Debunking money market fears
CNN Money, August 28th, 2007
Question: With all the woes in the subprime market and
considering the reports that some money market funds hold money in
securities that include subprime debt, should I be worried that my
money market fund may "break the buck"? - Keith Lobel, Columbia, S.C.
Answer:
The news wires have certainly been abuzz lately with reports of
securities linked to subprime mortgages turning up in money market
funds. And reading some of these reports can scare the bejeezus out of
you, as many have a "the sky is falling" tone to them.
Indeed, some of the coverage conjures up images of "The Blob," the
1958 sci-fi flick that featured that jelly-like mass that kept growing
and growing, devouring everything in its path.
I don't want to
dismiss concerns about the security of money market funds. Given the
level of fear in the credit markets these days, it makes sense to be
cautious. But you don't want to be paranoid. So to answer your question
of how worried you should be, let's first step back and try to gain a
little perspective.
To begin with, you should know there has been some misinformation
floating around about this issue. Two weeks ago, a number of financial
news outlets reported that an Illinois money manager told clients it
wouldn't satisfy redemption requests for the $1.5 billion it manages in
money funds.
The reports also referred to money market funds
investing in subprime-related investments. But the account in question
is a cash management account for commodity traders. It's not a true
money market fund.
Prior to that report, two AXA funds that had
been swept up in the turmoil of the subprime market were also referred
to as money market funds, although they too were not true money market
funds. So you've got to be careful when reading press reports about
problems in money funds.
Read more of this article.
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