Money Market Funds and Retirements Plus Case Of The Reserve Fund: The Fund That Broke The Buck

The Reserve Fund's Primary Fund is infamous with being the first money market fund in history that "broke the buck", that is the value of the share of a fund went under $1. This happened due to the risky investments in the fund especially that of Lehman Brothers Commercial Paper. Money market funds invest heavily in short term monetary instruments such as commercial papers. They are supposed to be highly liquid and safe as cash. Of course tell that to the investors of the fund.

I am not too concerned about institutions or other individuals who voluntarily put money into a fund like that. That is their problem that they did not do their homework. I am concerned about people who were forced to buy money markets in their retirement accounts such as in 401Ks. These people are forced to hold these because they are not allowed to hold it as cash in their retirements. This, by the way, is not done for the benefit of the retirement account owners, but rather to create a buyer for the commercial papers corporations issue. Another big win for the corporatocracy. Probably the thinking was that if people do not want to hold the Ponzi scheme stocks or bonds that are the only investment options in 401Ks as well as most IRAs, they should at least hold commercial papers and other short term debt instruments. Anything but gold or even cash is the mentality. they want you to put your money into unsafe, volatile instruments so that the corporations benefit and the stock market bubble continues.

Going back to the special case of the Reserve Fund's Primary Fund, we come across other ridiculous practices. When the Reserve Fund broke the buck, all redemptions were frozen. So people who were forced to put their money in this fund could not access their own money, or what they thought or told was as good as cash. Obviously money market funds were not as good as cash. One of the related bad practices is that most people did not even know their money was in these money market funds. A lot of people were thinking that they were moving to cash by selling their stock or bond holdings in their retirement as they realized that the Federal Reserve head Ben Bernanke and Treasury Secretary Paulson were either not telling the truth or just did not understand or know anything about the economy or economics for that matter and that meant that stocks and bonds were about to crash. These prudent people got punished by the money market funds. In a special case the Reserve Fund's Primary Fund that finally distributed the remainder of the money to the people on January 29, 2010. Holders of this particular fund ended up getting 98 cents on their dollar, a loss of 2%.

Primary Fund broke the buck on September 15, 2008. So not only did the holders of the Primary Fund lose 2% of their money they thought was cash, but they also missed the stock market bear rally of gigantic proportions or even simple interest that they could have earned on their money by putting it in a bank. On top of this the Reserve Fund despite holding people's money against their will still charged management fees. By October 13, 2009 the management and other fees amounted to over $18 million and they continued to collect fees until the closure of the fund recently. Ridiculous to pay fees to a fund that lost you money and kept your money hostage. Besides this is after the fund announced that they were not going to charge a management fee and then decided to charge it anyways and removed the announcement from their website.

Another ridiculous practice was that the fund held onto $3.5 billion of the investors' money for what they called the "special reserve". This special reserve was for the legal and other fees and any penalties that they would have to pay the investors that were suing them. Can you imagine that? They were using the investors' money to fight the investors suing them and -if they had to- to pay the punishments due. What kind of a joke is this? Rule of law? Justice? I can't see any. They eventually ended up keeping $160 million of this money after announcing that they would keep only $90 million. It is ridiculous that they did not take any losses whatsoever in this, kept the money hostage for a year and a half, paid no punishment or make up money for that, no other punishment for any other reason such as not doing their jobs well, and they still kept $90 million for what they call expenses -even if it was that high, it should be coming out of their pockets- and they still charged a management fee even for the periods they were holding investors' money hostage. They should be paying investors opportunity cost on their money. The investors of the Primary Fund should own the company after this fiasco. But of course not....