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Wednesday, September 17, 2008

Money Market Fund Breaks the Buck

posted by on September 17 at 10:55 AM

Ok, you now have permission to feel the ground rumbling beneath your feet:

Sept. 16 (Bloomberg) — Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.

Money-market funds are considered the safest investments after cash and bank deposits, and Reserve Primary’s losses come as confidence in financial markets has been shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial banks and Lehman’s bankruptcy yesterday…

“This is uncharted territory,” said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. “That’s certainly a stunner.”

(Also at the NYT and WSJ.)

This is a very bad sign, indeed. To quote one of the more financially savvy slog readers, who sent me an email this morning on the topic, “[t]hat’s the scariest news I’ve heard all year, because it indicates just how horrifically bad things are now.”

Why? Money-market funds are supposed to be backed by the very safest kinds of short-term debt—under thirteen months and of only the highest debt ratings. In other words, this is the first debt any borrower should pay back. If borrowers can pay anything, they’ll pay this.

And enough of these lowest-risk borrowers have stopped paying to cause a major fund of this type to lose money—to lose enough money that the banks putting together the fund cannot cover up the losses.

This is a very dark sign for the health of the global financial system and economy.

RSS icon Comments

1

Have you bought a Lotto ticket?

It's the only thing going up.

Posted by Original Andrew | September 17, 2008 11:00 AM
2

COMMENT DELETED: Off-Topic/Spam
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Posted by regisrd commenz plz | September 17, 2008 11:01 AM
3

lul wut

Posted by Non | September 17, 2008 11:11 AM
4

This is implicitly a problem based on holding lehman and AIG debt. There is definitely cause for concern over this BUT there are at least some options for them to get back to 1:1.

Posted by Bellevue Ave | September 17, 2008 11:12 AM
5

This whole matter is the fault of compromised and no longer trusworthy credit rating agencies. Forget AIG - nationalize them, pronto, or our economy is doomed.

Posted by tsm | September 17, 2008 11:13 AM
6

As a member of the Angry Right, I am 100% against these bailouts that spill into pilfering of 401k monies.

They're doing the same thing they did to Social Security -- the grasshoppers are stealing honey from the ants and then saying "the system is broken"!

Posted by John Bailo | September 17, 2008 11:15 AM
7

Not to mention, money market funds are not insured by the FDIC. We are sca-reeewwed.

Posted by The General | September 17, 2008 11:15 AM
8

TSM: Agreed. Remember when Moody's blamed a computer error for their ratings? Hilarious! (In the 'we're so doomed, it's kinda funny now' way.) Just like Ohio!

Hell, someone suggested yesterday in the comments that a Marxist be put in charge, as punishment. I think we should nominate Charles.

Posted by Jonathan Golob | September 17, 2008 11:21 AM
9

Please stop with these posts. You are interfering with my ability to ignore these events and hope that everything turns out alright.

Can you guys come up with a pill to take that will make me forget this this is happening? Perhaps one that will provide me with an overwhelming sense that my job is indispensable and that whatever I am doing with my money is the right thing to do at this particular moment?

That would be great. Thanks.

Posted by Julie in Chicago | September 17, 2008 11:24 AM
10

TSM, this is what I've been saying all along; The rating agencies are the biggest bunch of crackerjacks in this entire operation and they won't get theirs (or they might if a truly objective rating agency is developed). They absolutely failed to do their job properly. Unlike AIG, Lehman, etc etc that just made poor decisions, the rating agencies make negligent decisions. Unlike Consumer Reports, they had a conflict of interest and way too much influence.

Regulation FD has a far reaching impact due to rating agencies being exempted. So in this case more regulation or percieved "transparency" didn't reach far enough and created larger problems down the road.

Posted by Bellevue Ave | September 17, 2008 11:26 AM
11
Posted by Bellevue Ave | September 17, 2008 11:30 AM
12

@6: As a member of the Angry Right, I can't figure out why you aren't outraged at the GOP for so thoroughly abandoning its former principles of fiscal conservatism. Deregulate the industry, act surprised at the collapse, bail-out the perpetrators has been the formula for what, twenty-eight years now?

Just remember, you can't say "Bail-out" without "Bailo."

Posted by flamingbanjo | September 17, 2008 11:33 AM
13

@6 - I feel your pain. You'd really be better off voting Libertarian.

Posted by Mahtli69 in Taiwan | September 17, 2008 11:41 AM
14

@13. Agreed. Any Republican that is pissed about this situation should vote for Bob Barr. Please make a note of it.

Posted by Julie in Chicago | September 17, 2008 11:44 AM
15

Come on, Jonathan, this is nothing an endless string of payday loans couldn't solve.

Posted by Mahtli69 in Taiwan | September 17, 2008 12:00 PM
17


And that's another funny thing. People are debating whether they should move their checking account from a bank to a credit union, etc, etc, but if we have a true fiscal-economic collapse, it'll be immediately followed by a period of hyperinflation that'll wipe out the value of your US dollars anyway.

That's what's really scary about the bailouts is that Paulson and Bernanke are basically pulling the levers on the printing presses and hoping for the best. It's not backed up by anything (other than the full faith and credit of the US Guvmit--cue the laugh track).

Remember those pictures from Germany in the 1920s when they burned stacks of currency because it was cheaper to just burn the money than buy firewood or heating oil?

Posted by Original Andrew | September 17, 2008 12:48 PM
18

@9 : I believe Quietus will do the trick.

Posted by laterite | September 17, 2008 12:53 PM
19

Andrew, inflation might be bad for cash but it is great for debt. Furthermore, the fed isn't "printing money" as you state. It's a bit more complicated than that.

Posted by Bellevue Ave | September 17, 2008 1:33 PM
20

Bellevue Ave @ 19,


Well they're printing up T notes and browbeating foreigners and beleaguered domestic investors into buying them.

It's not like those T notes are based on anything tangible...HOLY FUCK THE PAULTARDS WERE RIGHT ABOUT THE GOLD STANDARD!!1!

Posted by Original Andrew | September 17, 2008 2:17 PM
21

Andrew, gold only has value placed on it by people; it doesnt actually do anything that great other than command the attention of old bitties with edwardian rings. also, the gold standard would have had to been modified multiple times to account for the size of our economy now. so much for "standard"

Posted by Bellevue Ave | September 17, 2008 2:31 PM
22

i'll tell you what, show me a 1st world country with a gold standard today. It isn't that standard that matters, it's the direction of the central bank and their mandate.

Posted by Bellevue Ave | September 17, 2008 2:33 PM
23

Perhaps we need an oil standard. Or a corn standard, or an iPod standard. Something other than the AAA rating placed on US T-bills by rating agencies that apparently spend their workdays with their thumbs up their asses, anyway.

Posted by tsm | September 17, 2008 2:54 PM
24

i'd say a calorie standard. 1 dollar = 100 calories

Posted by Bellevue Ave | September 17, 2008 3:07 PM
25

Uh, I thought it was obvs that I was being facetious.


Anyhoo, I've always liked the idea of edible money--let's just cut out the freakin' grocery store middle-man, right?

Posted by Original Andrew | September 17, 2008 4:27 PM
26

Uh, nobody is pushing T-bills. People are happily snapping up T-bills with interest rates of less than 1% because it's the only debt that you can bet is safe. The chance of the US government defaulting is incredibly slim.

Posted by east coaster | September 17, 2008 5:21 PM
27

@ 26,


Bush only has a few months left and that sounds like a challenge. I'm sure he'll figure out how to blow the bottom out somehow.

Posted by Original Andrew | September 17, 2008 5:45 PM
28

This financial crisis is worse than Golob has let on. 3 month T-bill rates are at their lowest level since World War II.

Posted by kk | September 17, 2008 10:29 PM
29

I made the move today because I wanted to fully protect my cash funds I decided to move them from my Vanguard prime money market account to my online ING Direct savings account . This is not a reflection on Vanguard, because it is the best fund manager in the industry, it is more a risk management move on my part due to all the financial market and institutional turmoil.

Posted by Andy | September 19, 2008 8:13 AM

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