Shoring Up Money Market Funds

Ulli Uncategorized Contact

Just because its not headline news, does not mean that all is well in “money market land.” I have repeatedly advised not to play the sucker’s game and invest idle cash in high-yielding money market accounts, since they are the biggest investors in toxic Subprime slime.

On that topic, MarketWatch reported that Legg Mason swings to quarterly loss. Here are some highlights with my emphasis added:

Legg Mason Inc. posted its first quarterly loss as a public company in what its chief executive said was among the toughest periods it has ever seen, as the investment manager also announced plans to raise $1 billion through an equity offering.

Legg Mason said the results for the three months ended March 31 included a $291 million charge related to previously announced support for money market funds hit by the credit storm. The company has buttressed troubled structured investment vehicles, or SIVs, that are held by money market funds.

Other investment managers, such as Bank of America Corp. and Wachovia Corp. have been forced to provide support to their money market funds to prevent them from “breaking the buck,” or falling below a net asset value of $1 per share. Legg Mason has cut down its exposure to SIVs, which were threatened by liquidity issues.

Legg Mason’s moves to support its money market funds have been “prudent and proper,” and the company “will stay vigilant,” Fetting said. He acknowledged the lagging performance of the U.S. equity managers, and getting them to “return to form” is a “top priority.”

Of course, support of money market funds is prudent and proper. The alternative is that investors would be leaving in droves if a company “breaks the buck.” The unknown simply is who has how much exposure and will other troubled companies be cash-rich enough to bail out their money funds?

You don’t want to wait to find out, which is why I recommend to move idle cash to a U.S. Treasury only money market fund at your custodian (minimum is usually $100k). You have to realize that keeping cash in a money market fund will never make you rich; it is only a temporary parking place during times of great uncertainly where you want absolute safety with no risk.

Once market trends resume, we will look for new opportunities to make our money grow.

Contact Ulli

Leave a Reply