Moody's warns on money market mutual funds

[masteff]

Moody’s Investor Service warned mutual fund clients that the impasse was threatening money market mutual funds. “Direct risks include the potential for a missed interest or principal payment on government bonds for a short period of time, as well as incremental weakening of the overall credit quality of money-market fund portfolios that have U.S. government exposure," the New York-based ratings company said in a statement.

http://www.nytimes.com/2011/07/27/us/politics/27fiscal.html

And to think I used to reassure employee's that the plan's Govt money market was the safest investment in the plan and if the MM ever lost it's value, there'd be a lot bigger problems to worry about (because the whole world would surely be in chaos, crisis and war before it happened).

[GMK]

So, do plan sponsors/administrators have a fiduciary responsibility to share this warning with participants and let them know that the sky may fall on their money market accounts?

Should we wait until Monday ... you know, in case a just-in-time agreement is reached?

[masteff]

Here's an interesting table: http://www.treasurydirect.gov/instit/annce...s_cashpydwn.htm It shows how some of the debt just keeps getting rolled forward from auction to auction.

Of course the devil w/ a debt cap is you can't borrow enough new money to cover the interest accrued on the maturing debt. (You could play w/ the interest rate to make new debt sell at a premium but that only works for a round or two before it compounds into a death spiral.)

[GMK]

So, do plan sponsors/administrators have a fiduciary responsibility to share this warning with participants and let them know that the sky may fall on their money market accounts?

Interesting stuff at Treasury Direct.

Actually, my question about fiduciary responsibility is a serious one, looking for opinions.

[masteff]

Actually, my question about fiduciary responsibility is a serious one, looking for opinions.

Hmmm... that question takes me back 10 years to the 13th or 14th of September and my wanting to issue a statement to not panic trade while the market was closed (I got overridden because someone didn't want to risk being seen as giving "advice").

Short answer: my opinion is no, assuming you're complying w/ 404©.

Of course you could do something more from an investor education point of view than a fiduciary responsibility view....

My thoughts:

1) I wouldn't just warn on money markets because a huge number of mutual funds actually have a small percentage held in treasuries or money market funds of treasuries. And frankly the "mob mentality" of the financial markets will make all investments a lot more volatile in the short term.

2) Of the few articles I can find that really discuss the issue (w/ regard to money market mutual funds), the consensus seems to be that warnings like Moody's are "alarmist". I'd say the ratings agencies have a duty to be semi-alarmist because people need to fully appreciate the ramifications of a worst case scenario (and especially after their failure to alarm during the last financial crisis). The worst case scenario touched on in several articles is a repeat (but worse) of 2008 where interbank lending halted and took nearly all liquidity out of the financial markets.

3) If my current employer had a retirement plan and if I were to issue something, I'd probably go with a message about uncertainty and panic trading. I'd not focus on but would mention that we don't know how the Treasury Dept will handle payments on bills and bonds and it's impossible to predict the impact that will have on the broader financial markets. Any trading made now or over the coming days and weeks should be made from a deliberate investment decision and not out of panic.

4) And I'd either issue it right here, right now, or I'd wait until the debt ceiling is really hit (not the swag date of Aug 2nd). If I issued anything at all.

[GMK]

Thanks for your thoughts. Makes a lot of sense.

The "Don't Panic" message always applies, of course. What about having that towel handy?