Posted on 09/22/2008 4:30:19 PM PDT by Red Steel
Money market funds in the US suffered an estimated $197bn of net outflows last week as confidence in their safe-haven status weakened after one fund “broke the buck” and others closed.
The outflows mark a new and potentially dangerous phase for the $3,400bn money market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets.
Some money market fund operators are facing the prospect of either closing funds to halt redemptions or engineering more costly bail-outs of their funds.
The funds, which in the past two years had huge inflows from retail and institutional investors, were rocked last week by the news that the oldest, Reserve’s Primary fund, would return only 97 cents in the dollar. It was the first time in 14 years that a fund had “broken the buck” with its shares falling below their par value of $1, meaning that investors selling them will receive less than they paid in.
On Friday, shareholders in the Reserve fund filed a lawsuit in the US District court in Manhattan, charging that the fund had failed to follow its objective of preserving capital and instead had pursued yield by buying $785m in Lehman commercial paper. The fund had to write down the value of that paper to zero and closed the fund.
Putnam last week closed a money market fund to avoid losing investors’ money. The fund did not close because it held subpar holdings but because high levels of redemptions were going to cause it to begin forced selling in an illiquid market. That would have resulted in heavy losses to investors.
On Friday, Lehman Brothers closed three Dublin-based cash funds for similar reasons.
Investors last week continued to seek safer ground, taking big sums from money market prime funds, which invest in corporate debt, and putting some of that into Treasury funds, which buy government bonds.
The single biggest outflow was from institutional prime (non-government) funds, which had outflows of $130bn on Wednesday alone, according to iMoneyNet, which tracks the industry. Total industry net outflows added up to $197bn over the whole week.
Investors have viewed money market funds as virtually as safe as a bank account, but the funds have not been backed by Federal guarantee.
Should check my retirement account status but am afraid to.
Some money market funds through firms such as T.Rowe. Price, wont let you transfer to another “cash” fund because it competes with the existing one. If you have money in a money market account and it’s in your company’s 401K plan your only option is to transfer to a stock fund. .
You can check what type of money market fund you have by going to morningstar.
Mine is down almost 40% from the first of the year. I told my wife she'll have to get used to living in a tepee when I retire.
My wife and I had been in this flow from money funds to CDs for over a year going to Bank CDs via Fidelity.
We picked up the pace in the last couple of weeks with more money going to CDs. Last week, I even withdrew my normal 4th quarter of withdrawal from my IRA, (I will be 70 very soon), and put that money in an online CD.
Our two money funds are Funds based on US Treasury notes.
The panic was so bad for some people, the Feds sold out of Zero interest short term treasury notes. Two weeks ago Fido sold out its big inventory of corportate notes as people fled the money markets.
In anticipation of this event, this past summer we bought some of the etf, GLD, shares. We may be buying more soon.
Too many mutual funds are run/owned by liberals, who buy shares of crap stock like the NY Slimes, McClatchy, Freddie Mac, Fannie Mae and Tribune stock. So we got out of most of our mutual funds about two years ago. We are down to two, and one of those may get peeled back and replaced with two that have a better track record this past year.
If I was 20 to 40 years younger, I would be buying as much of the S&P index, mid cap index and small cap index as I could put into our IRA’s and 401ks. This is the time to buy American index funds if your time horizon is at least 10 years out before you start to go conservative or need to withdraw that money.
Remember Grampa Dave’s investment core: Avoid owning stock, bonds, mutual funds and money funds controlled by liberals.
I keep my cash in a Treasury money market fund at Vanguard. There is free electronic transfer to my checking account - takes one or two business days. If you are really in a hurry, they will wire the funds for free.
I was certain I heard on Thursday and again on Friday that the government was extending FDIC $100k to Money Market Mutual Funds!!! Somethings wrong here!!! I’m going to Google this!!!
"Now, the federal government has created the equivalent of the FMMMFIC--the Federal Money Market Mutual Fund Insurance Corporation. Of course, that really means the American taxpayer is backstopping the $3.5 trillion in money market mutual funds for the next year. (It also means that everyone--like me--who accepted a lower yield on their money market fund in return for parking emergency money in the most conservative option paid an unnecessary interest rate penalty. Those that reached for yield just got bailed out.)" (from the link above)
Even the soundest money market fund could get clobbered by a bank run. From that perspective, some type of insurance may make sense. On the other hand, insurance can also create a significant moral hazard, and to my mind avoidance of moral hazards should be a key aspect of any economic plan.
My off-the-cuff plan would be to provide some insurance for money market accounts, with the proviso that the insurance covers a fraction of the loss between the account's Jan 1. 2007 value and the value at withdrawal, with the fraction increasing through the coming year. Such a plan would mean that those who put their money in unsound funds would not do as well as those who put their money in sound funds, but those who didn't need their money immediately would have an incentive to let the fund's securities mature (money markets are things like t-bills, right? Essentially guaranteed to pay out at maturity, but not guaranteed to be redeemable at full value before that?).
How does that sound for a plan?
I'm 20 years younger and am having a tough time following this advice (my soon-to-be ex-financial adviser also mentioned this). I'm worried about a full blown market meltdown and losing everything. I'm at the point where I'm moving back to cash for a bit while things settle down.
Good move.
I wonder if the holders of these funds will limit their balance to $100,000 in a single account - as the prudent do with FDIC insured bank accounts. If that were to become widespread, what effect would that have on the current problems?
Now with that understanding, go back and read what I linked because I was surprised to find this new insurance for the next year even though the Financial Times article that started this thread doesn't refer to it at all!
The hazard with this new insurance scheme is that the one year period only gives you time to shift the money to a regular FDIC Bank Account such as one of their "Money Market Accounts," or CD, or other type actual Bank Account.
After that short 365 day period, one's money will NOT be insured in such a Mutual Fund, just as before as I understand the linked info above. It's just temporary insurance!
People are already so panicked that the time for worrying about moral hazard has probably past as it should have been considered back when CONgress repealed the Glass-Stigal Act in the 90's along with the enactment of their stupid housing act that has blown any moral hazard risk all to pieces (IMO)!!!
See #13 below. I was technically wrong to refer to it as “FDIC” in the line that you quoted in your reply as it’s some new type of tempory (one year) Federal insurance specifically for Money Market MUTUAL FUNDS ONLY, (not bank accounts) like normal FDIC insurance has been.
“I’m 20 years younger and am having a tough time following this advice (my soon-to-be ex-financial adviser also mentioned this). I’m worried about a full blown market meltdown and losing everything. I’m at the point where I’m moving back to cash for a bit while things settle down.”
You should do whatever makes you comfortable.
There are only a couple of mutual funds I would consider staying in. We have been out of bond funds for years going back to Fannie and Freddie problems that were showing up even then.
What I’m talking re investing and stay in, is the pure index ETF funds or low cost mutual funds which mirror those indexes. These indexes automatically weed out the losers and bring in the new upcoming winners. I don’t like the Dow as too much politics, good ole boy/girl bs, and political correctness are in the selection of the top 20 corporations in America.
The time to load up with these index funds is when the stock market is going down. When the market recovers, and it will, if you are not in, you might miss a large part of the recovery in a day or so.
I have a friend, who will be 65 in November, and he plans to work full time until he is 67. He comes from a family of CPAs, and they have told him to load up on the index ETFs, max out his 401k which apparently increases the maximum $’s in the last couple of years before retirement. To max out his IRA and his wife’s, who is retired.
He is a type A like my wife and will probably work part time until he dies which could be a long time with a Mother in her 90’s and his Dad made it to 90. So his CPA relatives have told him to buy as much index ETF’s as he can before his 401k is shut down. He will get a pension, so does his wife and both will get social security. They need a larger nest egg with their possible long lifeline.
Again, “You should do whatever makes you comfortable.”
Doncha just luv it?
“SUFFERS”
Hell, how much “sufferin” did they do when the cash was pouring in and they were doling out multi million dollar bonuses?
Interesting re the money funds.
Of course Pelosi Galore is trying to sneak college loans, auto loans and even over due credit cards of individuals into the package.
We need the line item veto for our presidents to stop this bs from either side.
One of the reasons, we like Fidelity for our IRAs is their wide choice of CDs @ no cost to us. The CDs are from banks that we can pick and choose from, with interest payments running from monthly to twice a year. Supposedly, we are insured up to $100,000 for each bank CD we own. Once you buy them, you let Fido handle them. You get the interest deposited and converted to Fido’s money fund free of charge. When the expiration date runs out, you get the full amount of the CD deposited automatically to your account.
Sounds good in these dangerous times!!!
That is the best advice I've seen offered ANYWHERE!!!
“You should do whatever makes you comfortable.”
‘That is the best advice I’ve seen offered ANYWHERE!!!’
Heaven forbid if a financial advisor actually listened to his/her client re their comfort levels, goals and where they are in their life.
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