Crane Data Founder and President Peter Crane speaks today at the Treasury Management Association of New England's 2008 Conference in Boston on the topic "Is Your Money Market Fund Safe? Examining The Crisis in Cash". Crane answers with a resounding "Yes", citing money market mutual funds nearly spotless record of safety, their extensive body of evolving regulations, and the sector's enthusiastic support from both investors and fund sponsors. No money market mutual funds have "broken the buck" during the current crisis, and none are expected to, says Crane.
The Great Liquidity Panic of 2007-8 is nearly ended. While the episode was painful for fund advisors, who likely will end up losing hundreds of millions on soured extendible ABCP and SIV investments, this is a mere fraction of their almost $15 billion in annual revenue -- more than Hollywood earns at the box office, says Crane. Money fund investors came out unscathed. He says to keep in mind that money market mutual funds have survived similar events in the past, including the 2001 default of Pacific Gas & Electric and the 1994 spate of "derivatives" bailouts. Nineteen ninety four also saw the only case in history of a fund "breaking the buck" as the tiny ($82 million) Community Bankers U.S. Government Money Fund was liquidated at $0.96.
Crane cites money funds' protective quality, maturity and diversity regulations -- Rule 2a-7 of the Investment Company Act of 1940 -- as one of the keys to their success. Money market mutual funds are not allowed to invest in lower quality or longer maturity instruments, and they are only allowed to own a 5% maximum position in any single issuer. Money funds also are exempt from other mutual funds' "mark-to-market" requirement, using "amortized cost" accounting.
Funds have also withstood the unprecedented stress in the money markets due unprecedented inflows, over $1 trillion over the past year, which were helped in part by the Fed's interest rate cuts. Prudent investment policies and actions by the vast majority of fund advisors were instrumental too. Extremely diversified investors bases, long track records of performance, and of course deep-pocketed parent companies didn't hurt either. Money funds continue to stand while almost every "cash" substitute around them has faltered; their record of safety has only grown during the recent crisis, says Crane.
