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POSTED ON BY Ken Tumin
An article in a New York Times yesterday has raised concerns that the subprime mortgage problems may have effects on money market funds. Money market funds are mutual funds composed of short-term debt investments. As the article mentions:
The problem is that some of these funds hold commercial paper, and according to the article:
It should be noted that money market funds have many safety precautions in place to protect the investors and have a long history of principal preservation. Also, it's widely believed that the money market funds offered by major brokerages like Fidelity and Vanguard provide extra safety since these major brokerages wouldn't allow their money market funds to "break the buck". Nevertheless, there are no guarantees or FDIC insurance.
It's important to note that money market funds are different than money market accounts. Money market accounts are offered by banks and credit unions and are typically federally insured by the FDIC (for banks) or NCUA (for credit unions). Money market accounts are essentially the same as savings accounts. Unlike savings accounts, they usually have limited check writing and have higher minimum balance requirements. But this can vary based on the bank. For example, AmTrustDirect calls their account a money market account, but it has no check writing or minimum balance requirements. On the other hand, GMAC Bank calls their account a money market savings account and it allows limited check writing. It would probably make things clearer if all of these bank accounts were just called savings accounts. That would also help distinguish them from the money market funds.
Thanks to the reader who emailed me info on this article.
Such funds are sold to investors as the equivalent of cash, and their $1-a-share net asset value is considered inviolate. But if the funds experienced big losses, the value of the assets could be vulnerable.
The problem is that some of these funds hold commercial paper, and according to the article:
Standard & Poor's, the ratings agency, warned yesterday that it might downgrade several issuers of commercial paper, a short-term I.O.U. by companies that promise to repay loans typically within a few weeks to a year. In these cases, S.& P. said, the commercial paper was backed by residential mortgages.
It should be noted that money market funds have many safety precautions in place to protect the investors and have a long history of principal preservation. Also, it's widely believed that the money market funds offered by major brokerages like Fidelity and Vanguard provide extra safety since these major brokerages wouldn't allow their money market funds to "break the buck". Nevertheless, there are no guarantees or FDIC insurance.
It's important to note that money market funds are different than money market accounts. Money market accounts are offered by banks and credit unions and are typically federally insured by the FDIC (for banks) or NCUA (for credit unions). Money market accounts are essentially the same as savings accounts. Unlike savings accounts, they usually have limited check writing and have higher minimum balance requirements. But this can vary based on the bank. For example, AmTrustDirect calls their account a money market account, but it has no check writing or minimum balance requirements. On the other hand, GMAC Bank calls their account a money market savings account and it allows limited check writing. It would probably make things clearer if all of these bank accounts were just called savings accounts. That would also help distinguish them from the money market funds.
Thanks to the reader who emailed me info on this article.
On money market funds, just a note to everyone to say they're perfectly safe. No individual investor has ever lost money in one, and no one will over this "extendible asset-backed commercial paper" episode. (Several companies extended on their debt obligations.) No money market securities have defaulted and no funds have dropped below $1.00 a share. Check our site at: http://www.cranedata.us for more money fund news.
Sincerely,
Pete Crane
Publisher, Money Fund Intelligence
Money Market Funds, even those offered by bank subsidiaries or affiliates are NEVER insured by the FDIC or NCUA. (And the SIPC does not insure them against loss of value.)
Banks offer deposit accounts called Money Market Deposit Accounts or Money Market Accounts. These are bank accounts and are insured (if the bank is insured).
Don't confuse a Money Market Account with a Money Market Fund. For example, the Wells Fargo Advantage Money Market Fund is NOT FDIC insured. The Wells Fargo Money Market Savings Account IS FDIC insured.
That is why no MMF has yet failed.
So, if you have 1000 shares of an MMF in your brokerage account, the SIPC guarantees that if your broker goes bankrupt, they will replace the 1000 shares. They do not guarantee that the 1000 shares will be worth $1000.
They do not guarantee that the management of the MMF will not mismanage the fund or that the MMF will not lose money.
The answer is simple. Some pay MUCH higher.
Take a look at Millenium Bank. They have some CDs paying over 8%.
Of course the rule as always is that there's some reason for a higher rate. In this case, unlike most CD's you can't pull your money out of the CD early -- not even if you're willing to pay the penalty -- and it is not FDIC insured.