Tuesday, November 20, 2007

Why would you leave your money in Money Markets?

Well it was funny today I saw an article on Motley Fool speculating about the perceived risk in money market funds. But I already saw this risk weeks ago. In fact someone I know has moved money in response to my expressed concern.

Okay so what am I talking about? I am talking about Money Market funds, which are funds that typically pay better than FDIC insured savings accounts. Money Market funds are allowed to invest in and have invested in all sorts of so called toxic debt instruments (CDO's, Asset backed securities, etc. ). They are also not insured by either the FDIC or the SPIC. According to the article money market funds only pay a 1% premium over similar funds which limit their holdings to Treasuries. A 1% risk premium seems pretty stingy for something that might only give you back 95% of your money.

I also remember vividly having a conversation with someone managing money for high net worth individuals at a party about a year and a half ago who cued me in that the Broker/Dealer/Investment Bank had recently amended their disclosure statements within the prospecti of their money funds. Clearly the risk that these funds might lose money was understood by the big investment banks. So some smart people foresaw these risks. I mean how else did Goldman make a profit in Quarter 3?

The article is tame and trying too hard to be objective. But I have to ask you in this market what kind of idiot would leave money in a money market fund? I mean in the future when the capital markets regain some stability sure, but for now with all this volatility and the uncertain nature of how far the write downs will go why risk it? For the record I am very bearish on the financial stocks for the time being. I will not even think about changing my mind until 4th quarter results come out in January. I expect that FASB rule 157, effective November 15, 2007, will require these financials to mark even more worthless securitized products to market forcing more write offs and mark downs.

No comments: