Broke The Buck

Finance allah shmoop what does breaking the buck mean Okay

so there's this dog and call of the wild Remember

him Alright Wait That's different and it wasn't broken He

just became wild at the end Right Isn't that what

happened All right well anyway breaking the buck in finance

land is about the price of a money market fund

as indexed to a dollar Well that is normally when

you invested dollar while you get more than a dollar

back Right Like a finance kindergarten concept One o one

in money market funds Thie investment is design id lee

Very low risk and low reward And it is purposely

set up to be extremely liquid and safe That is

that buck or dollar invested should almost always be sacred

And the pricing of a money market fund composed mostly

a very safe short term bonds Well it should always

be above that buck If it weren't it would mean

that you were getting less money than a dollar when

you invested a dollar And that would be bad right

And know that buck is the net asset value or

in a v of essentially all money market funds just

make the math easy here If nothing else if it

breaks the buck and trades below a dollar well then

it means that investors investing a dollar will in fact

get like ninety nine cents back or ninety eight cents

back Well how on earth can this happen Is it

fraud Deceit chicken ary Well those could be issues but

the breaking the buck phenomenon actually happened during the mortgage

crisis of two thousand nine when interest rates were extremely

low in fact so low that the throw or interest

from those bonds wasn't enough to cover the operating costs

of managing those money market funds There was a whole

lot of risk it that time to remember We thought

the financial system hopefully bust well is an extremely bad

situation for the bank which sold those funds as extremely

safe toe widows orphans and nervous nellies all around the

world with the cost of running One of these funds

isn't zero There are legal costs secretary cost brokerage costs

or spreads rent insurance all that stuff which is must

have in the world of managing a fund So when

rates fell extremely low and or the managers of that

fund took on all kinds of crazy weird derivatives risk

trying to goose another ten basis points of performance out

of their money market fund wealth They only found that

the results whipsawed and cut well pretty much their arms

and other appendages off It was potentially calamitous for the

banks and the brokers involved So breaking the buck is

a rare phenomenon in history It's happened only a few

times and when it did it was oh so bad 00:02:49.99 --> [endTime] That whipsaw is wicked That's gotta hurt