Grandma’s Money Market Fund feels the SIV pinch

The SIV panic did not really set in among regulators until “supposedly-safe” money market mutual funds started to take losses. The federal regulators are now calling foul.

‘Securities regulations state that money market funds can only buy short-term, very safe securities. In particular, rule 2a-7, part of the Investment Company Act of 1940, says that money market funds can only hold securities that have "minimal credit risks."’

Impacted money market funds include offerings from industrial giants such as Bank of America, who watched $640M of customer funds get flushed down the tubes when Cheyne Finance went under, to smaller brokerages. The list of firms, whose money market funds are holding SIV paper, includes major players such as JP Morgan, Fidelity and Federated.

It is now obvious that SIVs never merited AAA ratings, which would imply these securitized products had the strength to weather any storm. The defense made by some funds that the debt was “ultra-safe” because it was highly rated, does not really hold up when performing any type of basic risk analysis of these instruments.

Money market funds are supposed to be the safest investment; something that a retired grandmother can feel safe in. The financial manipulations of Wall Street in building derivatives have now destroyed this trust. Money market funds offered by most brokerages are not covered under FDIC protection so retail customers will take the hit. No wonder steam is rising from the brows of regulators. The question remains will they implement the necessary reforms to eliminate future occurrences, or stand frozen like a deer in the headlights.

A recent article in Fortune discusses SIV impact on money market funds in more detail.

Risky money market fund bets may be illegal
Money market funds may have broken a law dictating a conservative investment profile by investing in SIVs, reports Fortune's Peter Eavis.
http://money.cnn.com/2007/10/25/magazines/fortune/funds_sivs.fortune/index.htm?postversion=2007102605