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Municipal Money Market Funds: Caveat Emptor

Posted by Larry Doyle on June 29, 2009 6:17 PM |

If and when your money market fund “breaks the buck,” will you be there to collect the change?

I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.

In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”

Today the Wall Street Journal offers another whiff of the factory and gives us further reason to stay away from municipal money funds specifically. The WSJ writes, Mutual-Fund Giants Give Mixed Reviews to SEC Proposals:

The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)

Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?

Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?

Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of  municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.

I will keep my nose to the ground in an attempt to sniff this out.  Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.


  • .


    When I check the web sites of various investment firms (Dreyfus, Schwab, Vanguard, American Funds, etc.) they each list several MMF’s at their firm that were covered by the SEC guarantee. These funds are not limited to municipal funds. What happens to the funds that are not munis, such as basic MMF’s that are used as primary MMF’s for investment accounts? Are they still guaranteed?

  • The guarantee is actually not provided by the SEC but by Treasury. The initial guarantee was put in place September ’08 and ran out in March ’09. It was renewed and is now scheduled to expire, I believe in Sept’09.

    To the extent that you have exposure to any of these funds, I STRONGLY encourage you to call your adviser or a rep at the fund manager to double check on your funds coverage and the expiration date of the guarantee.

    Please let us know what you learn.

  • TeakWoodKite

    LD munipalities across the US are under severe stress for operating cash. This pent up demand / pressure needs financing. How does excluding them make it easier for the muncipalities to obtain the “sausage” by making this exception?

    Second, how does the declining dollar effect translate in higher cash requirement in these funds?

  • TWK….In my opinion, the municipal auction-rate security, x-Tender, does not adhere to the standards being established for money market investments. That said, the SEC will allow these ‘pigs’ to be eligible for municipal money market funds. To do so, though, I believe the municipal money market funds need to be excluded from these new regulations.

    This is my supposition. I can’t imagine that anybody in the industry would share this opinion…certainly not on the record.

    However if the municipal ARS market develops it may serve to address municipal financing needs, although i do not believe investors will appreciate the risks they are taking.

    The decline in the value of the dollar should not truly have an effect on these funds as they would not look to make investments in foreign markets thus presenting currency risks.

    Given that the funds will have higher cash requirements going forward only means they will need to hold more cash on hand.

  • TeakWoodKite

    What happens to all those “frozen” ARS?

    Thanks LD, I appreciatte your explinations as I might not ask the right questions.

    When do you think we will see a subprime market for Cap and Trade?

  • Howard Fitzwater

    It’s a good thing this prediction didn’t come true. The only instance of money market funds breaking the buck was during the crash and the government had to step in. We’re all pretty happy that didn’t have to repeat itself.

  • LD


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