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Money Market Fund Busts the Buck

Lost in all the AIG/Fannie/Freddie/Lehman news is perhaps something considerably more important for the average American.

Extraordinary events are piling up on Wall Street so fast, it’s hard to know where to focus. Forgetting the prospective bailout of AIG for a moment, since every media outlet is on that one, the most shocking development of the day for me is news that a $60 billion money market fund “broke the buck” on Monday due to losses in Lehman Brothers paper that it held. So much for the safety of “cash”.

The Reserve Primary Money Fund (RPFXX) has become the first money-market fund in more than a decade to lose money because its board was forced to write down $785 million worth of LEH debt to zero. The fund reportedly has seen assets plunge by 60% to $23 billion in the past two days after holders got wind of the fact that it would have to cut its net asset value to less than its usual $1 per share.

This is perhaps more significant than AIG, Fannie/Freddie, Lehman and so on. For those desiring safety, money market funds are considered the best. Unlike normal mutual funds, their share value is always $1. There’s no guarantee of maintaining $1/share of course, but the idea money market fund’s could be money losers has the chance to alter the financial landscape, if it spreads to other money market funds.

AIG and so on won’t affect the average person much, but if money market funds begin to be losers, that impacts main street a whole lot more than AIG and the others, and has been lost in all the shouting over AIG and sub-prime mortgages.

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