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Money Market funds in potential danger.
Old 06-27-2011, 03:37 AM   #1
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Money Market funds in potential danger.

I have heard enough discussion about this to know that it isn't completely bogus. How likely money market funds are to break the buck is something I don't know.

However, given the pathetic returns of money market funds it probably makes sense to move as much as possible to a FDIC insured bank or checking account.

The full WSJ article is here

Quote:
Amid the Greek mini-panic this month, did you notice the really shocking news? To wit, U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt.
That's right, nearly three years after the panic of 2008, our all-seeing regulators have somehow not fixed what was arguably the single biggest justification for government intervention at the time. In 2008, the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper, Reserve broke the $1 net-asset value, and in the following days some $400 billion fled prime money funds. We'd have thought our regulatory wise men would have fixed this systemic risk before all others.
Yet now we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper. The Treasury is even saying privately that the U.S. needs to support the European bailout of Greece lest European banks fail, U.S. funds take big losses, and we get another flight from money funds....


Can this possibly be happening?
Yes, and this time it's an entire industry as opposed to a particular fund. Half the assets in U.S. prime money market funds were invested in European banks as of the end of May, according to Fitch Ratings. Apparently, our regulators were too busy writing 2,300 pages of Dodd-Frank law and thousands of new rules to notice the systemic risk that is right before their eyes.
The flight from money funds in 2008, and potentially now, highlights a key vulnerability of the financial system: Money funds are perceived as akin to bank savings accounts because they seem to be all but guaranteed against loss, even though they aren't. Even worse, they employ a creative accounting technique that rewards the first customers to head for the exits.
This investor conditioning is courtesy of a 1983 Securities and Exchange Commission rule that allows money funds to report a stable net-asset value of $1 per share, even if that's not precisely true based on changes in the fund's underlying assets. The result is that investors have come to expect that money funds never "break the buck," never decline in value. It also means that if big institutions notice that a fund's underlying assets start to decline, they have a strong incentive to get out quickly while their 99-cent investment is still officially valued at $1.
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Old 06-27-2011, 05:24 AM   #2
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Thanks for the heads up...

It appears that the Vanguard Prime Money Market Fund has quite a bit of exposure to Foreign debt including Europe. About 46% is listed as Yankee/Foreign.... but not all of it is Europe.


https://personal.vanguard.com/us/fun...T#hist=tab%3A2

I briefly looked at the portfolio.

It seems that most of the foreign investments are Northern European Countries (e.g., Norway, Netherlands, Finland, etc), Germany, France, Australia, Canada, and others.

Here is a CNBC piece on it. Crane Data Analyst has some interesting comments. He pours a little water on it... makes it sound like there is a little sensational yellow journalism going on.

How Safe are Money Market Accounts? - CNBC


IMO - The yield on most money market accounts is so low, I see little justification to take any risk.
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Old 06-27-2011, 10:18 AM   #3
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Originally Posted by clifp View Post
I have heard enough discussion about this to know that it isn't completely bogus. How likely money market funds are to break the buck is something I don't know.

However, given the pathetic returns of money market funds it probably makes sense to move as much as possible to a FDIC insured bank or checking account.

The full WSJ article is here
I shifted from a money market mutual fund to a bank "money market" savings account some years ago. I expected to get a little bit less interest, but I figured that if really bad things happened I had FDIC insurance.

Then the really bad thing happened, and the Feds came in and guaranteed the MMM Funds, even though they hadn't been paying the FDIC premium or living by checking account reserve rules.

Okay, I said. Now that they have seen what happens, fixing the MMM Fund issue will be high on their priority list.

Silly me.
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Old 06-27-2011, 10:30 AM   #4
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Originally Posted by chinaco View Post
Thanks for the heads up...

It appears that the Vanguard Prime Money Market Fund has quite a bit of exposure to Foreign debt including Europe. About 46% is listed as Yankee/Foreign.... but not all of it is Europe.


https://personal.vanguard.com/us/fun...T#hist=tab%3A2

I briefly looked at the portfolio.

It seems that most of the foreign investments are Northern European Countries (e.g., Norway, Netherlands, Finland, etc), Germany, France, Australia, Canada, and others.

Here is a CNBC piece on it. Crane Data Analyst has some interesting comments. He pours a little water on it... makes it sound like there is a little sensational yellow journalism going on.

How Safe are Money Market Accounts? - CNBC


IMO - The yield on most money market accounts is so low, I see little justification to take any risk.
FWIW, a couple of weeks ago I had a conversation with Vanguard about the exposure of Prime to the PIIGS. After putting me on hold to get the answer, I was told that there is no exposure to PIIGS directly and that any exposure to EU banks was such that there was no exposure as well (i.e. the banks in Prime didn't hold PIIGS paper).

To the extent non-EU banks have exposure to PIIGS there may be risk, but I think this is very small.
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Old 06-27-2011, 10:55 AM   #5
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An interesting subject, since it affect my DW in the last month, or so.

In preperation for her eventual retirement, she/we planned on liquidating her 403(b) plan - from a prior employer, over 20 years ago and move the funds (rollover) to her VG IRA.

She did have the funds in the 403(b) invested in various funds (through Zurich Kemper) but we moved them to an available MM fund in order to "freeze" the account, before the transfer to VG.

I do check balances on all our accounts on a daily basis and I noticed early on that the Z-K MM account was falling in value by a few dollars every day. Upon investigation of their MM documents, I did find that the fund did not adhere to a $1 valuation, and it could be affected by such things as "mass redemptions" by fund holders.

For those that have attemted to liquidate/transfer a 403(b), you may be aware of the problems incurred, since it is not treated in the same manner as a 401K/IRA, and requires a great amount of documentation, both for the originator, and the "accepting company" (in this case, VG), including a release by her former employer (after 20+ years), along with a statement of "acceptance" by VG, along with a "medallion guarantee" by VG.

It took a bit over a month to have the funds transferred, and of course, she lost a bit in her account due to the MM situation, not being tied to the $1 value.

OTOH, since I moved her investments to the MM account two-three months ago, she did not experience the market loss of those funds that she had in the 403(b), so it came out as a bit of a "wash".

Just to say that in some cases, a MM account (held at a security firm) does not keep that $1 value.

We've have extensive holdings in MM funds (for current retirement expenses) held at both VG & FIDO. If we get any "hint" of a problem in maintaining that $1 par value/share value, we will move the value of our accounts to our local CU (IRA already set up) immediately.

I know - some will say "why not move it immediately"? Well, that would involve a bit of a discussion of transfering of funds, paying taxes, and general income requirements in retirement (which I'm doing, since I'm retired) - but not part of the subject of this thread.

We'll hold that discussion to later...
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Old 06-27-2011, 12:28 PM   #6
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Given what these accounts are paying, its hard for me to imagine there is any exposure to greece or the other troubled countries.
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Old 06-27-2011, 03:07 PM   #7
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Given the 0.01% Fidelity claims to be paying on Cash Reserves I bet they're waiving some of their fee to keep it positive. Though I have seen it creep higher once in a while.

Good reminder to make sure I'm not keeping too much in MMF's.
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Old 06-27-2011, 03:30 PM   #8
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Given what these accounts are paying, its hard for me to imagine there is any exposure to greece or the other troubled countries.

I checked on Schwab MM funds also and while they didn't hold any Greek bank debt directly they did hold a lot of debt in German, French, and UK banks. These banks in turn own a lot of Greek debt which they will likely take losses on. The $64 billion questions is how much of those losses if any will be passed on the Money Market funds. The funds in turn don't have enough income (most are waiving some fees) to absorb the losses and hence risk breaking the buck.

Now to be fair it takes a string of unlikely events to make this happen, and even then it is very unlikely that any loss would be more than $.01/share. On the other hand with yield of .05% (which means that you get a penny/week per $1,000 in interest) you are betting that the funds won't break a buck in the next 20 years. Not great odds considering that funds are in worse financial shape then the were during most of the crisis.
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Old 06-27-2011, 03:54 PM   #9
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I only have $10K in MM funds for my emergency fund. VYFXX is a NY TE short term money market fund that is limited to NY municipal type instruments. Highly unlikely (make that impossible) that it is investing in anything overseas.
My foreign stock exposure is only 6% (out of total portfolio 30% stock allocation).
Sleeping well tonight...
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Old 06-27-2011, 04:10 PM   #10
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Thank you Clif, that's very interesting. I don't keep much in my Vanguard MM and use it as a revolving checking type of account and shuffle funds from there. However, this is all surreal...what will they be into next?
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Old 06-27-2011, 04:15 PM   #11
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I have only insured bank deposits as my "core accounts", so I really do not have any taxable money market funds. I made this change back in 2008 and don't plan to change this.

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Old 06-27-2011, 04:16 PM   #12
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Until 2008, I never thought I would see a MMF break the buck. I don't take any chance anymore. I moved all my taxable cash to a savings account. Probably overkill, but I sleep better at night.

I am not sure what I will do with the cash sitting in MMFs inside our retirement accounts. I may have to buy some short term brokered CDs.
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Old 06-27-2011, 08:10 PM   #13
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Given what these accounts are paying, its hard for me to imagine there is any exposure to greece or the other troubled countries.
Maybe not but they are sitting on a lot of commercial paper from European banks that are holding Greek debt. If they are covered with swaps, it is also unclear who is behind the swaps.

MM funds have zero return. I don't understand why anyone is in them right now.
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Old 06-28-2011, 07:44 AM   #14
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Maybe not but they are sitting on a lot of commercial paper from European banks that are holding Greek debt. If they are covered with swaps, it is also unclear who is behind the swaps.

MM funds have zero return. I don't understand why anyone is in them right now.
jebmke,

clifP already responded to my post. As for me, I'm not in MMMF, unless you count a brokerage clearing account. Nevertheless, it seems to me this concern may be more FUD than anything else, but its certainly a valid point to not hold money there given the returns and possibility of some risk. I suppose some may have $ there waiting for interest rates to rise, but I wouldn't hold my breath waiting for that to happen. If MMMF are a worry, I suspect other bond funds (eg international, floating rate/high income funds) are more vunerabable, and many have probably gone there in anticipation of raising rates.
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Old 06-28-2011, 08:02 AM   #15
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jebmke,

clifP already responded to my post. As for me, I'm not in MMMF, unless you count a brokerage clearing account. Nevertheless, it seems to me this concern may be more FUD than anything else, but its certainly a valid point to not hold money there given the returns and possibility of some risk. I suppose some may have $ there waiting for interest rates to rise, but I wouldn't hold my breath waiting for that to happen. If MMMF are a worry, I suspect other bond funds (eg international, floating rate/high income funds) are more vunerabable, and many have probably gone there in anticipation of raising rates.
Agree. While the concern may be FUD, you get nothing for the risk, however small. I also wonder what exposure exists in Investment-Grade bond funds - short of poring through the portfolio to see what they hold, there is probably no way to know.
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Old 06-28-2011, 09:36 AM   #16
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Let's say they break the buck.

1. How low would the share price be likely to go?

2. How long would it be likely stay below zero?

When I learned about MM accounts, I remember reading "If the value goes below $1, you might consider investing more, because it is likely to go back up to $1."

My online banking/automatic payments are tied to my MM accounts, so while I don't get much benefit from higher returns, there is a convenience factor.
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Old 07-03-2011, 07:10 PM   #17
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Vanguard comments on concerns about money market accounts:

European debt concerns: Will money markets suffer?
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Old 07-03-2011, 07:21 PM   #18
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With the yield on MM funds under 0.05%, why does anybody have any money with them at all? It is laziness?
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Old 07-03-2011, 07:36 PM   #19
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With the yield on MM funds under 0.05%, why does anybody have any money with them at all? It is laziness?
Like DFW_M5 I have a MM account for clearing deposits from my bank for investing at Vanguard. I think I have about $30 there right now.

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Old 07-04-2011, 08:03 AM   #20
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The SEC now shows the actual "shadow" price, not the rounded to $1 price. Wall Street Journal (WSJ) 1/30/2011: "The new data will help investors still shaken by the financial crisis to gauge the true risks of money funds - and see why these conservative investments aren't quite the same as cash."

The shadow price is to 4 decimals and is shown at U.S. Securities and Exchange Commission (Home Page). There is a two month lag time in reporting. The first data released was 1/31/2011 which was the shadow prices as of 11/30/2010. Money funds can quote $1 as long as the shadow price is between $0.995 and $1.005.

It appears some funds pumped in extra money, as the first report shows out of the 236 largest funds; only 30 were below $0.9999. but this varies monthly.

WSJ points out if the shadow price of a fund is $0.996 and someone cashes in at $1, they are getting slightly more than their fair share at the expense of other shareholders. If lots of people sell and the fund sponsor does not prop up the fund, it could force the shadow price to below $0.995 and "break the buck."

As with all fixed income investments the value decreases if interest rates rise and the longer the duration the greater the risk.

Because money market funds are required to own mostly short term paper the risk is far less than in bonds. The WSJ points out in the unlikely event of a 1% increase in interest rates, the average money fund shadow price would drop to $0.9983 if it had been shown as $1

A bigger problem would be if a holding defaulted (like Lehman). If the average money market fund had 1.25% of its assets in a security that lost 40% in value that would be enough to "break the buck."

This added disclosure is to inform the investor of the risk because the Lehman crisis money fund guarantee by the Treasury has expired and it does not want to have to rescue the industry again.

The fund industry has a proposal under discussion to create an industry funded insurance fund to avoid further regulation.

Many believe these new rules are excess government regulation. Others believe these actions are needed to inform and disclose the risks to investors.
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