A review of recent market events suggests that there may be far more risk in money market funds than was previously thought. In an article in the Business section of today’s New York Times, Eric Dash reported that, during the last year, many of our country’s largest brokerage firms have been forced to contribute more than $10 billion to prop up money market funds that are threatened by the mortgage crisis. In recent months, the following firms, among others, have taken action to bolster their affiliated money market funds: Legg Mason, Credit Suisse, Bank of America, SunTrust, Morgan Stanley, Lehman Brothers, and Wachovia.
The Big Question is: How long will these firms be willing and able to provide this support? All of these firms have reportedly sustained billions of dollars in financial setbacks over the past twelve months. At some point, will their financials become so tenuous that they cannot afford to continue spending billions to support faltering money market funds? Is there risk associated with this $3.5 trillion market?
Perhaps investors should learn a lesson from recent developments in the $330 billion auction rate securities (“ARS”) market. For many years, ARS were regarded as cash equivalents because brokerage firms routinely supported the auctions as buyers. In February of this year, however, the brokerage firms uniformly withdrew from the ARS market and left millions of Americans holding illiquid securities. Could this scenario play out in the money market arena?
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