This is really scary...

...that a major money market mutual fund has "broken a buck"! Say what?

That's Wall Street jargon for this expectation: When you put a dollar into a money market mutual fund you expect at minimum a dollar back. Of course, you also expect to get paid some interest.

Money market mutual funds aren't backstopped by the Federal Deposit Insurance Corporation. But the product has been sold--and individual investors have assumed--that it's a safe haven for emergency money and similar funds. Now, that promise has been broken, thanks to a money market fund run by Reserve Management Corporation. It owned a slug of Lehman Brothers debt.

Here's part of a release put out last night by the Investment Company Institute, the main trade association for the mutual fund industry.

Today, Reserve Management Corporation announced that one of its money mutual market funds is unable to maintain a $1.00 net asset value (NAV), an event triggered by unprecedented market conditions that have affected a wide range of financial firms. This type of event--known as "breaking the buck"--is extremely rare.

Money market mutual funds have been a successful financial product for millions of investors. Although money market funds are not guaranteed, investors have benefited from the security, liquidity, and diversification that these funds provide under stringent and effective regulation. Today, money market funds hold $3.5 trillion in assets for a wide range of individual and institutional investors.

The last time a money market mutual fund broke a buck was in 1994, and it was a small fund.

No, Wall Street and the regulators have to be very worried in the current environment if individual investors decide they don't want to put their "safe" money at risk in money market mutual funds anymore. Already, U.S. Treasury bills are at their lowest level since 1954, according to a story on the Bloomberg newswire. And to say that more funds will "break the buck" isn't an outlandish forecast, considering the disaster in the auction rate preferred market and the stunning list of companies that have been bailed out by the government or the private sector, Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers, Merrill Lynch, AIG--and whomever is next. The unthinkable is suddenly thinkable.

Nervousness about the money market mutual fund industry is one reason why we'll continue to see ad hoc bailouts of financial institutions until a more systemic solution is decided on. And that will come sooner rather than later.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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