Money market funds battered

Some losing money, others rush to add cash

Several money market funds are losing money as the $3.5 trillion sector that long had been considered as safe as cash is buffeted by the turmoil on Wall Street.

Separately, four mutual fund firms are taking extraordinary steps to calm investor fears and protect customer investments. The companies - Wachovia Corp.'s Evergreen Investments, Bank of America Corp.'s Columbia funds, Ameriprise Financial, and Frank Russell Funds - said they had either injected millions of dollars to shore up their money market funds or were ready to do so. More companies are expected to make similar moves in coming days to compensate for losses from fund investments in the securities of Lehman Brothers Inc. after the financial behemoth filed for bankruptcy protection this week.

The Reserve Primary Fund, a pioneer of money market funds, was the first this week to announce it had reduced the value of its shares to below $1. The fund cut its share value by 3 cents to 97 cents, which means a loss for investors, unthinkable for funds that were long regarded as safe havens. Only once before, in 1994, did a money market fund "break the buck," as the industry calls it.

The Reserve, which runs the fund, then announced two more of its funds were also losing money. One more fund, the Colorado Diversified Trust, which holds investments for schools and government in that state, also saw the value of its assets fall below $1 a share, according to the rating service Standard & Poor's.

Of the four, only Reserve Primary is a traditional money market fund. For example, one of the Reserve funds is an "enhanced-cash" product, which can make riskier investments.

"This is the real human cost of allowing Lehman to fail. There's a ripple effect," said Don Phillips, managing director of Morningstar Inc., the Chicago mutual fund tracking firm.

Although money funds are not insured by the federal government as bank deposits are, investment analysts and fund companies said there is no need for worry. "I'm certainly not thinking I need to move my money out of a money market fund and into a mattress," said Phillips.

Wall Street investors have pumped a record $1 trillion into money funds since the summer of 2007, following a collapse of the subprime mortgage market and a slowdown in housing. The bankruptcy filing from Lehman, which had an enormous portfolio of securities backed by subprime loans, was one in a series of financial upheavals this week that included an $85 billion government bailout of insurance giant American International Group and yesterday's 449-point stock market plunge.

But some ordinary investors, who have watched some of the nation's largest financial institutions fall like dominoes, were terrified.

"It's Armageddon," said Gokmen Kilincarslan of Westport. The 27-year-old said he transferred money from his money market account to a bank savings account yesterday. His money is now "safer," he said, "but I still don't feel confident."

Fund companies, including Fidelity Investments in Boston, the nation's largest, offered reassuring statements to investors. "We can state unequivocally that Fidelity's money market funds and accounts continue to provide safety and security for our customers' cash investments," said a statement on Fidelity's website.

Standard & Poor's, which rates the financial soundness of 500 money market funds in the United States and Europe, said the actual damage from Lehman's bankruptcy is limited. The company lowered its ratings for just three funds this week: Reserve Primary Fund, Reserve International Liquidity Fund, and Colorado Diversified Trust. Other funds either did not invest in Lehman or made only overnight loans to the investment bank, which have already been paid back, said Peter Rizzo, senior director at Standard & Poor's.

"This is only the second time in the last 35 years that a fund had this kind of problem," he said. Rizzo also said none of the tracked money funds hold securities in troubled mortgage company Washington Mutual, which placed itself on the auction block after its value plummeted. Analysts were still looking into whether any tracked funds were at risk from investments in AIG, Rizzo said.

Today, most Americans who invest have some money in money market funds, either as part of their mutual fund portfolios or in their 401(k) retirement accounts. There are 33 million retail money market accounts in the United States, in three forms: those that invest in tax-exempt municipal bonds, in US Treasury securities, or in corporate bonds.

Money market funds were designed as a place for investors to store their cash safely. They exploded in popularity during the late 1970s, when Americans learned they offered better returns than low-interest bank savings accounts. Investors buy shares in a money market fund, and the value of each share does not fluctuate - unlike, say, stocks. Rather, yields on funds rise and fall, depending on the general level of interest rates and actions by the Federal Reserve Board. Recent Fed rate cuts, for example, have pushed money-fund yields down to around 2.5 percent, compared with about 1.6 percent for savings accounts.

In the early 1990s, after some money funds ventured into more risky investments to boost payouts to investors, the Securities and Exchange Commission tightened regulations, restricting the types of investments funds could make to only the most secure, short-term, and highly rated corporate debts. The Lehman bonds were highly rated, analysts said.

Worries over the holdings of money market funds began last year after companies, including Bank of America's Columbia unit, disclosed they had spent capital to buoy funds that lost money on complex corporate investment vehicles. Since then, there have been 21 episodes of mutual fund managers bailing out their money funds - including a second infusion by Columbia - said Peter Crane, publisher of cranedata.com, which follows money market funds.

Connie Bugbee, managing editor of iMoneyNet, which publishes a weekly newsletter called the Money Fund report, said he "can't guarantee there would not be a run" on money funds, creating a Depression-style situation where the government might have to step in. However, he stressed that institutional investors such as pension funds and corporations own more than half of their total assets and are unlikely to panic.

"We'd like to think there's a certain amount of sophistication there," he said.

About $1.5 billion in Lehman securities were held by funds run by the four companies that said they had or would shore up those funds, according to Lance Pa, director of research for Capital Advisors Group in Newton.

Morningstar's Phillips said, "This is something that could happen to any fund."

The companies said their Lehman holdings represented a tiny portion of their funds' total assets. For example, Evergreen Investments, the Boston asset management arm of Wachovia Corp., said three Evergreen funds had Lehman credit exposure of $309 million, $110 million, and $75 million respectively, or roughly 1 percent to 2 percent of their total assets. Wachovia will support the value of those holdings, the company said.

"This is a message of reassurance to investors," said Laura Fay, an Evergreen spokeswoman.

Bank of America's Columbia yesterday said less than 1 percent of its assets, or about $400 million, in Lehman securities were held by one of its money funds, the Columbia Cash Reserves Fund. Spokesman Jon Goldstein stopped short of saying the company will put money into the fund, but said it had set up a $760 million line of credit that it could tap, if needed, to ensure the value of the fund remains at $1 a share.

Ameriprise, based in Minneapolis, said $50 million is available, if needed, for two funds with Lehman holdings: RiverSource Cash Management Fund, a $5 billion money market fund, and RiverSource Tax Exempt Money Market, with $140 million in assets.

"We are committed to maintaining" a $1-a-share price, said Benjamin Pratt, spokesman.

Ross Kerber of the Globe staff and Globe correspondent Jonnelle Marte contributed to this article.

Editor's note: The Colorado Diversified Trust was originally identified incorrectly