Some answers to questions about money market funds

ByABC News
September 18, 2008, 11:54 PM

— -- Lehman Bros.' bankruptcy filing caused the Reserve Primary Fund to "break the buck" this week, exposing investors to losses because the fund did not have assets of at least $1 for every dollar invested. USA TODAY reporter David Lieberman explains what happened and its significance.

Q: What's so interesting about the Reserve Fund?

A: The company's chief, Bruce Bent, created the world's first money market fund in 1970.

Q: What makes a money market so special?

A: It provides a safe alternative for ordinary investors who want to earn market rates of interest without locking up a lot of cash.

Q: How does it work?

A: The fund makes low-risk investments designed to guarantee a constant $1 per share price.

Q: How successful are they?

A: Until this week, only one money market fund had fallen below $1 a share: Commercial Bankers Mutual Fund ran into trouble in 1994 after Orange County, Calif., filed for bankruptcy protection.

Q: What happened to Reserve?

A: Its Primary Fund owned about $65 billion in assets, including Lehman Bros. debt securities that had been valued at $785 million. Monday, after Lehman filed for bankruptcy protection, Reserve said it would consider those securities worthless. As a result, the fund's net asset value fell to 97 cents a share.

Q: What did its investors do?

A: At least a dozen withdrew about $40 billion.

Q: Why didn't other money funds also fall to under $1?

A: Many other funds have well-capitalized parent companies that can inject enough cash to keep the net asset value at $1. And most others don't hold Lehman Bros. debt.