The Money Market Fund Controversy

Almost everyone knows of money markets; those readily available low-yielding funds that come with all brokerage and advisory accounts. However, not many investors really know how money market funds work.


Prior to the financial crisis of 2008, no one paid much attention to money market funds. Then, with the collapse of Lehman Brothers, a handful of investors learned a painful lesson.

A money market fund is a pool of investor money that is used to purchase short-term government and corporate debt. Historically, it has always kept its Net Asset Value (NAV) at $1.00; even though the debt in the portfolio fluctuates, the issuing firm assumes the short-term debt will mature at par or the typical $1,000 face value. So, no one loses, right? Well, not so fast.

The Reserve Primary Fund, a money market fund with decades of experience in managing short-term debt instruments had a position so large in Lehman Brothers debt (1.2% of its $63 billion size) that it officially “broke the buck”; a term meaning that the net asset value fell below the stated $1.00 a share.

While the fund only lost a few cents a share (it posted a value of 0.97) it was enough to cause a run on money market funds. In September of 2008 $310 billion or about 15% of all money market funds saw redemptions. To help stave off a continued run on funds, the government stepped in to shore up investor confidence by guaranteeing the assets of the remaining money market funds that remained and in 2010 the SEC imposed stringent new rules that restricted the kind of investments that money markets could hold as well as the amount of cash they need to have on hand to meet investor redemptions.

Recently, SEC chairwoman Mary Schapiro has been pushing for even more rules and regulations on money market funds. One of her main components was requiring investors to only receive a portion of their money in the event of someone cashing out completely. The balance would be paid in 30 days. Schapiro offered a second option in that the sacred $1.00 share value would have to fluctuate to show the value of the holdings in the portfolio. Neither one was well received by the industry. It obviously wasn’t well received by her own 5-member commission panel. They voted down her recommendations and stressed that more needs to be done to understand the possible ramifications of any significant changes.