Question: How safe is my money market fund?

Lynne Schaffer

Dear Lynne,

Money market mutual funds, although not federally insured like money market bank accounts, have long been considered safe because they are liquid, solid and conservative.

Liquid in that you can take out your money at any time. Unlike Enron 401(k) participants and those who invested with Bernie Madoff.

Solid in that they maintain a per share value of $1.

Conservative in that they invest in debt issued by highly rated companies, commercial paper, Treasury bills, asset-backed securities and other A-rated credit instruments.

They also tend to pay higher interest rates than bank savings accounts, adding to their appeal.

So it’s not surprising that both individual investors like you and me and institutions have used them for years as a place to park money while waiting to invest it elsewhere.

Nevertheless, money market funds have not been as safe as FDIC-insured bank accounts. For example, in 1944, Community Bank’s U.S. Government Fund saw its shares fall below $1 in the wake of the Orange County (California) bankruptcy. Investors got back 94 cents on the dollar.

Then in September of 2008, the Reserve Primary Money Market Fund “broke the buck,” with investors getting back 97 cents on the dollar. This $64 billion fund collapsed because it had invested heavily in Lehman Brothers debt, which, as you know, became worthless when Lehman Brothers filed for bankruptcy.

In reaction, that same month the U.S. Treasury Department announced it was establishing a “guarantee program” for money market mutual funds through which a mutual fund company could purchase federal insurance. This means the Treasury if guaranteeing the share price of any participating money market fund whose shares fall below $1.

Last week, the temporary money fund guarantee program was dropped because the Treasury and the Federal Reserve Board maintain the banking crisis and the recession are over or almost over.