When Safe Isn’t Safe

You know that the market’s in trouble when even safe investments aren’t safe anymore.

On Tuesday, we found out that one of the first-ever, largest money market funds put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1. Yikes!

This is called "breaking the buck" in the money fund industry, meaning that a dollar just isn’t a dollar anymore. This is exactly what happened in the Primary Fund (RFIXX), managed by New York-based money market fund inventor The Reserve. The company announced late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero. Double yikes!

As of Tuesday’s market close, the value of a Primary Fund share was 97 cents. That’s most-definitely not good when you expect that share to equal $1. News of the Primary Fund’s troubles basically caused a scurry for the exits, evidenced by the fact that at 3 p.m. on Tuesday, Primary Fund’s assets stood at $23 billion, a $40 billion hit from the $62.6 billion in the fund on Friday.

This is only the second time that I can remember a money market fund’s net asset value falling below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate. Well, the same thing, in essence, has happened here, and hopefully, this will be an isolated case.

To help assure its customers that their money is safe, some of the largest money-market fund providers already have tried to calm investors in the wake of The Reserve’s revelations.

Fidelity Investments, a company I really like, said that its money market funds are sound. "We can state unequivocally that Fidelity’s money market funds and accounts continue to provide security and safety for our customers’ cash investments," said Anne Crowley, a Fidelity spokeswoman.

That’s good news, and very reassuring, especially if you are like me, and you have a substantial percentage of your investment portfolio allocated to cash.

The bottom line here is that safe is indeed safe when it comes to most money funds. However, as an investor, it is always your responsibility to make sure you find out what your money fund holds, and to make sure it isn’t about to break the buck.