Just when you thought things couldn’t get any weirder comes a disaster that will affect a great many ordinary people in the pocketbook: the Reserve Fund’s Primary Fund has suspended withdrawals.
The Primary Fund is a money-market fund. The kind of fund where you put your cash for short periods of time to get a higher interest rate than on passbook savings.
The whole selling-point of these funds is that they’re unquestionably safe and unquestionably liquid. You get your money back out of them with interest, whenever you want it.
Until today. The Reserve/Primary Fund’s net asset value is now 97 cents. (They “broke the buck.”) That implies a loss to principal. You get less back than you put in.
To go along with this, the Fund has suspended customer withdrawals for seven calendar days, which kills the liquidity promise as well.
There are already signs of extreme disorder in the overnight-repo markets in reaction to this news, even as stock markets prepare for a mild rally in response to the AIG acquisition.
This has the potential to become a very major story, folks. Stay tuned.