Your 'safe' money really is safe

Jon Markman has usually been a very credible and competent financial journalist, but somehow he has managed to slip off the track and into the journalistic equivalent of a ditch with his piece on MSN Money entitled "Your 'safe' money isn't so safe" which misguidedly attempts to argue that most retail money market mutual funds may be entering a "danger zone." He says:

Investors are fleeing the volatility of the stock market at the year-end, according to industry data, and stashing the proceeds in supposedly nice, safe money market funds at the scorching rate of $18 billion per week.

Yet investors might only be exiting one danger zone and entering another, as a close look at money market funds at major U.S. brokerages reveals that most are invested in the same sort of dubious paper that has rocked the financial world in the past six months.

Although many money market funds have the word "cash" in their names -- leading investors to think that they are no more risky than a handful of paper money -- many are thinly veiled bets on the deteriorating mortgage market, a bet that has gone very bad for Wall Street, to the tune of hundreds of billions of dollars. The question now is how bad it could get for these supposedly safe funds.

Talk about the-sky-is-falling fear-mongering and yellow journalism. Yes, Jon does start with a number of specific and correct reports, but then he misleadingly represents that they are relevant to retail investors, which is simply not the case. And then he proceeds to do the financial and jouranlistic equivalent of making a federal case out of what is at most a minor parking violation.

Let me be very clear: Contrary to the overall tone that Markman takes, investment in retail money market funds is extremely safe.

I (and others) have written about this before (see "Enhanced cash funds vs. money market funds"), and I can assure you beyond all shadow of a doubt that no retail money market fund investors are at risk of losing a single dime. Sure, some institutional funds and some "cash management vehicles" and "investment pools" that sound  as if they are money market funds but are not have had some issues, but none of those difficulties in any way indicates that retail money market funds might be at risk.

Yes, there have been a few cases where the parent money management firm or bank has felt the need to acquire or guarantee some of the assets held in money market funds, but these situations have been dealt with in an orderly manner and at no point was even one dime of retail money market fund money at risk. Not one single dime. There is simple no "danger zone" as Markman suggests.

I have in fact looked at the asset holdings lists for several popular money market funds and although there is a lot of commercial paper, little of it has any exposure to mortgages. Even when it does, it is all short term by definition (and required by SEC regulation). In general, the assets held in retail money market funds mature in less than 90 days, so that the vast bulk of any exposure to subprime debt that may have been acquired by the fund before the crisis in August would have already matured before the end of November. You can be sure that the managers of retail money market funds would not have rolled over any of that maturing commercial paper into any new paper which is now considered risky. By SEC regulation, they are not allowed to. Sure, money market fund managers will continue to invest in quality commercial paper and in some cases that may even be asset-backed or even mortgage-backed, but you can be absolutely sure that your money market fund holdings will not be bets on the future of subprime mortgages.

To be crystal clear, no retail money market fund is as Markman insists "thinly veiled bets on the deteriorating mortgage market." Not even close. He couldn't be further off the mark. He has no evidence to back up this assertion, it is simply his shoot-from-the-hip opinion and misguided characterization. He should be ashamed of himself.

Markman makes the following false assertion:

4.5%-plus annual yields on money market funds... have been generated by a relatively new brand of mortgage-focused investment companies called special investment vehicles, or SIVs...

The correct characterization is that the higher yields come from commercial paper and repurchase agreements. Very little of the commercial paper in retail money market funds is "mortgage-focused." Yes, a fair amount of the repurchase agreements may be "mortgage-related", but are very short term (usually a few days or a couple of weeks) and very low risk and usually have already matured by the time even the monthly holdings report comes out. To be very clear, a repurchase agreement or "repo" is not the same as an investment in the asset for which the agreement is written. The implication that repurchase agreements may be bets or risky is completely groundless.

Markman makes the following false assertion:

If you are among the tens of thousands of Charles Schwab customers who keep cash in the Schwab Value Advantage Money Fund (SWVXX), for instance, then you have had a subprime time bomb ticking away in your brokerage account. Likewise if you are a Smith Barney customer who keeps cash in that brokerage's gigantic Western Asset Money Market Fund (SBCXX). Sadly, these funds are just two among many.

You will be happy to know that there are no ticking time bombs in even those funds. A ticking time bomb implies that you could lose your entire investment, and that is simply not the case. In fact, in these cases there is no significant risk of losing any of your money. The manager of the Western funds has decided to use corporate funds to finance the purchase of the questionable commercial paper that was in the funds. At no point was even a single dime of retail money market fund money at risk, not a sigle dime. Labelling the situation a ticking time bomb is grossly misleading. I do not know what Markman's ultimate motives are, but fear-mongering is never a reasonable approach by a journalist, although it is a key and defining characteristic of yellow journalism.

As far as Schwab, you can read a December 5, 2007 MarketWatch article by Murray Coleman entitled "Analyst sees Schwab unwinding SIVs in money markets - But no threat to credit risk of its money markets seen" which explains Schwab's situation in more detail, but as the title suggests, does not back up Markman's false claim of the risk of loss of investor principal via some purported ticking time bomb. And this is a story that was available several weeks ago.

Markman must have read that or similar articles because he goes on to say that "Brokerages have pledged to shrink their exposure to SIVs and tacitly pledged to support money market funds' values in the event that the mortgage-backed securities in which they are invested go belly-up." But that is once again trying to mislead readers into believing that a retail money market fund might be invested in "mortgage-backed securities", when the most they are exposed to is short-term commercial paper or repurchase agreements, neither of which is even close to being the same as investing in mortgage-backed securities which are by definition long-term and not even permited in retail money market funds which by SEC regulations limit duration of debt to 397 days and also require the avaerage duration to be under 90 days.

Things get a little murkier when Markman brings up SunTrust. It is true that SunTrust bought or was planning to buy SIV-issued debt from two of its money market funds, but one was institutional, so it is not possible to sense how much of the retail fund was at risk. But ultimately no retail investor money was at risk at all since SunTrust bought the questionable assets at full price plus accrued interest. So, once again, not a single retail investor dime was at risk. No "danger zone" and no ticking time bomb. In short, Markman is completely wrong when he uses SunTrust as an example of "It's only getting worse." The SunTrust story is a great example of things getting better, not worse. Maybe things might get worse for SunTrust shareholders, I couldn't say, but that is not relevant to an assessement of retail money market funds.

Markman mentions BlackRock Cash Strategies Fund, but once again that is not relevant to retail money market fund investors. Markman conveniently neglected to inform his readers that a "cash strategies fund" is not a money market fund.

Markman says that "Bank of America closed an 'enhanced' institutional money market fund at its Columbia unit", but once this has no relevance to retail money market funds.

Markman says that "Over in Europe, Rabobank Groep said it would bail out its own SIV, Tango Finance, by taking responsibility for its $7.6 billion in fast-diminishing assets", but a) that is not relevant to retail money market fund investors, and b) is an example of things getting better, not worse.

Deep within his "your money isn't safe" article Markman finally tells us that "Only one U.S. money market fund has ever 'broken the buck,' or failed to return a dollar for every dollar invested, and that was more than a decade ago." Only one. Ever. He has essentially no firm basis for the central thesis of his article.

Also hidden deep in his article he tells us the good news about Schwab:

Schwab spokeswoman Sarah Bulgatz said her company is "very comfortable" with its money market holdings and their underlying credit strength. She said all of the company's funds "maintain the highest short-term and long-term ratings available" and that none has been downgraded. Bulgatz says that as the commercial paper in question matures and rolls out of Schwab's funds, it is not being replaced, and that the percentage of the funds in SIVs has declined sharply.

But then strangely Markman goes off the deep end again by groundlessly asserting that:

Yet other institutions may not have been as proactive as Schwab, so no one really knows whether any bank will find itself forced to rip off its cash customers over the next year.

He clearly either didn't read or didn't take to heart the part about commercial paper maturing repidly and the fact that it is short-term. And on what basis is he concluding that retail money market fund investors should worry that their "bank will find itself forced to rip off its cash customers over the next year"? Did I say fear-mongering?

Let me say this clearly: You as a retail investor do not need to worry that your bank might be "forced to rip off its cash customers over the next year" -- other than the fact that banks charge higher fees and pay lower yields (in general) than investment firms such as Fidelity and Vanguard.

MSN Money can do better. This abysmal performance by Markman is unacceptable. It is time for him to go.

Oh, and by the way, did you know you can get 5.30% APY for an FDIC-protected savings account (not a money market mutual fund) from Countrywide Bank? Yes, it is with Countrywide, but it is FDIC-protected. Countrywide bank also offers a 5.50% APY 6-month CD that is also FDIC-protected. Why couldn't Markman have told us about some of this good news? What exactly is his agenda?

-- Jack Krupansky