Got money? Then there's a good chance some of it's in money market funds. Investors now own over $3 trillion in these buck-per-share mutual funds that offer the liquidity of cash, the yield of Treasury bills, and the safety of …. well, that’s the part that's now in question.
Money market funds have only been around for about three decades, making them the young'ns of a mutual fund business that's existed in one form or another since before the Great Depression. Whenever we suffer a credit crisis of some sort, the same question comes up – are money market funds safe?
The number of articles written about the money fund industry's current troubles has been climbing in lockstep with the number of financial institutions taking multi-billion dollar write-offs related to mortgage “investments” (and we use the term loosely).
In last week’s Wall Street Journal, for example:
The risk to money-market funds is that a decline in the value of a single investment can cause them to "break the buck," or allow their net asset value to fall below the $1 level the funds are required to maintain.
FAF Advisors [a unit of U.S. Bancorp] is the latest in a string of about a half-dozen financial institutions that have taken steps to protect their money-market funds. The others include Bank of America Corp.'s Columbia Management Group, Credit Suisse Group's Credit Suisse Asset Management and Wachovia Corp.'s Evergreen Investments. No money-market fund has broken the buck in the recent turmoil.”
Like a top-40 radio station, the (mortgage) hits just keep on coming. This latest evolution of the mortgage disaster is now placing even the safest category of mutual funds in jeopardy. But just how risky are these funds?...
