought them to be about as safe as cash and that's because it's almost unheard of for their value to fall below $1 a share.
Vigeland: But, in fact, that's exactly what we've seen happen this week. I think the term for it is "breaking the buck."
Scott: Yes, actually, a few funds have broken the buck. Remember I mentioned the father of money market funds, Bruce Bent? This week, the fund that he started, the Reserve Primary Fund, told its investors their shares were worth less than a dollar. The fund had invested in Lehman Brothers' debt and when Lehman, the investment bank, filed for bankruptcy, that fund lost a lot of money and since that announcement the Primary fund's manager, Reserve Management, has said that investors in some of its other funds may lose money too. And Tess, as far as we know, this only happened once before in the nearly 40-year history of money market mutual funds. Fourteen years ago, investors in a small institutional money fund called Community Bankers lost about four cents on the dollar.
Vigeland: Well Amy, at this point, given that the government has said it will ensure these money market mutual funds, what's next?
Scott: Well, yeah. I think this should go a long way towards reassuring investors. We had another fund run by Putnam Investments close this week because investors were pulling out money. Then on Friday the federal government announced it would set aside as much as $50 billion to protect money market fund investors from losses. For a year, the treasury department will basically provide insurance, drawing on a fund that dates back to the Great Depression. The money market funds will have to pay a fee to participate in the program and then if that fund breaks the buck, investors will be made whole.
Vigeland: Alright, Marketplace's Amy Scott. Thanks so much.
Scott: Thank you.