Money Market Account vs. Money Market Fund

[scfr]

Just thought it might be a good time to review the difference between:

1. Money Market Account (MMA) or Money Market Deposit Account (MMDA)

vs.

2. Money Market Fund (MMF) or Money Market Mutual Fund (MMMF)

In a nutshell, the big difference is that the first, if held at a bank covered by FDIC-insurance, is insured by the FDIC and the second is not.

Here is what Suze Orman says in her book "Women & Money" (p. 83)
---------------------------------------------------------------------

(QUOTE)

- Insured: Deposit accounts, including checking accounts, savings accounts, as well as money market deposit accounts (MMDAs) and certificates of deposit (CDs).

- Not Insured: Stock mutual fund, bond mutual fund, individual stock, individual bond, money market mutual fund. Pay particular attention to that last one: A money market mutual fund (MMMF) is not the same as a money market deposit account (MMDA). They look, smell, and behave the same in that both are designed to never lose a penny. But because an MMMF is a product created and run by a fund company --- and not a bank --- there is no insurance program. So in the extremely unlikely event that a mutual fund company runs into some sort of trouble --- and I want to stress that this is highly unlikely to ever occur --- there is a chance that you would not receive $1 for every dollar invested in an MMMF. Instead, your account might be nicked a few pennies for every dollar invested in the MMMF, whereas your bank MMDA woudl be fully insured as long as you meet the deposit limits ...

(END QUOTE)

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If anyone thinks that they are hearing a financial guru recommend that they close their "money market something-or-other" please make sure that you listen to exactly what they are saying ... It is very important to make the distinction between the 2 types of accounts. I have a real hard time believing that any respectable expert right now would be recommending anyone close a MMA that is fully covered by the FDIC.

Okay, I feel better getting THAT off of my chest. Is it too early in the day for me to have a drink?

[jIM_Ohio]

I did not think either was FDIC insured. Please give a better reference than Suze Ormon for what is or is not insured.

IRS pub or similar would be a good reference.
Bank web site would be a good reference.

[scfr]

I did not think either was FDIC insured. Please give a better reference than Suze Ormon for what is or is not insured.

IRS pub or similar would be a good reference.
Bank web site would be a good reference.

Here you go Jim... straight to the source... see the 2nd paragraph entitled "What is Insured?"

FDIC: Insured or Not Insured?

I used the Suze quote because I thought it explained in plain English (and not too lengthy) the difference between the 2 types of accounts.

[MonkeyMama]

If the financial gurus are recommending we cash out our MMMFs, I am missing something.

(& I may just be, I can hardly keep up with all the doom and gloom).

I think as mentioned elsewhere, depends on how much you have and which MMMFs you have.

Since I have some cash in MMMFs, I don't appreciate all the panic. Yikes!

[Merch]

It was Cramer talking on the Today Show. He also said to sell 20% of your equities. Nice.... If everyone was to take money out of their MMMF, the PMs would be forced to sell there assets at a loss and dip below 1.00.

There are other money market accounts that use the word enhanced or cash plus. These are the ones that are general in the CP on SIVs, CDOs, and ABSs. Those are the ones to avoid. They usually are the ones with the highest yields.

I only know about the Cramer comment because my wife stays at home and watches Today and called be in a concerned voice.

[jIM_Ohio]

The issue with MMMF is they might break a buck- meaning their share price might drop when they unload the MBS.

The panic/ run on the banks will be worse than breaking the buck- because the breaking of the buck will be temporary, selling would make any loss permanent.

[Merch]

I hate to split hairs but MMMFs don't hold MBS. The general rule is that the maturity has to be less then a year. The basically invest in commercial paper, certificates of deposit and repurchase agreements, or repos-basically overnight loans to banks or securities dealers.

MBSs are too long in maturity (usually). The have invested in short term coprorate bonds. That's what happened to Reserve Primary fund. It was holding some real short Lehman bonds.

Like I said, the big issue is the commercial paper on ABS, CDO, and SIV. I don't think the write commercial paper on MBS, CMBS, CMO, and the like.

[jIM_Ohio]

I hate to split hairs but MMMFs don't hold MBS. The general rule is that the maturity has to be less then a year. The basically invest in commercial paper, certificates of deposit and repurchase agreements, or repos-basically overnight loans to banks or securities dealers.

MBSs are too long in maturity (usually). The have invested in short term coprorate bonds. That's what happened to Reserve Primary fund. It was holding some real short Lehman bonds.

Like I said, the big issue is the commercial paper on ABS, CDO, and SIV. I don't think the write commercial paper on MBS, CMBS, CMO, and the like.

I agree MMF invest MOST of their assets (90%+) in short term paper. But there is a provision where a small fraction of assets can be invested in other things (take on more risk for higher yield for example), which is where the MBS come into the picture.

Because if the MBS had a value of 300k which was then discounted to zero, the MMF just lost something which it used to calculate its NAV to $1. Hence the buck gets broken.

Again more than likely the investors in the MMMF did not know their fund was holding something which could decrease in value.

[Merch]

Money funds hold only short-term debt. By definition, no money fund can have an average maturity -- the time when debt comes due -- of more than 90 days, and no holding can have a maturity greater than 13 months. The average maturity in all taxable money funds is about 45 days.

This is why money market accounts can not hold MBS. The only ones it could possibly own are small ones coming due in a year. It's the CP on the other investments that are the real issue as well as ultra short corporate bonds.

[jIM_Ohio]

Remember that certain types of sub prime mortgages were packaged together and sold. It's very possible one type of package was a portion of a mortgage which was less than the first 13 months of payments.

Just guessing.

[Merch]

We are kind of saying the same thing and that not really. I am saying the MMMF do not out right hold MBS. But the do hold commercial paper on SIVs which do hold MBS as well as a bunch of other assets like ABS.


Just some background. This was more eloquent then I could explain and less typos.

So what distinguishes an SIV from a CDO?

Greg Drennan, London-based vice-president of Morgan Stanley's CDO structuring team, explains that there are two fundamental differences between the two vehicles: "SIVs have a cheaper cost of financing because they can raise money in the CP market with limited liquidity. The second difference is the operating company-type characteristics an SIV has."
--Unlike a CDO, an SIV is an ongoing open-ended vehicle; it can change size and re-finance. "SIVs can increase or decrease leverage on a daily basis," says Cian Chandler, European structured finance analyst at Standard & Poor's in London. Also, unlike those CDOs that are funded through the CP market, SIVs do not have to be backed up with a full liquidity facility. Before a closed-end CDO that funds through CP can achieve good credit ratings on its notes, liquidity agreements with banks have to be in place.


source: work: Barclays SIV-lite hit the market