Money Market Accounts
The term “money market” can refer to two different products: [1] one is offered by the mutual fund industry and [2] the other is a type of bank account wherein the lender sets the interest rate. As of the beginning of 2012, ~ $2.7 trillion was in money market mutual funds while close to $6 trillion were in bank money market deposit accounts. The average money market yield was 0.06% while at banks it was 0.15% (Feb. 10, 2012, source: Crane Data). All bank money market accounts are guaranteed by FDIC for up to $250,000 per account.
There are some potential benefits that banks can have over their money market fund counterparts. While money funds pay a market rate based on securities yields, banks can pay “artificial rates based on funding needs and competitive factors.” In the past, some banks offered significantly higher yields because they were in trouble and needed to attract depositors. As of February 2012, one of the highest rated and highest yield bank money market accounts was offered by Sallie Mae Bank; the accounts received Bankrate.com’s top score of five stars for earnings, asset quality, capitalization, and liquidity.
Reserve Primary
In the entire history of mutual fund money market accounts, only two have “broken the buck.” The first time occurred over 20 years ago. The second time occurred after the 2008 collapse of Lehman Brothers. A large money market fund, Reserve Primary ($62 billion), held some Lehman paper ($785 million). A judge ordered the fund to liquidate and investors (virtually all were institutions) got back ~ 99% of their money.
In 2010, the SEC enacted new rules intended to make money market funds invest in even safer paper with shorter maturities and provide more disclosure.