Large money market fund breaks the buck and freezes trading

[dtw]

http://www.foxbusiness.com/story/markets/industries/finance/money-market-breaks-buck-freees-redemptions/

$785M in Lehman instruments written down to $0 caused this fund to close below $1.00.

Background: money markets are blends of all sorts of highly liquid short term instruments: treasury notes, FHLB notes, commercial paper, etc. For retail and institutional investors, they are a great place to keep excess cash. Their liquidity and safety, plus modest yields, make them very attractive. Industry practice has always been to keep 'shares' of money market funds at $1 for ease of tracking and for liquidity purposes. There's no appreciation or depreciation in theory; your investment return is always in the form of interest. Investment banks have often subsidized losses in order to maintain the $1/share standard. However, money market funds are NOT insured by the FDIC. This is generally irrelevant if you are a significant retail or an institutional investor, as $100k in coverage just doesn't help if your cash position ranges in the millions or billions.

Until I read this particular article, I was not aware of any time a money market had dipped below $1; apparently it has happened once before. This is a ripple effect of the Lehman 'failure'.

I'm not sure what to think of it yet - but one message right now is that even cash is not really safe, insofar as it is in highly liquid instruments. I am concerned that if little ripple effect incidents like this continue happening in the coming weeks, a boiling point of hysteria will be reached and a real bank run will start up.

Hold on to your hats...

[jyl]

They Broke The Buck On Money Market Accounts