Transcripts

Financial Firms Take Stock of the Latest Money Crisis

SUSIE GHARIB: Financial firms spent the day reassuring investors their money market funds are safe, after one fund did the unthinkable and valued its share price below $1. Fidelity, Vanguard, and T. Rowe Price all say they're confident their money market funds are stable. Money market funds are not insured by the FDIC, but they are regulated and limited in the investments they can hold. Stephanie Dhue reports.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Money market mutual funds are supposed to be as good as cash. It's a promise the industry has taken seriously, keeping shares valued at $1. The great fear was if a money market fund open to retail investors fell below $1, known as breaking the buck, the business model could unravel. Managing director of Morningstar, Don Phillips, says that fear has been realized.

DON PHILLIPS, MANAGING DIRECTOR, MORNINGSTAR: I think the potential of a fund breaking the buck for years was looked on by the mutual fund industry as an Armageddon-type event, and there was great fear that this would happen. Oddly, you know, today, when this has happened, when you look at this relative to other things happening in the financial services market, you know, this doesn't look as terrifying as some of the other events do.

DHUE: The Reserve Primary Fund broke the buck. It holds $785 million in Lehman debt, and massive redemptions since Lehman's bankruptcy Monday sent the fund plunging from $65 billion to $23 billion. Late yesterday, the Reserve valued its primary fund shares at 97 cents and temporarily froze withdrawals. It's ironic that the Reserve broke the buck. Its head, Bruce Bent, is considered the founder of the money market fund. Just a month ago on "Nightly Business Report," he told me other money market mutual funds were taking too much risk.

BRUCE BENT, FOUNDER & CHAIRMAN, THE RESERVE: It's supposed to be a mantra. Every morning, every night, a money fund provider should be safety of principle, liquidity, a reasonable rate of return and a sound night's sleep. And they forgot the mantra.

DHUE: At least four other money funds were hit by Lehman's bankruptcy. But, unlike the Reserve, those firms can cover losses with other assets. Since the credit crunch began, 20 money funds have done that to keep from breaking the buck. Morningstar's Phillips says investors who considered safety, not just yield, may have avoided the Reserve Primary Fund.

PHILLIPS: There was a red flag here. This was one of the funds that had one of the highest yields last year and one of the -- the biggest returns for the last calendar year. And in many cases, in the world of fixed income, that is a red flag. You know, if it seems too good to be true, it might well be.

DHUE: What happened with the Reserve Primary Fund could be an anomaly, but it's one that rewrites history. Now two funds have broken the buck. The other was 14 years ago and it was only open to institutional investors. Stephanie Dhue, Nightly Business Report, Washington.