Stressed investors flee money market funds

— -- In an extraordinarily unusual development, Putnam Investments shut its $12.3 billion Prime Money Market Fund on Thursday as the typically risk-averse industry continued its struggle to reassure skittish investors that their cash is safe.

Many Putnam investors wanted out. The firm, which is for institutional investors, said in a statement that it will pay everyone at the same time to be "equitable" to all. Meanwhile, shares in State Street, Federated Investors and other investment firms slumped over concerns that their money market funds will suffer losses.

Unlike bank deposits, money market funds are not insured by the Federal Deposit Insurance Corp. They have long been considered to be safe because the money is invested in short-term Treasury bills and IOUs from sound corporations.

Investors grew concerned about money markets, though, on Monday after Lehman Bros., a major issuer of commercial paper, filed for bankruptcy court protection.

That led to $60 billion in withdrawals, says iMoneyNet, which tracks money market data. Things calmed down Tuesday.

But then the Reserve Primary Fund, the oldest U.S. money market fund, said that losses from Lehman-related investments forced it to cut the value of its shares by 3 cents to 97 cents. It was the first fund in 14 years to commit the sin popularly known as "breaking the buck."

Wednesday, investors took $89 billion out of money market funds.

Data for Thursday were not yet available, but there was enough bad news to drive redemptions higher.

Money market funds of large companies including Fidelity and Vanguard are "probably safe," says Karen Dolan, director of fund analysis for Morningstar. Fidelity and Vanguard are among many funds that say they consider it a top priority to keep the share price up.

"A Bank of America would never let it happen. They would spend $5 billion or $10 billion to keep from breaking the buck," said Conrad Gann, president of TrimTabs Investment Research.

Dolan said investors should beware of high-yielding funds. For example, Reserve Primary paid 4.04%, way above the average 2.75%, because it was taking on added risk for higher yields. "There is still no free lunch," Dolan said.