Money Market Fund ‘Breaks the Buck,’ Freezes Withdrawals for Seven Days

The safe-haven reputation of money market funds may be called into question now that the share price of one of the oldest and largest funds has fallen below $1 in a rare move known as “breaking the buck.”

The Reserve Primary Fund in New York became the latest casualty of America’s financial industry meltdown Tuesday, thanks to losses on its debt securities from the now-bankrupt Lehman Brothers.

The fund, which had $65 billion in assets just one month ago, cut its share price to 97 cents. It said it would take up to seven days to make good on redemption requests by investors. Typically, money funds redeem investors’ shares immediately.

This is the first time a money market fund open to the public dipped its share price to below a dollar. In 1994, the value of a small institutional money fund, Community Bankers Money, gave less than a dollar-for-dollar return on investment.

Christine Benz, director of personal finance for Morningstar Inc., says the amount a money fund yields, as well as the assets it invests in, could raise a red flag. For example, she says, the Reserve Primary Fund was one of the highest-yielding money funds, delivering a return much higher than comparable funds. “Anytime you see any investment type that delivers a substantially higher return than its peer group, you have to ask, ‘What is the fund doing to generate that return?’ It’s a good bet it’s taking on higher risk to generate that strong return.”

The Reserve Primary Fund was heavily invested in Lehman Brothers securities, its “bread and butter,” Benz says. So it didn’t have the safeguards of a more diversified company that could tap other assets to make investors whole.

Other companies have seen share prices decline, she says, “but the parent companies stepped in and added assets to make sure shareholders didn’t see a drop in their principal values.”

Jean Setzfand, director of financial security for AARP, recommends that people not act hastily by withdrawing their money. She called the Reserve Primary Fund’s situation “an isolated case.”

She advises investors to be actively informed about their holdings. “We should know the underlying assets of the firms we're investing in. Things like this shouldn’t happen, but who would expect that Lehman was going to go under?”