Money market funds are often thought of as cash and a safe place to park money that isn't invested elsewhere. Investing in a money market fund is a low-risk, low-return investment in a pool of very secure, very liquid, short-term debt instruments. In fact, many brokerage accounts sweep cash into money market funds as a default holding investment until the funds can be invested elsewhere.
SEE: Money Market
Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase "break the buck," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money.
This only happens very rarely, but because money market funds are not FDIC-insured, they can lose money. Find out how this happens and what you can do to keep your "risk-free" assets truly risk free
Insecurity in the Market
Even though investors are typically aware that money market funds are not as safe as a savings account in a bank, they treat them as such because, as their track record shows, they are very close. But given the rocky market events of 2008, many did wonder if their money market funds would break the buck.
In the history of the money market, dating back to 1971, there was only one fund that broke the buck until the 2008 financial crisis. In 1994, a small money market fund that invested in adjustable-rate securities got caught when interest rates increased and paid out only 96 cents for every dollar invested. But as this was an institutional fund, no individual investor lost money, and 37 years passed without a single individual investor losing a cent.
In 2008 however, the day after Lehman Brothers Holdings Inc. filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck.
Shortly thereafter, another fund announced that it was liquidating due to redemptions, but the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, investors would be protected to $1 NAV.
Track Record of Safety
There are three main reasons that money market funds have a safe track record.
- The maturity of the debt in the portfolio is short-term (397 days or less), with a weighted average portfolio maturity of 90 days or less. This allows portfolio managers to quickly adjust to a changing interest rate environment, thereby reducing risk.
- The credit quality of the debt is limited to the highest credit quality, typically 'AAA' rated debt. Money market funds can't invest more than 5% with any one issuer, except the government, so they diversify the risk that a credit downgrade will impact the overall fund.
- The participants in the market are large professional institutions that have their reputations riding on the ability to keep NAV above $1. With only the very rare case of a fund breaking the buck, no firm wants to be singled out for this type of loss. If this were to happen, it would be devastating to the overall firm and shake the confidence of all its investors, even the ones that weren't impacted. Firms will do just about anything to avoid breaking the buck, and that adds to the safety for investors.
Although the risks are generally very low, events can put pressure on a money market fund. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or increased redemptions that weren't anticipated. Another potential issue could occur if the fed funds rate drops below the expense ratio of the fund, which may produce a loss to the fund's investors.
To reduce the risks and better protect themselves, investors should consider the following:
- Review what the fund is holding. If you don't understand what you are getting into, then look for another fund.
- Keep in mind that return is tied to risk - the highest return will typically be the most risky. One way to increase return without increasing risk is to look for funds with lower fees. The lower fee will allow for a potentially higher return without additional risk.
- Major firms are typically better funded and will be able to withstand short-term volatility better than smaller firms. In some cases, fund companies will cover losses in a fund to make sure that it doesn't break the buck. All things being equal, larger is safer.
Money market funds are sometimes called "money funds" or "money market mutual funds," but should not be confused with the similar sounding money market deposit accounts offered by banks in the U.S.
The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank, which can invest the money at its discretion - and potentially in (riskier) investments other than money market securities. In a money market fund, investors are buying securities and the brokerage is holding them. In a money market deposit account, investors are depositing money in the bank and the bank is investing it for itself and paying the investor the agreed-upon return.
If a bank can invest the funds at higher rates than it pays on the money market deposit account, it makes a profit. Money market deposit accounts offered by banks are FDIC insured, so they are safer than money market funds. They often provide a higher yield than a passbook savings account and can be competitive with money market funds, but may have limited transactions or minimum balance requirements.
The Bottom Line
Prior to the 2008 financial crisis, only one small institution fund broke the buck in the preceding 37 years. During the 2008 financial crisis, the U.S. government stepped in and offered to insure any money market fund, giving rise to the expectation that it would do so again if another such calamity were to occur. It's easy to conclude then that money market funds are very safe and a good option for an investor that wants a higher return than a bank account can provide, and an easy place to allocate cash awaiting future investment with a high level of liquidity. Although it's extremely unlikely that your money market fund will break the buck, it's a possibility that shouldn't be dismissed when the right conditions arise.
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Money laundering charges laid against GTA lawyer Kenneth James - Toronto Star
A 71-year-old lawyer from Etobicoke has been charged with money laundering in connection with a two-year international drug investigation by the RCMP that has resulted in arrests and freezing of assets worth more than $7 million.
On Thursday, police officers raided the Steeles Ave. office of lawyer Kenneth James, as well as a home on Willowridge Rd. in Etobicoke.
James has been charged with money laundering, possessing the proceeds of crime and fraud over $5,000.
A 61-year-old employee, Rosemary Cremer, has also been charged with money laundering and possessing the proceeds of crime.
Cremer shares a residence with James, according to Det. Insp. Derek Matchett, of the RCMP’s Integrated Proceeds of Crime unit. The Etobicoke home raided Thursday was purchased by Cremer in 1993, property records show.
Matchett said the RCMP began a two-year investigation into James shortly after an international drug investigation began in May 2010.
That investigation has led to arrests and the freezing of $7 million in assets, he said. Matchett said he cannot talk about the drug investigation because it is currently covered by a publication ban.
“This is a very complicated case and . . . we have a lot of work ahead of us,” he said Friday. “What we’re talking about is drug traffickers who make millions of dollars and then need to place that money into financial institutions — or need to ‘clean’ it, for lack of a better word.”
Charges have also been laid against three companies: James and Associates, Eveline Holdings Inc., and Sterling Capital Inc. The RCMP alleges these companies are under the control of James and were used to launder the proceeds of crime, Matchett said.
In May 2010, James was charged with professional misconduct by the Law Society of Upper Canada. In a notice of application, the Law Society alleged that James knowingly assisted with “fraudulent or dishonest conduct” in connection with some mortgage transactions in which he represented the lenders, vendor and purchaser.
The proceedings do not appear to have concluded, and James is still listed as a licensed lawyer on the Law Society’s website.
James has also been involved with a number of civil cases involving real estate deals. In 1990, he was sued, along with several other defendants, by the Church of Jesus Christ of Latter-Day Saints. The church alleged that James and the other defendants defrauded them in connection with four land purchases.
James has also been sued in connection with legal services he provided between 1996 and 1999 on six condo units in Orillia. Two condo owners sued after the condo mortgages defaulted in 2001, alleging James had a conflict of interest and was in breach of contract and fiduciary duty.
In 2006, James filed for bankruptcy in Ontario. He declared in his bankruptcy filing that he had $4,505,000 in liabilities and $1,418,500 in assets.
James and Cremer were both expected to appear in a Newmarket court on Friday afternoon.
Memphis finance director McElrath moving to MLGW - Memphis Commercial Appeal
Roland McElrath
Roland McElrath is leaving his post as the city's finance director to become controller at Memphis Light, Gas and Water Division.
The MLGW board approved McElrath's appointment Thursday on its consent agenda. The City Council also will have to approve his appointment.
McElrath, 51, is expected to start his new position in about 45 days. As MLGW's controller, McElrath will be responsible for developing the publicly owned utility's budget and helping to set rates for customers.
"I've had an admiration for the organization for a long time," McElrath said. "I know a lot of the people at MLGW and have interacted with them over the years, and I've enjoyed that relationship, and that's a part of it."
As director of the city's Finance Division, where he developed budget and fiscal policies, McElrath earned $118,879 annually. At MLGW he'll make $133,016 a year. He'll also be able immediately to begin drawing his annual city pension of $61,213 while earning his MLGW salary.
This is the second time McElrath has left his city post for another government job where he is eligible to receive a salary and a pension.
In January 2001, the council changed the city's pension system to allow elected and appointed officials to collect retirement benefits after 12 years of service. Previously, it took 15 years to become vested in the pension plan.
Shortly after that, in March 2001, McElrath, who began working for city government in 1988, retired from the city to become superintendent of business operations for Memphis City Schools. When he left city government in 2001 he was able to begin drawing what was then a $32,000 annual pension while working for MCS. The council has since ended the 12-year policy.
McElrath has held various posts within city government, including stints as deputy finance director, treasurer and finance director. Before starting work with the city, McElrath was an accountant with Coopers & Lybrand, a private firm that handled audits of school system finances.
MLGW president Jerry Collins said McElrath was chosen over "60 or 70" other applicants who responded to the controller job posting.
"He knows the business of finance, he knows the business of pensions and he's been involved in every aspect of the financial part of government," said Collins.
McElrath guided the city through financial troubles on multiple occasions, city officials said.
In 2005, former mayor Willie Herenton brought McElrath back to City Hall as finance director when the division, under then-Finance Director Joseph Lee III, faced unexpected deficits that resulted in service reductions and layoffs.
In 2008, the council cut its annual contribution to Memphis City Schools by $57 million, reducing the property-tax rate by 18 cents while increasing city spending by more than $40 million.
Each year since then the city has faced annual budget shortfalls that forced McElrath and his team to make large-scale adjustments to fund city schools and produce a balanced budget.
Mayor A C Wharton praised McElrath for his integrity and calmness under pressure.
"Number One, the first thing I look for in someone doing numbers is integrity," said Wharton. "I rate him highly when it comes to that. He's a very calm, steady-at-the-wheel person who has the ability to withstand scorching questioning and criticism, which you'll always get in a position like that."
Wharton declined to say if he had identified McElrath's replacement.
"We have been talking with folks, I will say that," he said.
McElrath's tenure has not been without controversy.
In December, Wharton proposed and the council approved end-of-year bonuses for most city workers. McElrath said the money for the bonuses came from a surplus created by cost-saving measures enacted the prior fiscal year.
However, in March, under questioning from council member Jim Strickland, McElrath acknowledged that city officials knew in October that the city was facing a deficit of at least $6 million for the current fiscal year, a shortfall which eventually grew to $17 million.
The council ultimately decided to dip into the city's reserves and use cuts to cover the deficit.
-- Amos Maki: (901) 529-2351
MONEY MARKETS-Spanish downgrade piles pressure on banks - Reuters
* Downgrade likely to hike repo costs for Spanish banks
* Spanish banks seen increasingly reliant on ECB cash
By Emelia Sithole-Matarise
LONDON, June 8 (Reuters) - Fitch's credit rating downgrade of Spain compounds funding problems for the country's struggling banks which may leave them even more reliant on the European Central Bank's cheap loans.
Fitch slashed Spain's credit rating late on Thursday, leaving it just two notches short of junk status. It signalled more downgrades could follow as expectations grew Madrid would ask the euro zone for help with recapitalising its stricken banks.
Cuts to individual Spanish banks' ratings are due to follow, which could complicate their use of repurchase markets which have been an important source of short-term cash.
Many of the big Spanish banks use clearing houses to reduce the risk and cost of repo trades using government bonds but the ratings downgrade will boost the cost, or the initial margin clearers require to offset risks.
"This means that for a number of banks...(that) clear through LCH.Clearnet the financing will become much more expensive through repo and it's possible that some banks will not be allowed to clear if they fall below BB+," said Don Smith, an economist at ICAP.
"LCH uses the most conservative of the ratings so this will have an impact of raising, if not immediately but after a short period, the cost of repo financing to banks which increases their reliance for short term funds from the ECB," he said.
Already earlier this week, banks' use of the ECB's weekly funding more than doubled as Spain's troubles left its institutions increasingly dependent on central bank support and as four Greek banks returned to mainstream ECB operations following a two week ban.
The ECB's weekly offering of limit-free 7-day funding saw a total of 96 banks take 119.4 billion euros, the highest since the second of its two 3-year injections at the end of February and more than double the 51.2 billion euros taken a week ago.
BANK RESCUE DETAILS EYED
Spanish banks have increasingly seen their access to funding markets shrink as they slid deeper into a crisis caused by a burst real estate bubble and the country's deteriorating fiscal situation.
"Effectively they were already locked out of the market...so it's not of huge concern as they were prevalent in tapping the ECB's liquidity operations," said Suki Mann, a credit strategist at Societe Generale.
"The latest downgrade doesn't help and it will mean they will need accommodative policy from elsewhere either from the ECB or some form of aid from the troika for the recapitalisation.".
The cost of insuring against a default by the country's banks jumped after Fitch's downgrade of the country's rating, with five-year credit default costs for Banco Santander rising by eight basis points to 412.5 bps while those for BBVA were up five bps at 447.5 bps, according to provider Markit.
Both Smith and Mann said they would wait to see the details of any planned Spanish bank rescue to see how far it would go in tackling the sector's problems.
Finance cost, Rupee fall key hurdles for infra - MoneyControl.com
UR Associates has come out with its report on infrastructure sector.
Construction firms pin hope on roads and railways sectors to improve order books When L&T declared its annual results earlier this month, it gave a bright outlook for the current financial year, saying it expected order inflow to grow 15-20%. Thermax Ltd, too, projects a similar outlook. L&T expects the orders deferred in the fourth quarter of the last financial year to come in this year, boosting the company’s order book. It hopes to get Rs 100-150 bn of deferred orders in the coming quarters. Though Thermax did not give details of the expected orders, M S Unnikrishnan, MD, said the company was in talks for a couple of projects. He said the second half of the current financial year could turn for the better if the macro-economic situation improved.
Currently, financing costs and rupee depreciation, among other factors, have led to a record number of projects moving into the freeze mode, resulting in reduction in capital expenditure of companies. The railway and road sectors, however, are expected to keep the boat afloat this year. Construction companies dependent on the power sector are the worstaffected. For instance, Reliance Infrastructure Ltd, which depends mostly on internal projects, is positive about its construction business margins at 8%, with an order book of Rs 173 bn. Besides, power companies such as GMR, GVK Power, Adani Power Ltd and Tata Power Ltd said they had frozen new projects for now, owing to coal supply issues among others.
Companies banking on orders from the power sector are still in a gloom. Capital goods companies are still talking about slowdown, and power sector orders are still in problem. But it’s still not completely gloomy. With the National Highways Authority of India hoping to bid out road projects of around 8,500 km this year, the road sector might be a saviour. Road projects have been offering steady orders in the last few years. In the last financial year, NHAI awarded projects worth ~Rs 570 bn, and gave away Rs 23 bn projects in January 2012 alone. It had set a minimum achievement target of 7,300 km for 2011-12, up by 43.6% from last year’s 5,083 km. Since last year, NHAI has set up month-wise targets in awarding projects to ensure a continuous flow of projects.
The railway sector has also started looking up with the Dedicated Freight Corridor Corporation planning to award projects worth Rs 100 bn this year.
GMR Infra claims TNEB owes dues of Rs 8.5 bn
GMR Infrastructure Ltd has alleged that state-run Tamil Nadu Electricity Board (TNEB) and its generation arm Tamilnadu Generation and Distribution Corporation Ltd (TANGEDCO) owes around Rs 8.5 bn to the company. According to the company's balance sheet, as of March 31, 2012 the power segment companies have receivables (including unbilled revenue) from Tamil Nadu Electricity Board (TNEB) and TANGEDCO Ltd aggregating to Rs 8.5 bn. Based on internal assessment and various discussions that the group had with TNEB and TANGEDCO, the management is confident of recovery of such receivables. In case of GMR Power Corporation Ltd (GPCL), a subsidiary of the company, claims/counterclaims arise out of the power purchase agreement (PPA) and land leasing agreement (LLA) in respect of the dues recoverable form TNEB on account of sale of energy including the reimbursement towards interest of working capital, minimum alternate tax (MAT), rebate, start/stop charges and payment of land lease rentals to TNEB.
More trouble for Lanco as Crisil downgrades Rs 82 bn worth of loans
Lanco Power, a subsidiary of Lanco Infratech, is in trouble. An increase in the cost of coal, a key raw material and delays in receiving payments from PTC India, have prompted ratings agency Crisil to downgrade Rs 82.07 bn worth of long and short-term loans given to Lanco Power. The downgrade reflects growing risk of timely repayment of its debt, Crisil said, adding that both higher coal costs and delayed payments have resulted in a sharp increase in working capital for the power producer. Crisil said Lanco is approaching various banks for more short-term credit as well as has started selling power on the power exchange, but is still likely to face intermittent “cash flow mismatches”. Hence, the downgrade in the power producer’s rating to ‘moderate risk’ from ‘moderate safety’.
BHEL bags Rs 11.43 bn worth of contract from NTPC
BHEL has bagged an Rs 11.43 bn contract from country’s largest power generation utility NTPC for setting up a 500 MW power generating unit at its Vindhyachal Super Thermal Power Station in Madhya Pradesh. “NTPC has placed a major order to the company for supply and installation of the main plant package (boilers, turbines and generators) for a power project in Madhya Pradesh involving one generating unit of 500 MW,” BHEL said in a statement. “Valued at Rs 11.43 bn, the contract envisages setting up a 1-500 MW thermal power generating unit at NTPC’s Vindhyachal Super Thermal Power Station (STPS), in Madhya Pradesh,” the statement said. On commissioning of the unit, 12 million units of electricity will be added to the grid, every day, BHEL said.
"Take my money, HBO!": Why you won't be able to watch Game of Thrones online anytime soon in the UK - New Statesman
Take My Money, HBO is a growing online campaign aimed at getting HBO, the American subscriber-TV network and home of the Sopranos, Game of Thrones and Curb Your Enthusiasm, to provide those without American cable, both "cord-cutters" and international audiences, a way to pay directly for the channels HBO streams through its HBOGO online service.
Currently, you can only receive HBOGO – the company's equivalent of BBC's iPlayer – if you subscribe to a participating American cable channel. Which isn't the best thing to tell people who want to move all their TV viewing online, or who don't actually live in America.
There are other ways to get HBO content, of course; you can wait until the DVD box set comes out, or buy it from iTunes once it is released there. But both of those are on a huge delay; the downloads and DVDs for Game of Thrones were finally made available this March, 11 months after the series started airing.
Alternatively, there is piracy. The day after most episodes aired, they were available in HD, for free, on sites like The Pirate Bay.
Clearly, that's not optimal. This comic, from earlier this year, neatly sums up the issues many had: Programs have aired, people are talking about them, but without a 1990s-style TV set-up, you can't actually watch them legally.
Hence, "Take My Money". The site asks users to tweet at HBOGO the amount they would be willing to pay for a subscription to the service; the average suggestiong is around $12 a month, according to TechCrunch
The business rationale at the first instance seems compelling. Digitopoly's Joshua Gans explains:
HBO has 29 million subscribers in the US paying around $10 per month. HBO receives $8 of that. That would seem to suggest that HBO couldn’t lose by offering a $12 per month subscription.
The fear for the company could be that, if they made another way to access their content, the cable companies would reduce their cut of the premium. But as Gans points out, in the US, where cable is the main form of broadband, most will keep a subscription of some sort anyway, and internationally, many have no option to get HBO at all.
The bigger problem is that HBO is far more intricately tied-up in the standard model of TV distribution than they might like to be. For one thing, it is in fact owned by Time Warner, the American broadcasting giant. For another, as Dan Frommer points out, there simply isn't the right infrastructure for such a thing to happen. HBO would have to support every major video game console, Mac OS, Windows, and probably Apple TV just to have a hope of getting on enough TV screens to even pay the money it cost to set up the system, let alone recoup the lost revenue from cancelled subscriptions.
And internationally the situation isn't much better. In the UK, Sky has forked out a reported £150m for a five-year exclusive with HBO; you can bet they wouldn't have paid nearly that much if it was available to anyone paying £10 online.
All of which means that if you are in the small (but likely over-represented in the New Statesman's readership) percentage of the UK population which watches barely any TV except for high-quality US imports, you are likely to have to carry on waiting or pirating for some time. Disruption may come to the market, but unless they are forced to, HBO just aren't going to take your moeny.
Finance ministry rejects ATEbank wind-down report - Athens News
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