Reserve Primary Fund

The Reserve Primary Fund was one of the oldest and largest money market funds in the United States. It's a name etched into financial history not for its success, but for its spectacular failure during the 2008 financial crisis. On September 16, 2008, it became infamous as the fund that “broke the buck“—a catastrophic event where its share price fell below the stable $1.00 value that investors had always taken for granted. This happened because the fund held a significant amount of debt from the investment bank Lehman Brothers, which had declared bankruptcy just one day earlier. The fund's failure shattered the illusion that money market funds were as safe as cash in the bank. The ensuing panic triggered a massive run on other money market funds, threatening to freeze the entire short-term credit system that businesses rely on for daily operations. This single fund's collapse was a key catalyst that escalated the 2008 crisis, prompting an unprecedented government bailout to prevent a complete economic meltdown. Its story serves as a powerful cautionary tale about hidden risks and the fragility of financial trust.

To grasp the shockwave sent by the Reserve Primary Fund's collapse, you first need to understand the promise of a money market fund. For decades, these were the sleepy, boring corners of the investment world, treated by individuals and corporations alike as a place to park cash that was slightly better than a checking account.

The core feature of a traditional money market fund was its stable net asset value (NAV) of $1.00 per share. You put in a dollar, you could take out a dollar, plus a tiny bit of interest. The funds achieved this by investing in what was supposed to be ultra-safe, short-term debt, such as high-quality commercial paper (corporate IOUs) and U.S. Treasury bills. The risk of losing money was considered practically zero. “Breaking the buck” meant a fund's NAV fell below $1.00, meaning investors would get back less than they put in. Before 2008, this had only happened once to a small, obscure fund.

The Reserve Primary Fund, seeking a slightly higher yield to attract investors, held about $785 million in debt securities issued by Lehman Brothers. When Lehman filed for the largest bankruptcy in U.S. history on September 15, 2008, that debt became nearly worthless overnight. This loss was so large that the fund could no longer maintain its $1.00 share price. The next day, it announced that its shares were now worth only 97 cents. While a 3% loss might seem minor in the stock market, for an investment perceived as cash, it was an earthquake.

The news that a major money market fund had broken the buck created sheer panic. The logic was simple and terrifying: if it could happen to the Reserve Primary Fund, it could happen to any of them. Investors, from giant corporations to individual retirees, stampeded for the exits. In a single week, over $300 billion was pulled from U.S. money market funds. This created a vicious cycle:

• To meet redemption requests, funds had to sell their assets, including commercial paper.
• With everyone selling and no one buying, the commercial paper market—the lifeblood of day-to-day corporate finance—froze solid.
• Companies like General Electric and Ford, which rely on this market to pay for inventory and make payroll, were suddenly unable to get the short-term loans they needed to operate.

The entire financial system was on the brink. In response, the U.S. government stepped in with overwhelming force. The U.S. Treasury created a temporary program to insure money market fund deposits up to their $1.00 value, and the Federal Reserve launched several emergency programs to directly buy commercial paper, effectively becoming the lender of last resort for corporate America. These actions calmed the panic and thawed the frozen credit markets, but the myth of absolute safety was shattered forever.

The saga of the Reserve Primary Fund offers timeless lessons for any prudent investor, perfectly aligning with the core tenets of value investing.

• Know What You Own: This is the most crucial lesson. Investors treated all money market funds as identical, safe piggy banks. They didn't look “under the hood” to see what the fund actually owned. A value investor rigorously investigates the underlying assets of a business or fund before investing. Had they done so, they might have noted the fund's exposure to riskier investment bank debt.
• “Safe” is a Relative Term: No investment is truly without risk. The perception of safety often breeds complacency and leads investors to ignore potential dangers. Always question assumptions and understand the types of risk you are taking, even with so-called conservative investments.
• Price is What You Pay, Value is What You Get: Investors who chased the slightly higher yield offered by the Reserve Primary Fund paid a devastating price. They took on hidden risk for a minuscule extra return, violating the principle of demanding a margin of safety.
• Regulation and Systemic Risk: The crisis prompted significant reforms by the SEC to make money market funds more resilient, including floating NAVs for some institutional funds and gates to prevent runs. This highlights that the “rules of the game” can change and that the failure of one entity can have domino effects across the entire economy. A wise investor pays attention to both the micro (their own investments) and the macro (the health of the system).