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Money Market Fund Investors Catch the Fear


How to find out if your money market fund is safe.


The news wormed its way out late Tuesday afternoon, after the market's close, the headlines squirming their way in and around a host of other, seemingly more pressing market news:

BN 09/16: Reserve Primary Fund Falls Below $1 a Share
BN 09/16: Reserve Primary Fund NAV 97 Cents a Share
BN 09/16: Reserve Primary Fund Redemptions Delayed Up to 7 Days

Three bullet-point Bloomberg headlines, screeching in bold red that the world's oldest money market fund had "broken the buck," as they say in the industry. In the money market industry, "breaking the buck" is akin to robbing the blind or kicking a dog. It is simply not done. The horror of the act will cause your family to disown you and your friends to burn your house down.

Nevertheless, the only reason money market funds have been traditionally viewed as safe havens is because, under most circumstances, firms would rather cut off the fingers of the fund's manager and cover any losses out of their own pockets to protect investors, and by extension, their reputation. They are like the Yakuza in this respect, but without the full-body art.

The Reserve Primary Fund was just the second fund in the history of money market funds to "break a buck" and the first in 14 years. Before Tuesday, the Reserve Primary Fund was considered among the money market funds least likely to cross this dangerous line. As recently as six weeks ago Bruce Bent, Chairman and CEO of the Reserve, was busy turning down requests to oust Ben Bernanke as Chairman of the Federal Reserve. "I responded that I would immediately resign and go back to being Chairman of The Reserve," Bent said, a doomed decision in hindsight, but at the time, who could blame him? He was riding the wave. Risk aversion felt good. Assets in the Reserve Primary Fund had doubled from the previous year. "One year has passed since the subprime and [Structured Investment Vehicle] crisis shook the foundation of our markets, which has investors questioning the safety of their money funds," Bent said. "Good!"

Then Lehman Brothers (LEH) filed for bankruptcy. The Reserve Primary Fund had a significant portion of Lehman debt and was forced to write off $785 million after the bankruptcy filing.

Ye gods, what next? Where will it all end? Are your money market funds safe? How do you know? This morning, anyone with any instinctual sense of fear and dread is desperately wondering precisely this. But I still find there are small pockets of resistance to this concept of embracing the fight or flight instinct, which is far different than panic; it is pure, inviolate and crystalline. In short, it is the only thing that separates us from the lesser animals that fill our food chain. So when I run across advice like this from today's Wall Street Journal, I get a headache and the room starts spinning:

"Stephanie Smith, a clinical psychologist and the Colorado public education coordinator for the American Psychological Association, says Americans overwhelmed by the financial crisis should focus on what they can control. Taking a break from reading or watching all the bleak financial news can be beneficial, too. "We don't need to know the gory details" because this can increase anxiety, Dr. Smith says. Families should consider a five-minute rule for discussing the banking crisis and then move on to less anxiety-inducing topics, she says."

Do not listen to this gibberish. In many respects, that attitude summarizes all that is wrong with America and Wall Street and why we find ourselves at his grim juncture to begin with. When the fat is in the fire, ignorance is not your friend. The "gory details" are the only thing that will help you survive. I will show you how to find out what they are.

First, understand that your money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation or any government agency. Your only protection is: one, the underlying quality and liquidity of the assets held in the fund, and two, the willingness of the money market fund to avoid "breaking the buck."

Number two is an article of faith. When the oldest money market fund manager in the world breaks the faith, it weakens the strength of the bond for everyone else. Thus far, money market funds at firms such as Wachovia (WB) and Bank of America (BAC) have either injected funds to shore up their money market funds, or said they will do so.

Number one, what assets are in your money market fund, is your baseline protection, and it is rather easy to uncover for yourself. According tot he Wall Street Journal, Vanguard Group, American Century Investments and Charles Schwab (SCHW), have posted notices on their Web sites assuring investors that none of their money-market funds hold any securities issued by Lehman or American International Group (AIG). That would be the first place to start.

Otherwise, each money market firm issues annual reports that disclose the fund's holdings. The web sites for these funds make these reports easily downloadable and available. You can see for yourself what your fund holds.

Of course, at the end of the day, remember that money market funds are investments and not without risk. Everybody knows this, but over the past decade many have seemingly forgotten it.

Todd discussed money market funds and keeping your cash safe on Yahoo's Tech Ticker this morning. Watch it here!

No positions in stocks mentioned.

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