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Money market funds, we've been told, are as safe as cash. Next to Treasuries, money market funds are one of the safest securities to park your cash in. Of course, we heard similar arguments with auction-rate securities, too, and we saw how badly that ended.
Bucking the trend
We might just be on the verge of seeing another disaster in the making as Reserve Primary, the $65 billion money market fund that invented the investment vehicle, finally "broke the buck" because of losses incurred on debt issued by Lehman Brothers (NYSE: LEH ) .
Money market funds bend over backwards to keep their net asset values priced at $1 a share, going even so far as to take on losses to maintain this value. The importance of ensuring that investors can always get back their principal has led money market funds to grow to $3.58 trillion in assets.
Over the past year, Bank of America (NYSE: BAC ) provided $300 million to its funds, Legg Mason (NYSE: LM ) used $2.2 billion to prop up its fund, and yesterday, Wachovia (NYSE: WB ) secured funding for its Evergreen Investment Management arm to prevent it from breaking the buck.
Reserve held $785 million in Lehman debt that it wrote off to zero in the wake of its bankruptcy filing. Its assets plummeted 60% in value over the course of two days, causing Reserve to suspend redemptions for a week and watch its net asset value break the buck and trade for $0.97 a share.
On hallowed ground
The sanctity of money market funds may no longer be so hallowed, as Standard & Poor's put nine similar funds on credit watch because of their investments in Lehman. A possible run on funds as investors flee to the security of cash has worldwide implications, because money market funds are one of the largest buyers of debt issued by corporations and financial institutions.
Most money market funds still represent a safe haven to earn interest and still allow ready access to your money. However, as we learned with auction-rate securities, the only thing as good as cash is cash. And you can take that to the bank.
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