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KAI RYSSDAL: Until last Monday probably not too many of you had heard of the Sentinel Management Group. That was when the fund company out in Illinois announced it was freezing its accounts. Late Friday night Sentinel filed for bankruptcy protection. Today the SEC said it’s filing civil fraud charges against the company.
That Sentinel ran money-market funds is what makes the news particularly surprising. Money markets are supposed to be some of the safest investments out there. They pay better interest than a typical savings account without much more risk — or at least that’s what investors had been led to believe. Marketplace’s Amy Scott reports some money-market funds have been investing in some dangerous debt.
Amy Scott: Money market fund managers get paid to play it safe. But as of June, funds managed by the likes of Bank of America and Fidelity held more than $6 billion in securities backed by subprime debt. So says Bloomberg News.
Louise Purtle is chief strategist at research firm Credit Sights. She says many of these securities were pronounced almost risk-free by ratings agencies. But now so many borrowers have defaulted on subprime mortgages, Purtle says the investments don’t appear so safe after all.
LOUISE PURTLE: We now have a situation where a lot of these assets are far less liquid and far less secure than the money managers who invested in them believed them to be.
Now, Purtle says money-market fund managers are ditching all kinds of commercial debt in favor of safer U.S. Treasury bonds. Jim Barth is a fellow at the Milken Institute, an economic think tank. He says what people call a “flight to quality” creates a whole different problem.
JIM BARTH: If everybody does that, of course, what that does is bids up the prices of treasuries as we’ve seen, and lowers the return on treasuries.
Lower returns mean less interest for investors in money-market funds. Today, yields on short-term T-bills dropped more than they had in 20 years. But if you discover your money-market fund invested in mortgage-backed securities, Barth says don’t panic. For one thing, it’s probably a small fraction of the portfolio. And the industry depends on the belief that for every dollar investors put in, they’ll get at least a dollar back. Analysts say money managers will even take a hit to their own fees to make that happen.
In New York, I’m Amy Scott for Marketplace.