Two noted money market funds, Reserve Primary Fund and Reserve International Liquidity Fund LTD, managed by Reserve Management Corporation, have “broken the buck.” “Breaking the buck” means that investors in a money market fund lose their invested principal. Stated another way, the net asset value of money market fund falls below the $1/share price paid by investors to invest in the fund.
This development could have significant ramifications for the entire money market mutual fund industry, which is based on confidence in the complete safety of the “buck.” Jeff Bobroff, mutual-fund consultant in Rhode Island, stated, “This is going to unsettle investors and probably create further runs on other money funds.” Experts fear that investors’ concern about the sanctity of money market funds could result in widespread withdrawals that would further aggravate the global credit crisis. Money market funds are major buyers of short-term debt issued by corporations and financial companies and significant withdrawals from money market funds could severely disrupt that market.
Over the past year, various money market funds have actually seen their assets’ value fall below $1/share but money market fund sponsors have provided capital infusions to avoid the money market funds’ “breaking the buck.” Legg Mason, SunTrust, Morgan Stanley, Charles Schwab, Wachovia, Bank of America, and Credit Suisse are among the firms that have supported their money market funds in this manner.
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