Beyond Wall St., Losses Spill Over

Long Regarded as Safe, Money-Market Funds Are Pulled Into Peril

The Dow Jones industrial average dropped about 450 points yesterday on concern about banks, bringing its weekly loss to 800.
The Dow Jones industrial average dropped about 450 points yesterday on concern about banks, bringing its weekly loss to 800. (By Richard Drew -- Associated Press)
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Washington Post Staff Writer
Thursday, September 18, 2008; Page D01

The cascading losses on Wall Street increasingly threaten the safety of investments in money-market mutual funds, which have long enjoyed a reputation for being almost as safe as bank accounts.

Money-market funds aim to invest in low-risk debt issued by the government and healthy corporations, allowing the funds to pay investors a marginally higher interest rate than an average savings account.

But as financial companies move from apparently healthy to definitely dead at ever-increasing speed, some money-market funds have been caught holding investments that are suddenly worthless.

The bankruptcy filing of investment bank Lehman Brothers, announced Monday, was the latest blow, forcing some fund managers to choose among covering losses with their own money, preserving the illusion of safety, or imposing the losses on their investors.

On Tuesday, for the second time in the 37 years since money-market funds were introduced, a fund manager chose to impose a 3 percent loss on its investors, a decision known in the industry as "breaking the buck." Roughly 20 fund managers this year have chosen to cover losses, the greatest concentration of interventions since the early 1990s.

"Consumers should certainly be paying attention," said Peter Crane, president of Crane Data, which tracks the industry.

The industry has tried to soothe investors. Most of the large funds' managers have issued statements affirming their willingness to cover losses. Several said they had done so this week. Wachovia covered $494 million in losses at three of its Evergreen funds. Northwestern Mutual Life Insurance covered $478 million in losses at two of its Russell funds.

Fidelity Investments, among the largest managers of money-market funds, issued a statement that read in part, "We can state unequivocally that Fidelity's money-market funds and accounts continue to provide security and safety for our customers' cash investments."

But investors appear to be fleeing the funds, particularly those that invest in corporate securities. Market analysts said the price of Treasury notes rose sharply yesterday, in part because of increased demand from investors seeking safe investments.

Money-market funds are carefully designed to mimic bank accounts. Customers can write checks. And the share price is held constant at $1, allowing gains to be reported as "interest" in the form of new shares. Money-market funds are distinct from money-market deposit accounts, which are offered by banks and can be insured by the government.

The fund that broke the buck, the Reserve Primary Fund, is owned by the company that invented the money-market fund. Reserve Management opened its first fund to investors in 1971. The company has since been surpassed by larger rivals, but its Primary Fund held investments of about $62 billion as of Friday.

The safest investments in America are short-term notes from the Treasury or government-insured bank accounts. The basic idea of a money-market fund was to offer investors the returns on Treasury notes with the convenience of a bank account.

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