The Truth about Money: Some money markets not as safe as usual in 2007 | Maryland Gazette (HometownGlenBurnie.com)

Money markets consist of two breeds: money-market accounts, which are offered by banks and are FDIC-insured, and money-market funds, which are offered by mutual-fund companies and are not FDIC-insured. It is the latter that has our attention and that is the focus of this update.

Money-market funds hold $3 trillion of the $11 trillion in assets in the mutual-fund industry, according to the Investment Company Institute. Consumers favor money-market funds because it's easy to transfer money between them and your mutual funds, and they generally offer higher yields than bank savings accounts.

Money-market funds also are considered safe, because their value always has been a stable $1 per share. There's no guarantee this always will be the case, of course, because it is possible for the securities held by money-market funds to decline in value.

However, the industry tries to select investments that are unlikely to experience changes in value.

Today, every mutual-fund company and brokerage firm offers money-market funds. So why are we suddenly devoting significant attention to what essentially is Wall Street's most boring product? Blame the subprime-lending crisis.

In an effort to offer investors higher yields, some money-market funds have invested in securities called structured investment vehicles (SIVs), some of which are tied to subprime mortgages. Because many borrowers have defaulted on these loans, as has been widely reported, many SIVs are not earning the interest that was expected. As a result, Wall Street has been downgrading the value of many of these securities.

This means that some money-market funds are paying lower yields than investors hoped.

And if the lower valuation of these SIV securities is sustained, it's possible that some money-market funds might break the buck - meaning the share price of a money market fund might fall below $1. The parent companies of some of those funds have taken action to reduce the risk that their funds might break the buck. For example:

Bank of America injected $600 million into its money-market funds to offset losses because of exposure in SIVs.

Credit Suisse reported that its SIV exposure has cost it $125 million.

Wachovia has purchased $40 million of distressed debt from the money-market fund of its subsidiary, Evergreen Funds.

Legg Mason invested $1.4 billion to bolster the value of several of its money-market funds.

SEI has secured credit in anticipation of supporting its money-market funds.

HSBC, Europe's largest bank, has said it will bail out two SIVs it manages by transferring $45 billion of their assets onto its balance sheet. HSBC also plans to invest $35 billion into the two funds to prevent liquidation of their assets.

SunTrust Bank has purchased $1.4 billion in SIVs from two of its money-market funds.

Although it's disappointing to learn of these losses, it's reassuring to see the parent companies step in to protect investors.

But will every money-market fund receive such financial support, and will that support be sufficient to protect investors of such funds? Time will tell.

In the interim, if you have invested in a money-market fund at another organization, you should verify that the fund is not incurring problems because of the subprime-lending crisis.

It would be a shame if an investor lost money by investing in a money-market fund that had offered a "high" yield, because those yields really aren't so high.

Compared to a money-market fund that avoided investing in SIVs, a fund that invested in SIVs might have offered an annual yield that was only three-tenths of a percent higher - before taxes.

Why would a consumer be willing to gamble the safety of $100,000 in an effort to earn an extra $300?

---

Financial Adviser Ric Edelman is the author of several best-selling books about personal finance, including "Ordinary People, Extraordinary Wealth" and "Discover the Wealth Within You." You can e-mail him at money@ricedelman.com.