Of all the outrages endured during the financial crisis, perhaps the most perplexing involved money-market mutual funds. In an example of moral hazard writ large, this uninsured risk instrument — with $2.57 trillion in assets — somehow became too big to fail. Five years later, the Securities and Exchange Commission is finally taking steps to address this.
Money-market funds invest in a variety of short-term securities whose values fluctuate. You know, kinda like everything else that trades on a market. However, the funds’ net asset value, and thus the share price, was always $1, regardless of what the underlying assets were really worth.
This is quite bluntly, a fraud, with a couple of twists. First, the true value of these funds was almost never exactly $1, as credit markets moved up and down.
The second part of the charade is that these fund companies were making an implicit guarantee that they would stand behind an investor’s account — until they couldn’t.