Fallout: The Financial Crisis

Are money market funds in trouble?

Jeremy Hobson Dec 22, 2008
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Fallout: The Financial Crisis

Are money market funds in trouble?

Jeremy Hobson Dec 22, 2008
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TEXT OF STORY

Tess Vigeland: It seems the entire investing community right now is looking for a safe place to park cash; people don’t even care if they make any interest, they just want a guarantee that at least they’re not going to lose their shirts. One popular parking spot: money market funds. Even though one of the darlings of the field, the primary fund, broke the buck a couple months ago, investors have been flooding into those funds — so many in fact, that some fund companies are closing them to new depositors. Marketplace’s Jeremy Hobson reports on why that safety valve is being shut off.


Jeremy Hobson: When you make your money on debt, the higher the interest rate, the better. In the world of money market funds, the problem lies in the 20 percent or so that are invested entirely or almost entirely in U.S. treasuries. Short-term government bonds are yielding almost nothing right now, so the cost of running a fund is more than the fees charged to investors. Milton Ezrati is a senior economist at Lord Abbett and Company.

Milton Ezrati: And so you’re asking your depositors effectively — the people who have their money in money funds — to get virtually no return. Or you subsidize it and you make no money on the money fund.

The pressure on funds may force some to shut down entirely, says Connie Bugbee of iMoneyNet.

Connie Bugbee: I think we’ll see that a small portion. But what we’ve seen over the years and we’ll continue to see is some consolidation.

Milton Ezrati say it’s unlikely that any investor will actually lose money in a money market fund.

Ezrati: At the very least they’d be breaking even or having a modest return.

He says it’s more likely that investors will move their money elsewhere. Perhaps to sometimes riskier funds that buy commercial paper, or maybe even back into the stock market.

Ezrati: The Federal Reserve is trying to induce people to invest in longer term instruments and in equities and so this is the first positive sign for what the federal reserve wants to accomplish.

In other words, bad news for short term debt investors may be a nice Hannukah gift for Ben Bernanke.

In New York, I’m Jeremy Hobson for Marketplace.

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