How Much Money-Market Vulnerability?

Bruce Bent says money-market worry
Bruce Bent says money-market worry "makes absolutely no sense." (By John Rizzo -- Bloomberg News)
By Tim Paradis
Associated Press
Sunday, August 26, 2007

NEW YORK -- The market turmoil of the past month spawned by growing credit market problems is spilling over to money-market funds, an investment long seen as a safe and secure place to park cash.

Concerns about fallout from now-failing mortgages and the grinding sounds emanating from the normally well-oiled credit markets have led some investors to throw the proverbial baby out with the bathwater. Investors clamoring for safety have been leaving the normally secure confines of money-market funds in favor of even more conservative investments.

Money-market funds can offer benefits of savings accounts but with generally higher returns. While they aren't insured by the government as savings accounts are, these investments are often considered safe because their primary focus is on Treasury bonds and debt from banks and big companies.

"This is the most overblown thing I have seen in my entire 46-year career. It makes absolutely no sense," said Bruce Bent, who invented the money-market fund in 1970. He said his firm, The Reserve, has assets of $70 billion and doesn't hold any investments in the mortgages in question, known as subprime loans. He says some investor concerns about money-market funds are unfounded because the funds are limited by rules that govern how much risk they can take.

Still, it isn't clear how many money-market funds have investments in subprime loans and to what extent.

As a result, some investors have been retreating to lower-yielding but even safer Treasury funds. In a four-day period ended Monday, regular and professional investors funneled $60.09 billion into Treasury and government paper funds, according to iMoneyNet. At the same time, investors withdrew $24.1 billion from money-market funds that can also invest in other areas.

Money-market funds tracked by iMoneyNet have about $2.69 trillion in assets.

But concerns about a widening impact from soured subprime loans should be put into perspective when it comes to money-market funds. These funds are limited to investing 5 percent of their assets in securities that don't carry the highest credit ratings -- and that includes subprime loans. While concerns have emerged that credit rating agencies perhaps at times issued rosy assessments of some debt, observers say money-market funds remain safer than many other investments.

Some of the concern about money-market funds involves corporate debt that could have exposure to mortgage-backed securities. These are mortgages that have been bundled together and sold to institutional investors such as hedge funds and mutual funds. The idea is to rake in the steady return of all those homeowners dutifully paying their mortgages.

The trouble is that some of these investments have run into trouble as a slumping housing market and ballooning mortgage payments have made it difficult for some homeowners, particularly those with weak credit, to keep up.

Some large funds have tried to reassure investors of their safety. Vanguard's Prime Money Market Fund has $93 billion in assets and, like its other money-market funds, doesn't have exposure to subprime loans, the company said.

"I am not aware of any fund that I think is in danger of breaking the buck," said Bent, referring to when a money-market fund's share price falls below $1. Money-market funds are designed to allow investors to recoup each dollar, and a move below a dollar would mean a loss for investors.

Paul Herbert, an analyst at Morningstar, an investment research provider, said he doesn't think it's a good idea for investors to hastily exit money-market funds.

"There is no need to panic about money-market funds. I can understand why people would want to seek the safest option possible. However, I'm not convinced that money-market funds are that unsafe except in a few cases," he said.

Bent said investors with concerns should contact their money-market fund and ask what type of exposure there might be to subprime and other risky investments.

"If you maintain your head when all about you people are losing theirs, you're going to make money."

© 2007 The Washington Post Company