Would you take money that you needed for next month's mortgage payment and deposit it at a European bank? Would you take money that your daughter needs for braces this summer and make a short term loan to a Wall Street firm? Probably not, but if you've put your ready cash in a prime money market fund, those are exactly the kinds of places where your money may be sitting right now.
To be sure, most mutual fund companies try to invest their money market accounts prudently. When you put your cash into a money market fund, it is expected that your dollars won't lose value. Unlike other mutual funds, where the value of the shares will float in accordance with how well the fund's investments are performing, a money fund tries to act like an FDIC-insured bank account, and never be worth less than the amount you have put into it.
But prior to 2008 financial crisis, a number of money funds took high risk bets on commercial paper issued by risky firms like Lehman Bros, or they lent to the infamous "SIVs," those "short term investment vehicles," which loaded up on toxic mortgage-backed securities. This risk-taking came home to roost when the Reserve Fund, the nation's oldest money fund, "broke the buck" on its Lehman investments. Money fund customers, who previously assumed that their accounts had bank-like safety, ran in droves when they realized that was not the case. In one short week, $350 billion -- 15 percent of all prime money fund investments -- were withdrawn, threatening to destabilize the financial system. The U.S. taxpayer had to step in with a temporary guarantee program to prevent further runs.
Under Dodd-Frank, the financial reform law enacted in 2010, taxpayer bailouts of the financial industry are now prohibited. The SEC wants to make sure that money fund investors understand this. One reform the SEC is considering would require shares in money funds to float in value as do other types of mutual funds. This would reinforce for money fund customers that their money is not guaranteed as it is with an FDIC-insured bank account. Another, more complicated, option would require money fund sponsors to set aside additional capital to absorb losses on money fund investments, as well as hold back 3-5 percent of an account holder's money for 30 days to discourage runs.
Mutual fund lobbyists are trying to scare people by saying that these proposals will lead to onerous tax consequences, that they will lower returns, and potentially kill off the industry. But the tax consequences will be no more onerous than they are for any other mutual fund. And if being honest with people about the true risks of these accounts will kill the industry (which I doubt), then so be it.
Industry lobbyists also argue that the SEC is over-reacting, since a money fund has only "broken the buck" a few times in the industry's 40-year history. In fact, money funds have lost value repeatedly in the past, but customers did not see it because the funds' parent companies stepped in with their own cash to make up for the losses. Moreover, the Reserve Fund incident underscores the cataclysmic consequence of a run when a major fund does "break the buck." We cannot afford the risk of that happening again -- not even once.
Money fund customers and taxpayers alike should applaud what the SEC is trying to accomplish. The SEC wants to make sure that money fund customers' expectations are realistic and informed, and it wants to make sure the money fund industry can meet those expectations, without resorting to government bailouts. Money market funds are still at risk for another run. And if that happens, their customers' losses will far surpass any short-term costs associated with the industry's exaggerated claims of lower returns or tax inconvenience.
ALL investors need to be hounding away at the Leadership to re-instate protections that do not allow the gambling, to the extent it is done via today's laws, of our money market funds or our 401K plans overall, and the tax penalties should be strictly upon the Wall Street boys who do gamble it in known, high risk investments. There are plenty of very low risk investments our 401K plans and all money market investments could be in.
The choices offered by the investment firms are made to strip us of our funds, not grow them. Our companies go along with the Wall Street boys on this, because we are not demanding otherwise.
The rules and laws around the 401K Plans are strictly manipulated, written, defined by WALL STREET. Congress does not have the good sense and the common decency to write these rules and laws to benefit the American investor. Period.
Until all American citizens investing in any 401K like plan take a stand and demand better legislation, it will not happen. SO WHERE IS YOUR VOICE, AMERICA? Where are your letters, faxes, emails to this CONGRESS, demanding better legislation now? Stand together and speak.
And you people should do the same.
Not, but this is what Congress & Wall Street want...err, make that FORCES us to do.
Example: In June 2008, I became convinced something was just not right with the markets. Nothing prescient: Reading the real deal blogs like The Big Picture, Yves Smith and Mark Thoma.
Hence I called Fidelity (401k) and told them to liquidate every security I held and convert it to CASH ON HAND.
"Not possible."
"Come again"? I asked.
"You money will go into money market funds" was the reply.
"Like Hell! I want cash on hand. It's not difficult to understand, isn't it?"
"We can't do that."
"And pray tell WHY??"
"Those are the rules."
A 3 echelons escalation didn't lead me anywhere. Whatever I wanted to do with MY money, they would retain control of it, unless I was willing to liquidate completely my 401k...and pay the tax penalty that Congress put right there to make sure that we, the individuals, wouldn't get ideas about deserting their beloved providers of campaign cash, ie. Wall Street.
So no, Ms Bair. We don't want to speculate with the college tuition. That said, please ask Wall Street and Congress why do they think it is OK for THEM to do so with our money.
I have far less in money markets than in checking, but good advice and thanks for asking.
Time mag's article recently re Attorney General Bharara convicting a whole bunch of finanacial crooks is encouraging. We need more of this.
Bank stocks and financials are finished, don't put your money. BofA is worth 12% what it was before crash, Apple can now buy it with cash. And Apple's overvalued, don't buy that. Me, all my money is in emerging markets, BRIC. That's where the growth is.
Interesting how the government lets private interest profit over prison taking on risk of holding felons, but risk of gambling debts is forced on us.
How can any American fight actions of the unelected Fed and campaign/portfolio stuffed Congress? Paul, the WS wildcard would let them racketeer freely, even without the Fed. The despotic interest is already too huge to let run wild in a free-market.
Time Mag's article on crime-buster Attorney General Preet Bharara is encouraging,. We need more of these incriminations.
Investors who were burnt by the meltdown are wise to be cautious putting their money back in, even if it appears there's the appearance of a recovery of the stock market. Who's to say the crooks can't pull the rug out from under us investors again? Though investing in the stock market is maybe the most likely way to beat inflation, when a meltdown occurs, it's back to 0 again, not fun and games to be sure.
It may be inflation is in everything except interest and housing. The odd thing is prices keep going up at places like Lowes that sell building materials.