I have a friend who recently retired. Because his pension plan is a defined benefits plan, and because he is skeptical about whether his former employer will be able to meet its pension obligations, he has been saving considerably for retirement on his own as well. Last weekend, in response to some e-mails we have been exchanging, he sent me this (reprinted with permission):
Twelve months ago, as the s began to hit the f, I converted the entire portfolio of XXX and Associate International Risk Management and Fun Fund into money market funds. I mean, what could be safer?
As it turns out, plenty! Here's the story.
About four months ago, I heard tell of some money market funds that took the very rare step of lowering their unit prices to take account of some losses. Oh, oh!
So, I called a broker at one of my funds and asked of what exactly the fund assets consisted. After the usual garbled wool that made it clear he had no idea but needed to sound like he did, I decided to check this out for myself.
It turned out that much of what, say, Fund A holds is not just short term debt but also units of Funds B, C, D, etc. Likewise Fund B holds lots of units of Funds A, C, etc. You get the picture: everybody holds everybody else's units as assets, which is the equivalent of fractional reserve banking--without the protection (psychological, at least) of deposit insurance.
Therefore, I moved everything again, this time into guaranteed investment certificates (GICs) that are covered by the Canadian Deposit Insurance Corporation (CDIC). It's worth noting that, in the U.S., insurance was very recently extended to deposits in money market funds, and I think I know why.
Ohhhh very scary, and it's not even Halloween yet.
He later added,
I think it's important that people understand what many of these money market funds have been up to. Talk about moral hazard!
And we all thought that money market funds would be immune from the vagaries and risks of holding stock.
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