How many folks, do you suppose, woke up with a start last week and decided that they'd sleep better if they switched their savings from uninsured money market funds back to federally insured savings accounts? For the first time, a money market fund had collapsed, giving investors only 94 cents for every dollar that they had put in.
Derivatives were at play, and the collapse of a money market fund sent a shiver through the financial world. Derivatives had hurt at least 15 other funds, but advisers had pumped in more than $650 million to maintain their value. Last week, the Community Bankers U.S. Government Money Market Fund decided not to inject more money but to shut down and liquidate. It was the first time a money market fund had, as the phrase in the fund game goes, "broken the buck."
The fund, to be sure, was small, with only $83 million in assets and 112 shareholders, almost all of them banks. Nevertheless, as Securities and Exchange Commission chairman Arthur Levitt Jr. remarked, "The moral is that any fund can lose money."
Just this August the collapsed fund had had the best record of any government agency money market account, with an annual return of 3.6%. To anyone with a memory of the late 1970s and early 1980s, it seems preposterous that chasing a 3.6% annual rate of return would make a money market fund play around with risky derivatives, but that's how much money management has changed.
A few local governments have lost money investing in derivatives, and their problems have raised warning flags for others. Charles County, Md., and Odessa Junior College in Texas lost money putting funds into unsuitable derivatives, and now a mney market fund has been caught in much the same trap.
What's to be learned from all this? Losses from risky investments are not new. Unsuitable investments are not new.
Levitt is right to trumpet the collapse of the Community Bankers fund, small as it is, because many investors have shifted money from insured certificates of deposit to uninsured mutual funds. And not all of them are small individual investors; some are officials responsible for local governments funds. The obvious warning to anyone managing cash is to understand fully the risks involved in playing with derivatives. Some do go down and produce significant losses; that's what the fund demonstrated last week.
The fund might be the "canary in the mine," suggested Rep. Edward Markey of Massachusetts as he listened to Levitt's testimony before the House Energy and Commerce Committee's subcommittee on telecomunications and finance. It very well might be.
