Will Money Market Funds Become More Risky?
Undoubtedly, the most appealing feature of money market funds is their extremely low risk. For all intents and purposes, it’s nil. But last week the SEC proposed new rules that would allow money market managers to take greater risks with investors’ money. More risk isn’t exactly what you’re looking for in a money market, so how might this new rule affect you?
Grading debt
First let’s take a look at the proposed new rule. Last Wednesday, the SEC put forth a proposal that would allow money market fund managers to invest in debt not rated by one of the major ratings firms. Moody’s, S&P, and Fitch make their money rating, among other things, bonds. But with everything that’s been happening lately in CDOs, people are wondering just how relevant those ratings are. Stuff that was rated AAA has completely blown up, soaking the holders of those debt instruments.
Money market funds generally must buy only short term, investment grade debt. The new rule would allow fund managers to determine just what is and is not ‘investment grade.’
This is not a defense of the ratings firms by any means (the whole ratings system is pretty warped to begin with), but is it a good idea just now to give fund managers a greater ability to ratchet up risk? Money market managers are probably pretty decent guys and girls, by and large. But their pay is aligned with greater return and as we all know greater return usually involves crime or greater risk.
Is your money market at risk?
Keep in mind the SEC only proposed this new rule. It’s not law yet.
Secondly, nothing says the management of your money market fund will take on greater risk. But the pressure’s sure going to be there. I mean, a money market is a money market right? Safe and stodgy. Why not put your money in the one with the best return?
I don’t think there’s anything to worry about, though. The bottom line is that if a money fund ever ‘breaks the buck,’ there’s going to be hell to pay. Only a very serious incident would give rise to that happening and even as pessimistic as I tend to be, I don’t think any major fund will ever do that.
June 30th, 2008 at 9:38 am
I was unnerved when I read this:
“Stuff that was rated AAA has completely blown up…”
Having just renewed my own membership, I was shocked to hear the American Automobile Association was in such dire straits.
June 30th, 2008 at 11:33 pm
Money market postings work the same way our paycheck works. We might not get paid by our boss everyday, but we are earning money at work.