Break the Buck

To “break the buck” is a term that sends a shiver down the spine of even the most seasoned financial professionals. It describes the rare but alarming event where a Money Market Fund (MMF) is unable to maintain its stable Net Asset Value (NAV) of $1.00 per share (or €1.00 in Europe). Money market funds are the piggy banks of the financial world, widely considered to be ultra-safe places for investors and corporations to park their cash. Their entire appeal rests on the promise that every dollar you put in is a dollar you can take out. When a fund breaks the buck, its NAV drops below this crucial $1.00 threshold—say, to $0.97—meaning investors will get back less money than they originally invested. This shatters the fund's reputation as a cash equivalent and can trigger widespread panic.

Imagine a bank telling you that the dollar in your savings account is now only worth 97 cents. That's the emotional and financial shock of breaking the buck. Because MMFs are seen as a safe harbor, this event undermines the very foundation of trust in a critical part of the financial system. The primary danger is a “run on the fund.” When news breaks that an MMF's NAV has fallen, investors scramble to pull their money out before it can fall further. This mass exodus forces the fund manager to sell the fund's assets—typically high-quality, short-term debt—quickly. A fire sale of assets can push their prices down even more, causing the NAV to drop further and creating a vicious cycle. In a worst-case scenario, this panic can spread from one fund to the entire market, freezing up the short-term lending that corporations rely on for daily operations. It’s a small crack that can threaten the entire financial dam.

While designed for safety, MMFs are not insured bank deposits; they are investment products. They primarily invest in short-term, low-risk debt instruments like government securities, certificates of deposit, and commercial paper issued by corporations. Breaking the buck typically occurs when one or more of these underlying assets experiences a sudden and severe loss in value. The most common culprit is a surprise default. If an MMF holds a large amount of commercial paper from a major corporation that suddenly goes bankrupt, that paper can become nearly worthless overnight. This loss is then passed on to the fund's shareholders, causing the NAV to fall. While fund managers are required to invest in high-quality, diversified assets to prevent this, a large-scale, unexpected crisis can overwhelm these safeguards.

The most famous modern instance of a fund breaking the buck occurred on September 16, 2008. The Reserve Primary Fund, one of the oldest MMFs in the U.S., announced that its NAV had fallen to $0.97. The cause? The fund held $785 million in debt from Lehman Brothers, which had filed for bankruptcy the day before. The effect was immediate and catastrophic. It triggered a massive run on MMFs, with investors pulling out over $300 billion in a single week. This created a credit crunch that threatened to paralyze the global economy. The U.S. government was forced to step in and offer a temporary guarantee on all MMF deposits to restore confidence and stop the bleeding. This event serves as a stark reminder that even the “safest” investments carry risk.

For followers of Benjamin Graham, the concept of breaking the buck offers a powerful lesson in risk management and the true meaning of safety.

• Understand Your “Cash”: A core tenet of value investing is to never lose money. This means understanding the risks of every asset you own, including those you use to store cash. An MMF holding only U.S. Treasury bills is fundamentally safer than one holding corporate commercial paper. Always look under the hood.
• Demand a Margin of Safety: The principle of margin of safety isn't just for stocks. When parking cash, your margin of safety comes from the quality of the underlying assets. Opting for the absolute highest quality (like government-only MMFs) is a prudent choice, even if it means sacrificing a fraction of a percent in yield.
• Recognize Systemic Panic: An event like breaking the buck is a symptom of extreme fear in the market. While this signals a time for caution, it can also create incredible buying opportunities for the disciplined value investor. When others are panicking and selling indiscriminately, those who have done their homework (and kept their “cash” truly safe) can acquire great businesses at bargain prices.