In a market that has seen even supposedly super-safe funds lose upwards of 6% in a single day, are even safer-than-super-safe money market funds immune from getting walloped? Gail MarksJarvis at ChicagoTribune.com writes that while companies that run money markets do everything they can insure that investors in their funds won't lose money, it's not impossible that the sub-prime mess could take a toll:
The models used by Wall Street to design the securities have been a flop. As a result, the securities have plunged in value. Some financial firms are laying low, holding onto the sludge, and hoping that if investors calm down the securities will regain some of their value.
Money market funds are allowed to invest in the mortgage-related securities, but only the safest slices -- or traunches -- of them; such as those rated AAA or AA.
Still, in the current environment, even those slices have lost value, and investors are learning that the top AAA rating on the mortgage-related securities is not akin to AAA in corporate bonds."
But don't panic. While money market funds are not backed by the government, the odds of a money market meltdown are slim:
According to federal rules, the securities within money market funds are supposed to mature quickly -- no longer than 13 months for securities, or 90 days on average for all the investments within a fund. Within those constraints, money market funds can also hold 'illiquid securities' -- or securities, like the mortgage-related bonds. 'Illiquid' means the bonds cannot be sold easily. Of course, in today's nervous market, institutions holding the mortgage-related securities can't find willing buyers at decent prices.
By requiring money market funds to keep risky securities at a minimum, and mandating that most securities mature quickly, the funds have had a reliable track record.
The industry prides itself on guaranteeing that funds "don't break a buck." In other words, if you put a dollar into a fund, you can get that dollar out.
Still, money market funds are not insured by the Federal Deposit Insurance Corporation like bank savings accounts are. So investors cannot take them for granted."
In a market that has seen even supposedly super-safe funds lose upwards of 6% in a single day, are even safer-than-super-safe money market funds immune from getting walloped? Gail MarksJarvis at ChicagoTribune.com writes that while companies that run money markets do everything they can insure that investors in their funds won't lose money, it's not impossible that the sub-prime mess could take a toll:
The models used by Wall Street to design the securities have been a flop. As a result, the securities have plunged in value. Some financial firms are laying low, holding onto the sludge, and hoping that if investors calm down the securities will regain some of their value.
Money market funds are allowed to invest in the mortgage-related securities, but only the safest slices -- or traunches -- of them; such as those rated AAA or AA.
Still, in the current environment, even those slices have lost value, and investors are learning that the top AAA rating on the mortgage-related securities is not akin to AAA in corporate bonds."
But don't panic. While money market funds are not backed by the government, the odds of a money market meltdown are slim:
According to federal rules, the securities within money market funds are supposed to mature quickly -- no longer than 13 months for securities, or 90 days on average for all the investments within a fund. Within those constraints, money market funds can also hold 'illiquid securities' -- or securities, like the mortgage-related bonds. 'Illiquid' means the bonds cannot be sold easily. Of course, in today's nervous market, institutions holding the mortgage-related securities can't find willing buyers at decent prices.
By requiring money market funds to keep risky securities at a minimum, and mandating that most securities mature quickly, the funds have had a reliable track record.
The industry prides itself on guaranteeing that funds "don't break a buck." In other words, if you put a dollar into a fund, you can get that dollar out.
Still, money market funds are not insured by the Federal Deposit Insurance Corporation like bank savings accounts are. So investors cannot take them for granted."
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