Here's a very interesting story that Francis Cianfrocca over at Redstate noted. First, a little background on money market mutual funds.
MM funds buy short-term debt instruments, generally from either government entities or highly rated corporations; you don't see any junk-bond grade paper in the money market. People can generally write checks on them or make electronic withdrawals from them like a checking account, so they act much as a big-boy's savings account.
Money market mutual funds aren't FDIC insured like bank deposits, but such insurance is generally not needed. Defaults on commercial paper are so rare that mutual fund companies consider it a point of honor that if a piece of paper does default, they will buy the paper off the fund at face value, so that the fund management company takes the loss rather the shareholders of the MM fund.
Thus, mutual funds keep things at a stable $1/share (it's industry standard to fix the cost of a MM mutual fund at $1/share) as a matter of course; investors never lose money in a money market fund. Since the tradition is for firms to eat any losses, "breaking the buck" and seeing a fund's shares go below a buck apiece is taboo in the industry; it's been 14 years since a money market fund reneged on eating bad paper.
The Reserve Primary money market fund broke that taboo today, not only dropped the value of its main fund to $0.97 due to bad Lehman paper, but has frozen withdrawls for a week.
I guess I'm going to need to update my notes on the money market before next term. Yet another whomperjaw moment this week.
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