What Investors Really Want by Meir Statman

Author:Meir Statman
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2011-10-10T16:00:00+00:00

The Buck Is Broken

The promise of managers of money market funds not to break the buck was sincere but not guaranteed. The small print always said that the buck might be broken. Still, managers of money market funds kept their promise for many years, on occasion paying from their own pockets so as not to break the buck when the value of the funds’ shares fell below $1. But when the financial crisis arrived in 2008 the managers of Reserve Primary Fund announced that their fund contained securities of bankrupt Lehman Brothers and they must break the buck and set its shares to 97 cents. The development “is really, really bad,” said Don Phillips of Morningstar. “You talk about Lehman and Merrill having been stellar institutions, but breaking the buck is sacred territory.”25 This breaking of the buck was prominent among the events that led Henry Paulson, America’s Secretary of the Treasury and Ben Bernanke, chairman of its Federal Reserve Bank, to recommend drastic measures, including government insurance of money market funds, fearing the panic that would ensue if money market fund investors raced to withdraw their money, further destabilizing the financial system.

The demise of Reserve Primary Fund is ironic because Bruce Bent, one of its founders, opposed buck accounting when it was considered in the 1970s. Bent feared that buck accounting would compel managers of money market funds to buy risky securities in attempts to provide higher returns than their competitors. Bent vowed not to buy such risky securities, but he broke his vow under the pressure of competition. This is why Reserve Primary Fund held securities in Lehman when it went bankrupt. What started as an attempt to turn money market funds into no-mental-loss investments ended with very real losses.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.