Money Market Fund Loses Money Due to Lehman Brothers

One thing I've never been able to figure out: What's the difference between a savings account and a MMA? Is it just that there are no restrictions to the number of withdrawals end ACHs from the savings account per month but there is for MMA? I think savings accounts also have this restriction, though.

Back in the 1970s, the federal government still regulated how much interest federally insured financial institutions could pay on accounts. It set a maximum interest rate for each type of account. In practice, virtually all institutions would pay the maximum permitted by law.

But inflation started to burn out of control. The annualized inflation rates were in the teens, but interest rates on savings accounts were capped at 5.5%.

Money market mutual funds were invented by the private sector. They allowed unlimited check writing and paid dividends that at some point were over 20% (annualized rate). Funds began to drain out of banks, hurting them severely. The term "disintermediation" was coined.

Finally, the government relented and let banks offer a new type of account called a "money market account." The new account had no upper limit on interest rate, but had certain restrictions like no more than three checks and six total withdrawals per month. The account also had another advantage for banks: the reserve requirement was zero. That meant the bank could lend out 100% of the funds it took in from money market account deposits. This kept them competitive with money market funds which were not subject to reserve requirements, unlike banks.

You'll note that the government said that the accounts could offer up to three checks per month, not that they had to. It soon became clear to banks that if they imposed a six withdrawal per month limit on savings accounts, the accounts could qualify under the reserve regulations meant for money market accounts. So banks began adding that restriction on savings accounts.

Well, eventually the government completely deregulated bank interest rates. For all practical purposes, the distinction between a money market account and a savings account became just a marketing distinction. Virtually all accounts marketed as savings accounts today have the six withdrawal limit. Some account marketed as money market accounts allow checks, others don't.

Now it's just a question of whether the bank's marketing department thinks the adding the words "money market" to a given account name will achieve its marketing objectives. For example, at one bank I have what they call a "money market checking account." What the heck is that? A checking account? A savings account? A money market account? You really can't tell just from the name of the account.

Everytime that the subject of money market fund safety comes up, somebody posts that SIPC insurance will cover you if you keep your money in a money market fund.

I hope this finally dispells that misconception.

Yes, if you keep your money market fund shares in a brokerage account at an SIPC insured firm and the firm goes bankrupt, the SIPC will give you back your shares, but they will not guarantee that they are worth $1 (or anything at all).

To add 1 thing to the very good explanation that "Anonymous, at 6:23 PM, September 16, 2008" gave - banks certainly have confused the terminology, more or less. I believe they also came up with the acronym "NOW (Negotiable Order of Withdrawal)Account" as a synonym for money marker accounts. I don't seem to hear that term much reticently as I used to, however.

NOW accounts arose as an end-run around federal banking regulations by state chartered savings and loans in the 1970s.

Federal law allows only commercial banks (not savings and loans, savings banks, etc) to issue demand deposit accounts (checking accounts). Federal law also prohibits payment of interest on demand deposit accounts.

This put thrifts (savings and loans, etc) at a competitive disadvantage. To get around this, some state-chartered thrifts began issuing savings accounts that allowed depositors to make withdrawals payable to third parties. These withdrawals payable to third parties were called Negotiable Orders of Withdrawal. For all intents and purposes, they functioned just like checking accounts. But technically they were not demand deposit accounts (which thrifts are prohibited by law from issuing) because the account agreement contained the clause the bank may require up to seven days notice before allowing the withdrawal. The thrifts had no intention of ever enforcing this clause, but including the perfunctory language technically kept them within the law.

Title III of the Depository Institutions Deregulation And Monetary Control Act of 1980 was known as the Checking Account Equity Act.

The Checking Account Equity Act authorized all banks and thrifts to issue a new type of interest-bearing account called a NOW account. It also authorized credit unions to issue share draft accounts. Title I required that these accounts be treated as transaction accounts for reserve regulation purposes.

Since it is still illegal to pay interest on demand deposit accounts (traditional checking accounts), if you ever open an interest-bearing checking account or if the fine print of the terms and conditions of the account contain the "we reserve the right to require seven days notice..." clause, then you are actually opening a NOW account rather than a checking account. But, again, we have the marketing departments doing their thing. You will hardly ever see an account described to you as a NOW account anymore. Banks found this too confusing to consumers. They now simply refer to both types of accounts as "checking accounts" for marketing purposes.

And to throw another recent twist into the mix: Banks have discovered yet another regulatory loophole that lets them get around the reserve requirements on checking accounts. At most banks, when you walk in and apply for a checking account, they will actually open two accounts for you: a checking account and a savings account. Except for a small disclosure buried in the account agreement, you know nothing about the savings account and nothing about it will ever appear on your statement. The bank endeavors to keep as much of your money in the savings account as possible and transfers (up to six times per month) money from your savings account to your checking account in order to cover any checks you may write. (Again, you don't know anything about these transfers.) The money kept in the savings sub-account is subject to the same 0% reserve requirements as money market accounts. This is known as "deposit reclassification."

So things have evolved to the point where if you walk into a bank and ask for a checking account, you are no longer getting a traditional demand deposit account, but are getting a package consisting of a NOW account and a savings account. Banks don't want you to worry about stuff like this, so they just call it a "checking account."

It has been many years since I owned a non-bank MM account. Just never could see a reason to open an uninsured MM account with so many insured alternatives available. Today, my resolve on this continues, but is strengthened.

I was told that TD Ameritrade accounts with cash invested in the Reserve Funds are effectively frozen for the next 7 days. According to a rep I spoke to, all Reserve investments held by TD Ameritrade account holders have been liquidated (to protect their account holders) and the company has been told it will have to wait 7 days to receive the proceeds. He was unclear on whether they would received $1/$1 or $0.97/$1. I guess we'll have to wait and see.

Money Market accounts are never safe nor guaranteed. Nothing in the free market system is EVER SAFE, even FDIC insured accounts.

There is no such thing as a free lunch in the existing structure we have now. Nothing is protected ever.

The sharks will control the money and be billionaires, the rest will be poor and indebted to them.

I have a lot of funds in the RYPQX but it isn't a money market fund and ameritrade nor The reserve is taking care of this fund at all. I hope the NAV don't drop in half or anything. They have 84% in cash but i am not sure if that means anything. I appreciate if someone can shed some light on this

I wish some one would advise whether they think RYPQX is in a worse postion than the rest of reverve debt. I was quote shocked to learn that RYPQX is not a MMF, but a bond. They seem to have very good assets. You would think that they don't have to sell off the assets at too much of a discount.

RYPQX

We need to organize and get the same protection that Treasury is giving to money market funds. How do we get organized to contact Washington to give us the same protection as MMF. Also how do we organize to sue Reserve and the brokers who sold us this stuff and told us it was secure. I contacted my broker 2-3 times to make sure it was insured etc and they always said it was. They repeated the same junk to me this morning. But clarified they were only talking about there own firm, not if I had a RYPQX.

RYPQX

Are we going to get paid $0.97 on the dollar or is this situation much more dire than it appears.