Tags: Fed | Money-market | funds | risk

Fed Study: 21 Money-Market Funds Were at Risk of Breaking $1 from 2007-2011

By Dan Weil   |   Wednesday, 15 Aug 2012 08:40 AM

A whopping 78 money-market mutual funds needed assistance from their management firms between 2007 and 2011, and 21 of those funds would have seen their net asset value per share drop below $1 without that aid, according to a new report from the Federal Reserve Bank of Boston.

Money-market funds aren’t insured like bank deposits. But their ability to keep their share prices at $1 have led individual investors to view them as similar in safety to bank accounts.

Only two funds have “broken the buck” — dropped below $1 per share. That happened in 1994 with a small institutional fund and again during the financial crisis of 2008, thanks to the collapse of Lehman Brothers, USA Today reports.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

The Securities and Exchange Commission (SEC) has proposed stricter rules for the funds, including the imposition of capital requirements and requiring that the funds’ share price float rather than staying at $1 a share.

Fund companies oppose stronger regulation, worrying that it will lead to lower returns for money-market funds, driving investors away. That, in turn, would mean less fee income for the companies.

However, the Boston Fed study may provide additional impetus for the SEC’s proposals, according to USA Today.

Many experts are concerned about the risks inherent in the funds.

"They're a clear and present danger to financial stability in their current form," Morgan Ricks, a former Treasury Department official now teaching at Harvard Law School, tells the Los Angeles Times.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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