Some doubt safe bet

Sat., Sept. 20, 2008

By David Pitt Associated Press

DES MOINES, Iowa – Industrial engineer Peter Miter of Doylestown, Pa., is like millions of American investors who had retirement money invested in the stock market, but sought the safe refuge of money-market funds recently when stocks became too volatile.

“Hearing that the banks and AIG, solid institutions are going under, I’m wondering where can I put my money where it’s secure,” said Miter, a 52-year-old employee of McNeil Consumer Healthcare.

He said he’s worried that money-market funds may not be the safe haven he thought they were and he’s looking for the next safest bet.

So were lots of other people.

Industry watcher iMoneyNet said investors pulled $224.3 billion from money-market funds in the week between Sept. 11 and Sept. 18. On Wednesday alone about $89 billion was taken out and another $56 billion was withdrawn on Thursday, said iMoneyNet Managing Editor Connie Bugbee.

The safety of money-market investments has been the hallmark feature of the funds that hold as much as $3.4 trillion of investor assets.

The money market world shuddered after New York-based Reserve Management Co. said Tuesday the value of $785 million in unsecured debt issued by Lehman Brothers Holdings Inc. had been written down to zero in its Reserve Primary Fund.

The fund’s managers were swamped by investors wanting to pull their money – more than $40 billion – out. Spokeswoman Ming Lee Hatch said that in just over two weeks, fund assets plunged from $65 billion on Aug. 31 to $23 billion on Tuesday.

All told, the value of the fund’s holdings dropped to 97 cents for each $1 put in by investors.

It was only the second time in the four decades – since industry-founding Primary Funds pioneered the money-market account – that a fund “broke the buck” or couldn’t assure clients of the full value of their investments.

On Thursday night, Reserve Funds said 23 funds will no longer offer any class of shares for purchase to retail or institutional clients until further notice, except through dividend reinvestment. Investors placing orders to redeem their investments in the funds will not receive any money for up to seven days, Reserve said.

The list of closed funds included the Primary Fund.

Reserve has said that its Reserve Yield Plus Fund and Reserve International Liquidity Fund also broke the buck.

The Treasury Department and the Federal Reserve announced separate actions Friday to restore confidence in money market funds.

Greg McBride, senior financial analyst at Bankrate.com, stressed the point that many industry analysts have been making: Money-market funds are safe. Most investors’ funds are with large mutual fund or brokerage companies that would do everything in their power to preserve the dollar-for-dollar value, he said.

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