Fallout: The Financial Crisis

Money market funds not quite so safe

Amy Scott Sep 19, 2008
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Fallout: The Financial Crisis

Money market funds not quite so safe

Amy Scott Sep 19, 2008
HTML EMBED:
COPY

TEXT OF STORY

TESS VIGELAND: Much of the rescue plan we’ve been talking about involves complicated financial assets owned by banks and institutions. But here’s where the government’s efforts could directly affect you. On top of everything else the Treasury Department announced today that it is setting aside up to $50 billion to protect investors in money market mutual funds. They’ve long been considered virtually as safe as cash. But as we learned this week, they’re not. Marketplace’s Amy Scott has the story.


AMY SCOTT: Investors got a real scare earlier this week when the country’s oldest money market mutual fund dipped below a dollar a share. It’s known as breaking the buck. And in the nearly 40-year history of money market funds, it had only happened once before.

Peter Crane tracks money market funds for Crane Data. He says the Reserve Primary Fund lost money on the Lehman Brothers bankruptcy. Investors started pulling their money out of funds that had nothing to do with Lehman.

Peter Crane: Investors basically took a look and said “Are other funds at risk?” What was just a Lehman problem — and some worries over AIG and WaMu — I mean, quickly spread into a mini panic.

The panic led Putnam Investments to close its Prime Money Market Fund yesterday. Today the U.S. government stepped in. The Federal Reserve said it would lend more money to keep the market liquid. And the Treasury said it will insure some $2 trillion in money market fund assets for a year.

Geoff Bobroff is a consultant to the mutual fund industry. He says he’s not sure a year will be enough.

GEOGG BOBROFF: I think it’s enough to calm people down now. The question really is how long does this crisis continue. And I don’t know that we have an answer for that.

The insurance plan arrives too late for investors in the Reserve Primary Fund. But Crane Data’s Peter Crane notes they lost just 3 cents on the dollar. Investors have lost more than that on inflation this year.

In New York, I’m Amy Scott for Marketplace.

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