The Chicago Tribune has a different view, a money market fund but not for the public.
Originally posted: August 14, 2007
Subprime slimes money market funds for a moment
In a sign of how panicky investors have become over the mortgage-related securities that are poisoning financial markets, an incorrect reference to a money market fund freezing investors' money today, sent the press and investors searching for ticking time bombs in funds that are considered almost as safe as a bank.
Luckily, the frenzy was unwarranted. Stocks fell after CNBC referred to Sentinel Management Group Inc.'s fund for commodity traders as a "money market mutual fund." In fact, the troubled fund is not a money market mutual fund and the distinction is very important.
Sentinel's fund is set up for pros, and was paying about 7 percent in interest to compensate commodities traders for the risks they were taking in it. Money market mutual funds, which pay about 5 percent, are the place where everyday investors and institutions put their money for safe-keeping. The funds are supposed to be the worry-free investments individuals can count on when they want to stash cash for awhile and withdraw it on a moment's notice. The thought of freezing a money market fund and telling investors "too bad...go away for some other day," is completely foreign to the expectations of investors in safe funds. Of course, it sent a chill while investors unwound the truth.
In today's market, investors are so troubled by the unfolding of one bad piece of news after another, they sell stocks first and ask questions later. Until recently, financial market regulators, rating agencies and Wall Street firms told investors they didn't have to worry about mortgage-related securities infecting markets. But now it's clear the mess is more serious than officials let on. It is causing billions of dollars in losses for banks, hedge funds, and even a few mutual funds that have tried to juice their yields with the mortgage gizmos. And central banks here and in Europe had to come to the rescue of financial institutions stuck with the messy investments as investors tried to run for the exits.
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.
With the securities under pressure, Standard & Poor's Joel Friedman says analysts are watching money market funds carefully for exposure to the troubled securities.
Money market funds are typically examined weekly. "We know what they have, and go through it every week," said Friedman. Analysts examine whether the securities are losing money and whether they mature within the time frame rating agencies and the Securities and Exchange Commission requires.
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. That, of course, is what sent investors into a new panic today.
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