Lehman Fallout Hits Money Market Fund

A stack of $1 bills i i

Individual investors could unexpectedly lose some of the principal they invested in the Primary Fund, a money market fund that held debt securities issued by Lehman Brothers. On Tuesday, the fund reported that its net asset value fell below $1 a share in what investors call "breaking the buck." Patryk Galk/iStockphoto.com hide caption

itoggle caption Patryk Galk/iStockphoto.com
A stack of $1 bills

Individual investors could unexpectedly lose some of the principal they invested in the Primary Fund, a money market fund that held debt securities issued by Lehman Brothers. On Tuesday, the fund reported that its net asset value fell below $1 a share in what investors call "breaking the buck."

Patryk Galk/iStockphoto.com

Investor confidence in money market funds, which many people use like a savings or checking account, was shaken this week when one such fund said its value fell below the industry benchmark of $1 per share.

This unprecedented turn of events marks the first time that individual investors in a money market fund are at risk for losing some of their principal.

Money market funds, which are a type of mutual fund, have the reputation of being a conservative port where money will earn some interest and remain secure.

The Reserve, a financial services company, reported on Tuesday that its Primary Fund fell below $1 a share in net asset value. This money market fund, created in 1970, was the first of its kind and had total assets of $64.5 billion as of the end of August, the company said.

The fund declined in value largely because debt securities issued by Lehman Brothers previously valued at $785 million are now valued at zero, according to The Reserve.

Since 1983, when the SEC revised its rules governing money market funds, there has been only one instance of a money market fund paying investors less than the principal they invested, according to the Investment Company Institute, a trade association for U.S. investment companies. That instance involved institutional — not individual — investors.

This is the first time that a mutual fund is in the position of "breaking the buck" for individual investors. That means they would receive less than the principal they invested. Now investors in the Primary Fund can only redeem 97 cents for each dollar invested and can't withdraw funds for at least seven days, the company said.

The company's online prospectus describes the Primary Fund as the world's "first and longest running money fund."

And the company's Web site says this fund launched the money fund industry, which now has $3.5 trillion in assets for both individual and institutional investors, according to the ICI.

Money market funds are not insured by the FDIC. Many invest in Treasury notes and government agency bonds, which are backed by the full faith and credit of the U.S. government, meaning investors will be paid back in full. Now, with the government takeover of Fannie Mae and Freddie Mac, investments in bonds from these companies also have the same guarantee.

Money market funds may also invest in municipal bonds backed by state governments, short-term notes issued by corporations, or CDs.

"Although money market funds are not guaranteed, investors have benefited from the security, liquidity and diversification that these funds provide under stringent and effective regulation," the ICI said in a statement on Tuesday. It added that "the fundamental structure of money market funds remains sound."

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