Money Markets: Easy To Ignore, Occasionally Dicey

Money market accounts are so dull that many people use them like checking accounts. But they're riskier than checking accounts, and federal regulators are proposing new rules to deal with those risks.

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A lot of investments sell themselves as exciting - huge upside, make lots of money. But one investment sells itself as boring - money market mutual funds. Even sounds boring. Once in a while, money markets get dicey and at a meeting tomorrow, the SEC is going to try to figure out what to do about that. Jacob Goldstein from our Planet Money team reports.

JACOB GOLDSTEIN, BYLINE: Joe Magee has had a money market fund since the '90s. He keeps thousands of dollars in it, writes checks from it. So I asked him, that money you have in a money market fund - do you know where it is?

JOE MAGEE: No, I have no idea. It's not under my mattress, I know that much.

GOLDSTEIN: Money market funds are easy to ignore. They don't seem like stocks or bonds which rise and fall in value every day. When you put a dollar into a money market fund, it holds its value at exactly $1 day after day, just like money in the bank.

MAGEE: Right now I think people are used to having a product that's constantly $1 in, $1 out. They don't have to think about it.

GOLDSTEIN: Ricardo Delfin is the executive director of the Systemic Risk Council, a nonprofit funded partly by that Pew Charitable Trusts. He says people should have to think about their money market funds because they're not just like bank accounts. When you invest in a money market fund, the fund turns around and lends that money out. On very rare occasions, those loans go bad and investors suddenly find that the dollar they put into the fund is suddenly not worth a dollar. When this happened in 2008, people freaked out.

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UNIDENTIFIED SPEAKER: Bruce Bent's Reserve Fund - one of the earliest money market funds has dropped under a buck. Net asset value is under a dollar.

GOLDSTEIN: That CNBC. This news triggered a panic. Investors rushed to pull their money out of lots of money market funds, and the government rushed in and issued a last-minute guarantee to try to stop the panic. Money market funds already come with a warning that investors could lose money, but since the crisis, regulators have struggled to figure out how to prevent the government from having to step in again.

One idea regulators are kicking around - make it clear to investors that a dollar in a money market fund is not always worth a dollar. Let the value of money market funds fluctuate like other investments. If you put, say, a $1,000 in a money market account, it might be worth $998 the next day, $999 the day after that. I talked to Eric Rosengren, the president of the Federal Reserve Bank of Boston, on Monday. He says even small fluctuations in the value would send an important signal.

ERIC ROSENGREN: Well, if you know the price varies, that highlights to people that have invested in the fund that there is some risk in the fund and that it is not a perfect substitute for holding money in a bank.

GOLDSTEIN: Getting away from that fixed world where a dollar is always worth a dollar, the argument goes, means it's less likely that the government will have to step in again. Many of the companies that run money market funds do not like this idea. The Investment Company Institute, which represents fund companies, declined to be interviewed for this story. But the group has written that getting rid of the stable $1 value would create tax and accounting headaches for investors. New rules could also push investors to move their money to other places that have fewer rules and create more risk for the economy.

Joe Magee, the guy I talked to who writes checks from a money market fund says the rule would change the way he looks at his money.

MAGEE: When things are moving up and down, whether it's drastically or just a minimally, I start to feel like it's a little less real and that it might not be there tomorrow if I needed it to, you know, go buy lunch.

GOLDSTEIN: Magee said if he saw that happening, he might keep more of his money in a regular checking account. Jacob Goldstein, NPR news.

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