Money Market Funds Abused

[TJ_98370]

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Mr. Bent, the inventor of the money market fund, weighs in on the "safety" of money market funds right now.
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Bruce Bent, the inventor of the money market fund, has criticised the "flagrant abuse" of the concept - which he introduced in 1970 - that has come to light in recent weeks.

Mr Bent, who established the world's first money market fund, the Reserve Fund, says the original idea behind the fund is being ignored.

His displeasure stems from a sense that many money market funds have exposure to sectors or securities they should not be in, claiming his original concept was not designed to give investors any headline risk and should give them immediate liquidity and safety above all else.

"The money market fund was created to provide effective cash management, to guarantee at least a dollar in and a dollar back and beyond that, a reasonable rate of return," Mr Bent says.........

.........Most investors, Mr Bent says, are unaware that some of the largest money market funds are putting their cash into one of the riskiest debt investments in the world - collateralised debt obligations backed by subprime mortgage loans.

"That is clearly inappropriate," Mr Bent says. "It really reflects poorly on what we are here to do. The sanctity of the dollar is key."

He adds that cash management must be viewed as a separate business and requires a certain skill. "In the current market environment, lots of money fund portfolio managers are acting as credit analysts when they are not. In fact, they wouldn't know if the underlying credit risk bit them on the behind."........
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[TJ_98370]

Mr. Bent changes his message slightly....



The market turmoil of the past month spawned by growing credit market problems is spilling over to money market funds, an investment long seen as a safe and secure place to park cash.

Concerns about fallout from now-failing mortgages and the grinding sounds emanating from the normally well-oiled credit markets have led some investors to throw the proverbial baby out with the bath water. Investors clamoring for safety have been leaving the normally secure confines of money market funds in favor of even more conservative investments.......

........"This is the most overblown thing I have seen in my entire 46-year career. It makes absolutely no sense," said Bruce Bent, who invented the money market fund in 1970. He said his firm, The Reserve, has assets of $70 billion and doesn't hold any investments in the mortgages in question, known as subprime loans. He says some investor concerns about money market funds are unfounded because the funds are limited by rules that govern how much risk they can take.

Still, it isn't clear how many money market funds have investments in subprime loans and to what extent..........

........But concerns about a widening impact from soured subprime loans should be put into perspective when it comes to money market funds. These funds are limited to investing 5 percent of their total assets in securities that don't carry the highest credit ratings -- and that includes subprime loans. While concerns have emerged that credit rating agencies perhaps at times issued rosy assessments of some debt, observers say money market funds remain safer than many other investments.......

......Paul Herbert, an analyst at investment research provider Morningstar Inc. said he doesn't think it's a good idea for investors to hastily exit money market funds.

"There is no need to panic about money market funds. I can understand why people would want to seek the safest option possible. However, I'm not convinced that money market funds are that unsafe except in a few cases," he said.

Bent said investors with concerns should contact their money market fund and ask what type of exposure there might be to subprime and other risky investments.

"If you maintain your head when all about you people are losing theirs, you're going to make money."
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