Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Money Markets Mayhem Continues!

Stock-Markets / Credit Crisis 2009 May 12, 2009 - 09:31 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleNilus Mattive writes: Although Wall Street has been partying like it’s 1999 or 2007 or some other happy time, I recently saw yet another stark reminder that our recent financial crisis did in fact just happen … and that the dangers were real and long-lasting and still far from over.

No, I’m not talking about the fact that half our big banks still need more money. Or the fact that they’ll be issuing a bunch of new stock to try and raise that capital.

Instead, I’m talking about the fact that the SEC has formerly charged the father of the money market mutual fund industry with fraud.

It’s the latest turn in a fascinating story, and as I’m going to show you today, it proves that we are still just beginning to learn how unsafe — and unsavory — even some of the so-called safest investments have been throughout this crisis.

Let’s start from the beginning …

Money Market Funds Find Favor With 1970s Investors Seeking Safety

Although they’re commonplace today, money market funds have only been around since 1972.

That’s when the idea of pooling together investor assets in order to take advantage of higher yields from ultra-conservative assets originated with two men — Henry B.R. Brown and Bruce Bent, partners at an upstart investment firm. The concept quickly caught on with both investors and rivals and literally created the trillion-dollar money market mutual fund industry that we know today.

Despite the similar names, these funds are decidedly different than money market (deposit) accounts, which are interest-earning savings accounts offered by FDIC-insured financial institutions.

Money market funds are highly regulated mutual funds that invest solely in short-term debt.

The SEC requires the average maturity of investments in money market funds to be less than 90 days, and the idea is that each fund’s share price should always equal $1. Only the interest rate fluctuates. And although they typically run a tight race, money market funds’ yields do vary because there are still plenty of different assets that they can legally invest in.

For a long time, Mr. Bent and his company — Reserve Management Co. — maintained that only things like CDs and Treasury bonds belonged in money market funds. In fact, they adamantly — and very publicly — opposed the idea of buying short-term corporate loans (known as commercial paper) to juice yield.

Bruce Bent publicly railed against the notion of putting riskier assets into money market fund portfolios, but his company ultimately went ahead and did it anyway.
Bruce Bent publicly railed against the notion of putting riskier assets into money market fund portfolios, but his company ultimately went ahead and did it anyway.

But as other money market funds stretched for yield by buying up commercial paper and other riskier assets, the heated competition apparently got the best of Bent & Co. Records show that in the spring of 2006, Reserve’s flagship fund changed its prospectus, began buying commercial paper, and never looked back.

Predictably, its yield began rising and investors flocked to the fund, tripling its assets under management within two years. Then the credit crunch began hitting in full force during fall 2008 …

The Reserve Primary Fund Breaks the Buck (And Maybe the Law, Too!)

It turns out that while Bent was still out talking the talk, the Reserve Primary fund was busy buying Lehman Brothers’ debt. And as you can imagine, the value of that commercial paper plummeted when news hit the wires that Lehman was on the ropes financially.

Initially, Reserve said everything was still hunky dory. But the fund’s depositors weren’t buying it, and they began pulling billions of dollars out of the fund in short order.

Only after the fact, did Reserve Primary come out and say the value of its Lehman paper was essentially worthless. It stopped allowing withdrawals. And it said the net asset value of the fund had fallen below one dollar!

Now, this was not the first time that a money market fund had “broken the buck.” Another much smaller institutional fund had done so back in 1994. And since then, plenty of other firms had been forced to shore up their own money market funds with outside cash to avoid the same fate.

But this was a money market fund with an illustrious past … literally the fund that started it all. It had more than $60 billion in assets. And even days before the meltdown, its leader was railing against other funds for chasing yield with more speculative investments.

The investment world was shocked, and trust in the entire category of money market funds was shaken. So much so that the U.S. Treasury department was forced to step in and temporarily guarantee them all against further losses!

This has been all history, of course. But the latest news indicates that there’s even more to the story:

In a formal complaint logged on May 5, the SEC now alleges that Mr. Bent and his sons “failed to provide key material information to investors, the fund’s board of trustees, and rating agencies as Lehman Brothers filed for bankruptcy protection on September 15.”

I will loosely translate the rest of the complaint for you: These guys probably lied through their teeth. They probably lied about their exposure to Lehman. They probably lied about their willingness to shore up their fund. And they probably lied about the number of investors frantically pulling money out of the fund to stop others from doing so.

How this will all play out remains to be seen. And you shouldn’t expect to see the verdict in your local paper.

After all, this scandal today is getting very little mainstream media attention. Yet in many ways, it is far worse than the Bernie Madoff affair!

No, the numbers don’t compare. Nor does the inherent drama or human interest angle.

But anyone with half a brain should have realized that nobody gets double-digit returns year in and year out ad infinitum.

Meanwhile, plenty of average investors trusted the Reserve Primary to at least keep their money safe. All they asked in return was a couple of lousy percent every year!

The fact that Bent’s firm not only failed in that regard, but may have also failed to fess up when the music stopped, is downright pitiful.

Yet Again: Caution Remains the Keyword

It’s hard to believe, but this money market swindle is less than a year old.

Sure, great strides have been made in propping up the financial sector since then. But are we really completely out of the woods already?

I’m generally an optimistic guy, but I have a hard time believing it. And this story is a great reminder why.

We cannot expect something for nothing. We cannot chase yields with reckless abandon. We cannot consider any investment 100% safe.

Greed recently rose to new heights across our nation, and it spread around the world. Can we really unwind all of it in just a few short months and with just a few swift fiscal stimulus packages?

I’m not so sure.

That’s why I continue to suggest you plan for the long-term by holding a quality basket of dividend stocks and select bonds, while taking any recent speculative profits off the table as markets rally.

I also think a little downside protection is now in order, and advocate keeping your cash reserves in only the safest of places.

Best wishes,


P.S. Want my latest reports on finding both yields and safety in this tricky environment? Click here to get them free of charge.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules