Money-Market Mayhem, or Stupidity Reins

In today's Wall Street Journal's "Review & Outlook," the Journal writes: "U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt."  In other words, we have learned absolutely nothing from the debacle of 2008.  To serve your memory correctly, that was the year the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper.  The Reserve Primary Fund broke the $1 net-asset value, and in the following days, some $400 billion fled prime money funds. 

Yet now, we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper.  (Read as Greece paper!)  Half the assets of all U.S. prime money market funds were invested in European banks as of the end of May 2011, according to Fitch Ratings.  (Yes, that is 50% of all money market funds are invested in paper that just maybe worthless!!)  Apparently, our regulators were too busy writing 2,300 pages of Dodd-Frank law and thousands of new rules to notice the systemic risk that is right before their eyes. 

The "systemic risk" problem, according to the Wall Street Journal, is that money funds are perceived as being bank savings accounts by investors, because they seem to be all but guaranteed against loss, even though they aren't.  Investors have come to expect that money funds will never "break the buck," never decline in value. 

We all know that stocks and bonds rise and fall without our government having to guarantee against losses, and if investors understood that money funds could decline like the securities that they are, investors would be more likely to accept that these investments are not a risk-free investment.

In 2010, the SEC, realizing the potential for disaster and wanting the money market funds to be more transparent, issued a rule requiring that funds publish the actual market value of their assets, but only on a 60-day delay.  Sixty days, by the then, all money market funds could be deeply underwater. 

What should investors in "money market funds" do?  You may want to move all such funds to a money fund, such as American Century's Capital Preservation Fund, that invests exclusively in short-term money market securities issued by the U.S. Treasury.