David Baum was quoted in a BetterInvesting magazine article discussing the crisis faced by money market funds over a year ago as financial markets deteriorated, Lehman Brothers declared bankruptcy and the Reserve Fund “broke the buck.” The market has since stabilized, and the federal government has allowed its guarantee program for money market funds to lapse, while the SEC has proposed new regulations to further protect investors in the future. One such proposal would eliminate a money market fund’s ability to invest in any security other than an eligible security receiving the highest short-term debt rating, or a “first tier” security, according to Baum. “The idea behind these proposals is to reduce overall risk by limiting the percentage of the portfolio that can be invested in second-tier securities and shortening the average weighted maturity of the portfolio,” he said.
Commenting on the Reserve Fund’s net asset value per share drop below one dollar last year, Baum said, “Ultimately, the Reserve Fund had a problem because it held a lot of Lehman Brothers paper and when Lehman Brothers went bankrupt, it didn’t have the value it did previously. If they had had a large sponsor who could have stepped in and helped support the fund, it might not have broken the buck.”