Reserve Primary money market fund breaks a buck

— -- If you want to know how severe the financial industry crisis is, here's further proof: The share price of the Reserve Primary fund, a money market mutual fund, has fallen below the sacred $1 mark, thanks to the Lehman Bros. meltdown.

Money market funds have been the fund industry's haven for more than three decades, and investors often view them the same way they do bank checking accounts. The funds' safety record has attracted more than $3.5 trillion in assets.

Until now, no money fund open to the general public has ever allowed its share price to dip below a dollar — "breaking the buck," as it's called. (A small institutional money fund, Community Bankers Money fund, broke the buck in 1994.)

Money market funds have long feared that if they broke the buck, thereby shrinking investors' principal, people would shift their money into bank money market accounts or ultrasafe Treasury securities. The question now is whether other money funds will follow the Reserve fund in dipping below $1.

The $64.8 billion fund held $785 million in short-term IOUs, called commercial paper, issued by Lehman Bros., which filed for bankruptcy protection Monday.

The fund's board has valued the securities at zero, causing the fund's share price to fall to 97 cents. The fund has also put a seven-day hold on all redemption requests.

Investors who put in orders to remove money from the fund before Tuesday afternoon will get their money back at $1.00 a share. As for redemption orders that came in after 3 p.m. ET on Tuesday, the amount they get back depends on the fund's daily share price, calculated at 5 p.m. — a price that could vary depending on the performance of the fund's investments, and ability to raise capital to bring the asset level back up.

Reserve said Tuesday night that effective immediately, investors redeeming cash from the fund will not receive their money until as long as seven days later — the maximum allowed by law.

Calls to Reserve for further comment rang busy on Wednesday morning, the Associated Press said.

The fund's action is particularly ironic because Bruce Bent, chairman of the Reserve fund, created the first money market fund in 1970. He was also an advocate of prudent money fund management.

"A lot of money funds lost their way," he told USA TODAY last month. "Just follow the rules. Don't get clever."

Peter Crane, publisher of Crane Data, which follows money market funds, says the Reserve fund's problems might be a relatively isolated incident. Many large money market sponsors have been willing to prop up funds that held shaky investments.

More than a dozen money fund sponsors have stepped in to keep their funds from breaking a buck in the past 12 months. But Reserve may not have had enough cash to replace the Lehman securities in its portfolio.

The nation's largest money fund sponsors were quick to reassure investors that they have no Lehman Bros. securities in their portfolios.

"Our money market funds have no exposure to securities dealers, including distressed issuers like Lehman and AIG," says John Woerth, spokesman for the Vanguard Group.

Fidelity said its taxable money funds had no holdings in Lehman commercial paper. Discount brokerage giant Charles Schwab said the same.

Crane says investors should be wary of any small funds with yields much higher than average — currently 1.88%, according to iMoneyNet. High yields are often a warning sign that a fund is holding securities with above-average risk.

Investors who are particularly worried about their money fund holdings might consider a Treasury-only money fund, which invests only in ultrasafe Treasury bills. These funds yield slightly less than other types of money funds, however.