Perry Glasser

Money Markets – the little footnote

In Business, Economics, Finance, Personal Finance, Politics, Wall Street on September 22, 2008 at 8:40 am

Money market mutual funds take lots of small deposits from you and me and buy big honkin’s notes and bonds for us, getting us a higher rate of return than we can get at the bank.  It’s a nice idea–provided the Wizards who are making those investments for us buy stable, conservative, reasonable paper.

And they have, usually. But with extraordinary financial times, comes extraordinary risks (as well as extraordinary opportunities)–and when Wall Street announced last week that all money market funds were guaranteed, the Wizards sort of fibbed, put their hands behind their backs, and crossed their fingers.

They whispered the part about how all deposits are insured, provided they were made before September 19. Putting money in a money market mutual fund after that date is to accept additional risk.

The Wizards make money by accepting assets (our dough) for their management. Little streams of capital become torrents of billions. They invest billions at 7%, give us 5.5 %, and send their kids to Ivy League colleges with vacations in Barbados, all funded by the the difference between take-in and paid-out.  One and a half percent of a several billion dollars is not pennies. The more they manage, they more they make.  And over in the mortgage market, they take the billions and lend it to real estate buyers.

That’s the theory, anyway.

Leave the mortgage market for another day: money market managers compete for our dough by bragging about their fund’s return. 

Uh-oh–that gives these Wizards incentive to expose our money to higher risks. Reward follows risk, right? The more of our money they manage, the more they make.

No one is out putting money market capital on a horse in the fifth race, but up until a year ago the mortgage market looked like a sure thing.  After all, the vast bulk of mortgages were conforming to FHA standards, and the Fed had quasi-government agencies guaranteeing the notes, Fannie Mae and Freddie Mac.

What could go wrong?

Suddenly, money market fund managers are talking about maybe if things get really really bad, just knocking down the par value of each share from $1.00 to something a teeny bit less, let’s say $.98.

But things may be getting really, really bad. That example would be a 2% loss–but only for new money under managment after September 19.

What should you do?  Well, your corner bank offers $100,000 worth of insurance on savings.  If you’ve got that kind of new cash, accept the lower interest for the higher security and don’t let the Wizards deceive you.

Oh, and if you have MORE than $100k, open multiple accounts at different banks.

Watch those dollar$.

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