Breaking the Buck

  • Written by David
  • December 29, 2007 at 6:19 pm
  • 1
  • In the world of finance, this phrase gives pause to something that should not be! Money market funds were created in 1971 by Mr. Bruce R. Bent. The goal then, and still the goal today, is to never let the net asset value (NAV) of the fund go below one dollar, $1.00. Hence the phrase, breaking the buck.

    Back in August when all the mortgage mayhem was starting, I was receiving invitations to attend telephone conference calls from various money market fund providers. I thought to myself back in August, this is curious, what does a money market fund, something short term, typically safe, in nature have to do with the mortgage mess if at all?

    Well simply put, many money market funds have been reaching for yield in past years, and have invested in a type of asset that is a part of the mortgage problem. How a part of the current mortgage securities market (Structured Investment Vehicles, SIV’s) works is that SIV’s go to the market and issue of form of well known corporate debt called commercial paper. These funds are then used to purchase longer term SIV assets. This is essentially where the problem emanated.

    As I followed this developing ‘problem’ over the late summer, I began to feel uncomfortable with what could happen. What if money market funds did break the buck? Can’t happen was sort of the feel I got back in August… Non-the-less I moved client money market fund positions at Pershing LLC into government only money market funds in November. Government money market funds, by prospectus, cannot invest in the short term corporate debt such as commercial paper. Clients will now take a bit less yield with the comfort that the $1.00 NAV should not be at jeopardy since these government only money market funds cannot invest in commercial paper.

    As of this writing, it is now reported that over $3 billion US dollars has been spent by many fund managers to keep from breaking the buck according to the Financial Times. The above linked article also states that there are probably more investment houses that have yet to ‘come clean’ with their problems. We shall see.

    Mr. Bruce Bent has several recent articles discussing these issues; “What’s Going On With Money Market Funds” and “Money market funds abused, claims founder“.

    If you are not a client of mine, David Gratke Investment Advisors, LLC, what have you learned from your wealth manager on this troublesome development within the money market arena?

    Be well…



1 Comment


  1. Pingback : From the Desk of David Gratke » Blog Archive » Useful Article | SEC Proposes Rules to Prevent Losses at Money-Market Funds

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