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Wells Fargo props up money market fund
Old 02-29-2008, 02:35 PM   #1
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Wells Fargo props up money market fund

Wells Fargo took a $39MM charge to prop up its money market funds that had suffered losses, even though they were technically not required to:

Wells Fargo incurs $39 mln loss from money funds: Financial News - Yahoo! Finance

As a holder of Vanguards Prime MMF, do I need to be worried that if things get bad enough, eventually firms will be unable/unwilling to bail out money market funds since the $1/share stable value is not guaranteed?
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Old 02-29-2008, 02:38 PM   #2
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The problem with worrying about "if things get bad enough" is that getting a critical mass to believe that might make it happen.

I really think the 24/7 financial media and its constant ratings-getting message of Supreme Doom is one of the worst things that has ever happened to the psychology of individual investors.
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Old 02-29-2008, 03:17 PM   #3
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You can switch to a MM fund that holds only government backed paper if you are really worried about preserving your capital.

I'm counting on Fidelity to not break the buck on Fidelity Cash Reserves. Hopefully I don't regret this decision!

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Old 02-29-2008, 05:38 PM   #4
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I have only heard a few times where a fund had to be 'propped up' so the $1 per share was not broken....

To me, it is one of those deck of cards... it is more a show than real... and it is USUALLY their own stupidity trying to get a bit more yield and get stung...

I am not that worried about the dollar.... if it gets broken, then what... it is 99 cents....
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Old 02-29-2008, 05:42 PM   #5
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I'm using a short-term bond fund and GNMA fund for cash reserves so the buck has been broken many times: to the upside and the downside.

But this news will probably alter the way some people save. They will avoid money market funds and only go with the 1% savings accounts and FDIC-insured deposit accounts. Sigh!
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Old 02-29-2008, 05:47 PM   #6
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Originally Posted by audreyh1 View Post
You can switch to a MM fund that holds only government backed paper if you are really worried about preserving your capital.
Agreed. And then you'd be getting 2% instead of 3.2%. Given the very rare rate of defaults and given the tendency of the big players to add capital to avoid "breaking the buck", I'll take the very small extra risk to get the extra 1.2% (or whatever it is now).

If you're with one of the big fund houses, while there are no guarantees, I find it VERY unlikely that they would allow money market fund owners to lose principal. That would be the kiss of death, and a few million bucks injected into it once in a blue moon is a small price to pay to keep confidence in your product.
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Old 02-29-2008, 05:50 PM   #7
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Quote:
Originally Posted by ziggy29 View Post
a few million bucks injected into it once in a blue moon is a small price to pay to keep confidence in your product.
I hope the "blue moons" do not become a regular occurrence.
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Old 02-29-2008, 05:54 PM   #8
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Originally Posted by ziggy29 View Post
If you're with one of the big fund houses, while there are no guarantees, I find it VERY unlikely that they would allow money market fund owners to lose principal. That would be the kiss of death, and a few million bucks injected into it once in a blue moon is a small price to pay to keep confidence in your product.
Well, not quite with MMFunds, but did you read this on ARPS:

Risks of a 'Safe' Investment Are Found Out the Hard Way - WSJ.com
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Old 02-29-2008, 05:59 PM   #9
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Agreed. And then you'd be getting 2% instead of 3.2%. Given the very rare rate of defaults and given the tendency of the big players to add capital to avoid "breaking the buck", I'll take the very small extra risk to get the extra 1.2% (or whatever it is now).
No.

Fidelity Cash Reserves - 3.58%
Fidelity U.S. Government Reserves - 3.41%

So, you are only giving up .17% for the "security" of US government backed MM paper.

Audrey
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Old 02-29-2008, 06:06 PM   #10
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No.

Fidelity Cash Reserves - 3.58%
Fidelity U.S. Government Reserves - 3.41%
Wow. Most places I've looked, the funds backed with Treasuries were a full 1% less or more.
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Old 02-29-2008, 06:13 PM   #11
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Back with treasuries MMs are indeed much lower (2.4% at Fidelity). I think FGRXX is more like the MM equivalent of a GNMA fund.

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Old 02-29-2008, 06:23 PM   #12
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Seems like a nonissue to me. These prop ups only happen under very limited circumstances, namely losses that are fairly minimal. If the funds lose too much it's not going to be worth it to prop them up. I worry about issues that are small and frequent or big and rare. Propups would be both rare and small.

It's kind of like companies that prop up their stock to smooth out share price volatility. The reason it's in the company's interest is because they bet that they can get more suckers to buy their stock if they disguise it as something it's not (low volatility). But when the volatility gets big enough, beyond what can be propped up, the people who bought this thinking it is low volatility suddenly find out that it's actually much worse than they thought. Kind of like a ponzi scheme where propped up returns look great up until it all falls apart.
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Old 02-29-2008, 06:42 PM   #13
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Back with treasuries MMs are indeed much lower (2.4% at Fidelity). I think FGRXX is more like the MM equivalent of a GNMA fund.

Audrey
Ah, okay. I was parsing it as "Treasury-backed" MM funds. My bad.
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