Bankrate.com reports that money market funds' exposure to subprime mortgages is creating the riskiest climate for these supposedly safe investments since the 1994 derivative crisis. Peter Crane, a money market fund expert, ranked the 1994 crisis as a 10 on a scale of one to 10, and ranks today's situation an 8.
- Not a bank account. Recognize that money market funds are not FDIC insured so you can lose money if they fail.
- Know what type of money market fund you have. A Treasury or government agency fund would not have any commercial paper that could be linked to Structured Investment Vehicles (SIVs), which may be backed by subprime mortgage-backed securities. But a prime, or a general purpose type fund, could have commercial paper, although not all do. Typically, the makeup of 200 such funds that can buy commercial paper, is 40% or 50% paper and the rest in repossession, Treasury, agencies, bank paper and other money market investments. These are the riskier ones.
- Read the prospectus. As I pointed out in this post, if you look at the prospectus, you can see how exposed your fund is to SIVs.
I would add an obvious point -- if you have money in a fund that's exposed to subprime mortgages, consider finding one that has no commercial paper and shift your money to that.