Another Run On Money Market Funds? (Treasury's money market fund guarantee just expired)

Forbes ^ | 9/25/2009 | David Serchuk

[SeekAndFind]

A little over a year ago the collapse of Lehman Brothers sparked heavy redemptions from the dozen or so money market funds that held Lehman debt securities. The hit was particularly hard at The Reserve Fund, a money market fund that had a $785 million position in Lehman commercial paper. Soon The Reserve saw a run on its Primary Fund, spreading to other Reserve funds. Reserve tried to furiously sell its portfolio securities to satisfy redemptions, but this only depressed their values.

Despite its best efforts, The Reserve Primary Fund couldn't find enough buyers and on Sept. 16 the unthinkable happened. The Primary Fund "broke the buck," meaning that the net asset value of the fund, $1, fell to $0.97 a share. It was only the second time a money market fund, which are commonly thought of as guaranteed, broke the buck in 30 years.

Panic set in. During the week of Sept. 15, investors withdrew $300 billion from prime (i.e., taxable) funds, or 14% of their value. The money market funds system danced on the edge, says Jack Winters, a chartered financial analyst, who has worked with money funds since 1976. "Reserve blew up and the market was frozen," he says. "All the prime money funds broke the buck. The government came in, and the Treasury guaranteed the funds, and the Federal Reserve provided liquidity programs to back it up."

These government guarantees stayed in place for a year, until they were finally dismantled this September 18. Meaning that money market funds are once again at risk for breaking the buck should there be a panic. Still, industry observers differ on how realistic this danger is, and what individual investors should do about it.

[SeekAndFind]

As of Sept. 18 the federal government halted its guarantees on money market funds. These guarantees were put in place during the crisis, after money market funds "broke the buck" in order to shore up investor confidence. There were some $3 trillion guaranteed by the government via this program. Investors pulled out tens of billions of dollars in the week leading up to the guarantee ending, though that pace has slowed considerably.

Now that money market funds are not guaranteed, including Treasury money funds, where do you think investors will go? Where should they go? What have you seen in your dealings and businesses? What is out there that offers safety and some kind of returns for investors?

I DON'T KNOW THE ANSWER TO THE ABOVE QUESTIONS. DO YOU ?

[george76]

Bank CD’s by FDIC self insurance.

Try several different banks.

[freespirited]

I’vw been dividing up my cash into lots of small CDs each held at a different bank.

You can do this without a lot of paperwork through a brokerage that sells brokered CDs.

Brokered CDs can be withdrawn without penalty, although you might not be able to sell them in the market for the face value. OTOH, you might be able to sell them for more, depending on where interest rates have gone since purchase.

[GeronL]

People should take their money OUT, IMO

[SaxxonWoods]

The fact that there was no run on MMFs just prior to the end of the guarantee tells us something very important and obvious.

[FreeStateYank]

Clueless here. What important and obvious things were told by the lack of a run on the banks?

Am I the only person left on the planet that is liquid?

[Freedom4US]

Why go through a broker, when individuals or LLCs can buy direct from the Treasury? I don’t get it - there’s no commission, and one can buy as little as $25.00 worth, or millions worth, of notes, bonds, TIPS, etc, roll them over, the whole nine yards. Cut out the middle man, no offense to brokerage firms, but jeez.