Wall Street Panic Spreads to Money Markets

September 26, 2008 by Alexis Cala

by Alexis Cala, PIC Current Assistant Producer

Why are we now so worried about money-market funds. These popular funds are believed to be one of the safest investments available. No we find out: no so much.

These funds invest in short-term debt issued by large, stable corporations and mature quickly (less than 90 days). Money-market funds are an opportunity to earn some interest on your investment and still remain secure. This means quick cash growth with little risk.

Money-market funds:

Invest in short term assets
Believed to be as secure as a bank account
Are not federally insured
The value of a share should always be $1
Also called cash investments because of the short maturities

So what went wrong?

Two main reasons why the Reserve Primary money-market fund dropped:

They owned Lehman Brothers bonds, which became worthless
A large number of investors yanked out $40 billion

Losses in money-market funds are very rare. However they are possible. The Reserve Primary Fund had many investors holding their breath as shares fell below the $1 per share value for the first time in 14 years. As shares dropped, people quickly cashed in a record $169 billion and walked away.

What is the government doing?

The Fed will lend up to $85 billion to AIG, the insurance giant
U.S. Treasury promised up to $50 billion to insure the value of deposits in money-market mutual funds
Whatever you put in before Sept. 19, the government now guarantees you’ll get out
Corporations are putting money into accounts to secure money-market funds

Money-market experts say investors should not panic. With the government insuring funds and working towards securing the market there’s no reason to cash out just yet. A number of corporations are stepping up to the plate and offering information about where your money is actually going.

What can you do?