People don’t understand or remember that just 2 weeks ago, two money market funds announced that the value of investor’s principal dropped below $1 a share. Money market funds are supposed to pay interest on a fixed principal amount that is deposited. They are supposed to be the safest place to put cash besides a T-Bill or a bank savings account.
Guess what, when the news came out that the principal amount that people had invested dropped below their original amount at these two money market funds, the funds suddenly looked very risky - like a stock mutual fund. Why did this happen? - its because the government allowed Lehman Bros to fail due to bad mortgages. Those two money market funds had substantial investments in Lehman Bros loan portfolio.
A panic run started where individuals and institutions started pulling money out of what they thought were “safe” money market funds. Those money markets had to sell a lot of bonds to raise the cash for redemptions, further driving down prices of everything.
This event is the one thing that caused Secretary Paulson to put together an emergency plan overnight. To stop worldwide investors from pulling out of everything, including money market funds. Money markets are very important as they provide short term loans (30 to 270 days) of their deposits to businesses.
Folks - Forget about the fat cats. This is all about you and your financial security or lack of it.
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