Investors take massive risks every day. But the last investments that most investors would think of as being vulnerable to losses are the accounts where they keep their cash.
Recently, though, the SEC has looked closely at one popular place where millions of investors stash their cash. Money market mutual funds don't typically get a lot of press, but they do have a lot of money. Despite concerns over systemic risk that surfaced during the financial crisis four years ago, the SEC chose not to move forward with a vote to make some massive changes to the money market industry. Although many would argue about whether those changes actually would have done more harm than good, what's clear is that whatever risk exists among the funds will remain there at least for the foreseeable future.
In SEC Chair Mary Schapiro's eyes, the risk involved with money market mutual fund stems from their exposure to corporate debt. Money market funds typically hold short-term commercial paper from a wide variety of corporations. Under ordinary circumstances, the commercial paper is quite safe, and default risks are very low.
Every once in a while, though, a crisis occurs. In 2008, the Reserve Primary Fund suffered big enough losses due to its holdings of Lehman Brothers commercial paper that it had to pass them on to investors after Lehman filed for bankruptcy. Because Lehman's bankruptcy came at such a critical time for the financial system, the resulting loss of confidence eventually led the Treasury to offer temporary insurance protection for money market mutual funds similar to what the FDIC does for bank accounts.
The (proposed) solution
As a result, Schapiro suggested some changes aimed at preventing a future crisis. The new rules would have required a tough choice: either maintaining capital reserves that would have cut the amount available for investment, or allowing fund prices to float. In addition, for fund shareholders trying to liquidate their holdings, the rules would have required a hold-back of a portion of proceeds to prevent preferential treatment in the event of a run on the fund.
But it became clear that Schapiro didn't have the support of her fellow commission members. With pressure from industry members such as Schwab
Of the proposals, the floating-price idea would have been the most devastating. It might well have killed off the entire industry, as it would have turned every purchase or sale of fund shares into a taxable event that would have made them far more complicated than they're worth.
The real solution
Leaving aside the fund industry's views, though, investors really shouldn't be concerned about the issue at this point. With most money market mutual funds paying very close to 0% in interest, money market mutual funds aren't a viable place for your money in any event.
Interestingly, even brokerage companies, many of which rely on money market funds for sweep vehicles, are starting to pick up on this trend. At E*TRADE Financial
Even better are high-yield savings accounts from other institutions. Metlife's
Take care of your money
The government can't regulate away every systemic risk to the financial industry. It's better for you to take your own steps to protect your money. Fortunately, with good alternatives to money market mutual funds, it's easy to sidestep the whole controversy and get your money into safer hands now rather than later.
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