Is Your Money Market Safe? - No Laughing Matter!!!

Unfortunately, if you have a money market account you should know where your money is invested. Text in bold is my emphasis. From Market Watch:

Millions of U.S. investors with cash in these mainstream vehicles are asking that question as some leading banks, investment managers and mutual-fund companies take steps to shield money funds from potential losses on troubled debt in their portfolios.

Money funds will dodge this bullet with reputations for safety and stability intact, experts predict, and while investors would do well now to review their funds' holdings, they can be confident that these won't become money-losing funds.

"There's no such thing as a dangerous money fund," said Peter Crane, president of CraneData.com, which tracks the money-fund industry. "These types of problems have occurred in money funds before, and every time the funds adjust and adapt."

Still, the worsening credit crunch is hitting money funds harder than at any time since the early 1990s. The sharpest jolt so far came on Tuesday when giant Bank of America Corp. said it plans to provide $300 million to support retail money funds and another $300 million to prop up an institutional cash fund. The funds are grappling with stakes in structured investment vehicles, or SIVs -- sophisticated debt instruments that bought subprime mortgages.

Money funds are considered one of the most secure parking places for cash, and now hold a record $3 trillion of assets from institutional and individual investors in taxable and tax-exempt portfolios. But unlike savers with bank money-market accounts, money-fund shareholders are not covered by the Federal Deposit Insurance Corp. Nor are they protected from market-related losses by the Securities Investor Protection Corp., or SIPC, which governs brokerage accounts.

Instead, investment firms have given money-fund holders an implicit guarantee that the net asset value of their fund will not fall below $1 a share -- known as "breaking the buck."

Financial institutions will "move mountains to keep that net asset value at $1 and preserve investors' confidence," said Greg McBride, a financial analyst at Bankrate.com. Anything less and companies would feel the heat, he adds: "Money will flow out the door to a competitor at the speed of light."

Indeed, safeguarding funds' $1 NAV is a driving force behind Bank of America's action, as is true of similar decisions by financial firms Wachovia Corp, Credit Suisse, Legg Mason Inc. and SEI Investments to protect their money funds.

On Wednesday, some of the biggest money-fund providers took steps to reassure investors that their cash is safe.

Fidelity Investments, the Boston-based fund giant, says about 3.6% of its $336 billion in money-market assets as of Sept. 30 had SIV exposure.

"Fidelity has not seen any need to set up a credit facility to support the money-market funds," spokesman Alexi Maravel said. "We continue to be proactive in keeping the money-market funds safe and protecting the $1 net asset value, which is always the primary objective."

Wells Fargo & Co. with more than $100 billion in money funds, sounded a similar tone.

"The quality of securities held by Wells Fargo Advantage money-market funds has remained stable and none of the funds' portfolio managers nor Wells Fargo & Co. have been forced to take any unusual action to preserve the net asset value of the funds," spokesman John Roehm said in an email.

"Wells Fargo Funds Management has the highest conviction in the credit worthiness and relative safety of the securities in its money-market funds," he added.

Only one money-market fund has ever failed since these products were created in 1970: Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate in 1994.

The derivatives debacle in 1994 socked all manner of income-oriented investors, swamping bond funds in addition to money funds, in large part because interest rates at the time were rising. High interest rates sink bond prices.

Nowadays, signs point to lower interest rates, taking pressure off money funds that hold higher-quality investments, such as Treasury and government agency bonds, because these top-rated assets may actually get a boost from declining rates, says Crane, who publishes the monthly newsletter Money Fund Intelligence.

"The average investor does not need to be losing sleep over this," Bankrate's McBride added. "Money funds are a very stable investment. Institutions are already taking steps to preserve that stability even with the current uncertainties in the credit market."

Nonetheless, if you are concerned about your money fund, experts say there are some ways to investigate.

The first -- calling the company to ask about the fund's holdings -- might seem daunting given the complexities of many of these portfolios. But in fact the request can test a company's responsiveness to its customers, observes Bruce Bent, who created the money fund 37 years ago.

"A number of funds will say 'we don't give that out,'" said Bent, whose New York-based firm, The Reserve, has about $80 billion in money-fund assets, none of which, he adds, is exposed to subprime loans or SIVs.

If the fund company isn't forthcoming, he says, "take your money out and say goodbye."
A second warning flag, Bent points out, is a money fund that's consistently the top-yielding performer. "That gives you pause," he said.

Ideally a fund would land in the top 25% of its peers. "If some guy is always the No. 1 fund, he's doing something that's inappropriate for a money fund," Bent said.

Said Crane of Crane Data: "There's always safety in numbers. If you want to be extra careful, 'don't be an outlier' is always sound advice."

The ultimate safe move would be to put your cash in a bank money-market or savings account - they're insured up to $100,000 and sport comparable yields to money funds, which recently averaged about 4.6% for taxable investors.