Are money market funds safe?
The money market industry is proposing changes that would lower yields, improve safety and place restrictions on certain funds. But should you choose a money market account over a savings account? Reporter Tamara Keith asks the experts.
A trader observes stocks at the New York Stock Exchange (Spencer Platt/Getty Images)
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TESS VIGELAND: At a time when the mattress looks like a great place to stash cash the money-market fund industry is trying to come up with ways to reassure consumers their money is safe. This week it proposed some new rules that could lower yields for those funds but provide more safety to investors. Among other things, regulators could look into any fund that's offering significantly higher yields than the rest. And the funds themselves could put a temporary stop to withdrawals if there are so many that the fund could have trouble paying a dollar for a dollar. Tamara Keith has more.
TAMARA KEITH: It's known as breaking the buck. On September 16th, the nation's oldest money market fund watched its shares sink below a dollar. The Reserve Primary Fund had invested in Lehman Brothers and Lehman had filed for bankruptcy. For money market funds, it was only the second time the buck had ever broken. That broke the industry mantra too.
MIKE MCNAMEE: A dollar is a dollar.
Mike McNamee is with the Investment Company Institute, a trade association. Money Market Funds are designed to be relatively low risk, with fairly small yields. The funds invest in things like U.S. treasuries, municipal bonds, CDs and commercial paper and then sell shares to investors.
MCNAMEE: People don't even think about shares when it comes to money market funds, right? You think I put in $100, I got $100. That is one of the core strengths of the product.
But when the buck broke at the Reserve Primary Fund -- investors freaked. Institutional investors pulled billions out of money-market funds within a couple of days. That's when the Treasury stepped in, insuring deposits. The insurance doesn't cover new investments, and the program is set to expire next month.
CHRIS DONAHUE: My name is Chris Donahue, and I am president and CEO of Federated Investors Inc. In Pittsburgh.
Federated manages $325 billion in assets for 50 different money-market funds. Federated is part of a working group that this week proposed new guidelines for managing money-market funds. Some of the guidelines, if regulators agree to them, include keeping more cash on hand and concentrating investments in safer, shorter-term debt.
DONAHUE: So we are very much embracing the overall strengthening of an already strong industry.
But are money-market funds really a good place to keep your rainy day dollars? It all depends on who you ask. Susan Moore is a financial planner from Waterton, Massachusetts. She's fielding a lot of questions from clients.
SUSAN MOORE: People are very concerned about safety, but they're also concerned about the fact that money-market funds are paying such low rates of return at this point.
According to iMoneyNet, yields on money markets are averaging between a quarter and a third of a percent. So while Moore says she trusts money markets, right now she doesn't think they trump savings accounts.
Moore: I would say go to the online savings account first. You'll get a higher rate of return, and you can still get the FDIC insurance.
Financial planner Andrew Tignanelli heads the Financial Consulate. He has lots of concerns about the security of money markets. Still he says the risks are relative.
ANDREW TIGNANELLI: I don't think you're going to wake up one day and lose 50 percent of your money in a money-market fund. I think your biggest risk is you might lose five.
He says some money-market funds may be invested in shaky corporate or municipal debt. And given the currently tiny yields, the risks may not be worth the rewards.
In Washington, I'm Tamara Keith for Marketplace Money.
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From HI, 03/22/2009
When foreign money-market breaks the buck, legislators of the foreign country force taxpayers to pick up the tab. Hold on thar, Wild Bill, money-market investor looses through buck-break on the one hand or on the other hand through taxation. What is the difference? More smoke and mirrors from lobbyist mob.
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Because money-market has no product or service it is only Ponzi-scheme paying off early investors with money from subsequent investors not to mention tidy profit for the well connected officers of the fund. Not to worry, Ponzi is backed up by foreign government.
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Because treasury of foreign country has no product or service it also Ponzi. Not to worry, when treasury belly-up it will be bailed out by company with largest factory in that country.
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Why not skip all the middle men and buy preferred stock in the big company. You crunch the numbers. You crunch historical prices on preferred stock of that company.
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U B Judge
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Does that logic work also in our country.
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Naaaaaaaaaaa
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