Fund 'collapse' was greatly exaggerated

Despite what you may have heard on television news or read in the headlines, no money-market funds "collapsed" in the last week. While some investors rushed the exits, there were no lost fortunes; the money markets - even at their worst - still felt a whole lot safer than the stock market.

Yet that perspective was missing in much of the reporting on the Reserve Primary Fund "breaking the buck" Tuesday, taking the heretofore unthinkable step of dropping its share price from the static $1 level investors expect from money funds.

And yet, understanding the situation and gauging its true severity is crucial. With the Treasury stepping in Friday to say it will guarantee any money fund that pays a fee, investors may decide to change how they pick a fund, but they shouldn't rush for the exits expecting the worst.

On Tuesday, the Reserve Primary Fund announced that it had declared $785 million in commercial paper from Lehman Brothers as worthless; as a result, the net asset value of the fund dropped to 97 cents per share. Further, the fund said that it would take redemption requests, but that it would not send proceeds for a week.

Other fund firms took steps to avoid the same fate.

While the media characterized the Reserve situation as a collapse, the plain truth is that the fund took a worst-case scenario hit - making the Lehman securities worthless - and lost just 3 percent. An investor who held the fund for the entire year is roughly back to even, having given back the income the fund earned through mid-September. Hardly life-changing.

In the $3.5 trillion world of money funds, the remarkable thing is how much money has not been affected by the troubles of Lehman, Fannie Mae, Freddie Mac and every other scary situation.

"People are acting as if everything is melting down, when the truth is that virtually all money market securities have done what they are supposed to do, and have held up in the face of these conditions," says Peter Crane of Crane Data, which tracks money-funds. "The fact that there is so much money in these funds and that the problems, relatively speaking, have been so small actually speaks well for money funds."

In the end, the money fund story is big news, but investors need to recognize that it has not meant big losses. And with additional protection from the Treasury, it's even less likely to mean losses as it plays out over the next few weeks and months.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.