SUBPRIME LOSSES PUT MONEY MARKET FUNDS AT RISK
Arguably the safest, non-FDIC insured investments are money market funds, which were introduced to offer investors slightly higher returns than savings accounts. Unfortunately, according to Bloomberg Markets, “Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans.” The scope of the subprime infection is daunting: “U.S. money market funds run by Bank of America Corp., Credit Suisse Group, Fidelity Investments and Morgan Stanley held more than $6 billion of CDOs with subprime debt in June.”
To illustrate how extremely out of place subprime debt is in money market funds, David Evans rounded up Bruce Bent, who is said to have created the first money market fund. Bent said, “ ‘[subprime debt] doesn’t have a place in money market funds. When I created the first money market fund, I said you have to have immediate liquidity, safety, and a reasonable rate of return.”’ CDOs backed with subprime mortgages are illiquid, risky, and defaulting.
Most major brokerages contend that they will not allow their money markets to default, and will infuse cash to ensure shares trade at $1 per share. Unfortunately, the appeal of an FDIC insured account is growing compared to any investment with CDOs and subprime debt.
http://www.bloomberg.com/news/marketsmag/mm_1007_story2.html
