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Tess Vigeland: Many investors are doing whatever they can to shelter their money from the subprime nightmare. Traditionally, money market funds were a big, snuggly security blanket.
Americans have $3 trillion invested in these things -- the most ever. But there's evidence the funds may be losing favor. We asked Marketplace's Nancy Marshall Genzer to look into it.
Nancy Marshall Genzer: This is a tale of two investors: one in San Francisco, one in the Washington, D.C. area. They're on opposite coasts with opposite opinions on money market funds.
Meet money manager Axel Merk -- he's the guy in San Francisco. Recently, Merk took more than $100,000 of his personal savings out of money market funds. These funds take your cash and put it into highly rated -- and therefore, supposedly safe -- investments, giving you a set interest rate.
Problem is, some of them got entangled in the subprime mess. That's why Merk dumped his money market funds.
Axel Merk: I'm not the kind of person who says the world is going to go to an end and I put all my money into gold under a mattress, but at the same time, if there are hiccups in the financial world, why do you want to expose yourself to them?
Across the country, in Falls Church, Virginia, Vas Madhava works from home, supporting his wife and two kids as a full-time investor and budding day trader. He's got 30 percent of his money in money-market funds and it's staying put.
Vas Madhava: The money markets are like cash. They're the safe alternative to being in the market.
So, who's right? I decided to ask an expert: financial adviser David Marotta.
David Marotta: Assuming your money market is with a major broker, a money market is one of the safest vehicles that you could have.
Oh great, it's safe. Well, that's settled...
What was that? You want to hear the first part of what Marotta said again? OK, rewind the tape.
Marotta: Assuming your money market is with a major broker..."
Ah, there's the catch. You can't assume that all money market funds are safe. Remember, they're not insured by the FDIC. Now, banks do offer something called money market accounts. Just like savings accounts, they are protected by the FDIC, but they have a lower return.
Now, back to money market funds. I know you like to root for the little guy, but in this case, Marotta says you've got to put your money with one of the major brokerage houses -- they can actually reach into their own pockets to make sure you don't lose anything. Marotta says they'll make up any losses from money market funds that strayed into subprime territory. They're protecting their reputations.
Marotta: If the broker that you're with has advertising on TV, they're spending more money for their advertising and their image than it would cost them to bail out their money market fund. So, if you're not with a major broker, they may not deem it appropriate to bail out their money fund. They may think it's better just to fold up operations and go bankrupt.
But what if you really like your little mom and pop brokerage? Can't you just call them up and ask them if any of their money market funds are in subprime investments?
You knew it wouldn't be that easy. Brokerages only have to list their money market fund investments in quarterly reports. Marotta says any subprime risk is mixed in with other investments.
Marotta: They've packaged it and when they package it, it's harder to see the sausage under the skin.
Marotta says some investors got tired of trying to decipher the fine print. At the height of the subprime scare this summer, a small number of investors did pull out of money market funds. But now they're back, according to Connie Bugbee of iMoneyNet.com.
Connie Bugbee: Since August 7, which is when the subprime woes began or hit the airwaves and so forth, $353.87 billion has come into the money market funds.
There's almost $700 dollars more in money market funds now than last year at this time. Bugbee's been following their ups and downs for years. In fact, she worked for the guy who created the funds back in the 70's.
Right now, she says some small investors are still skittish, but most would agree with our Virginia trader, Vas Madhava: that they won't lose any of the cash they put in money market funds.
Madhava: Historically, it hasn't been an issue. Why should I worry about it now? If it starts to become an issue, then I'll worry about it at that time, but why bother?
But Axel Merk, our San Francisco investor, says if you have that attitude, it'll be too late by the time you start to worry. Everyone can agree though, we'll know a lot more as the subprime mess shakes out.
In Washington, I'm Nancy Marshall Genzer for Marketplace Money.