High-Performing Money Funds Had Subprime Ties

Money market mutual funds that put cash into investments tied to the mortgage crisis and subprime debt saw huge gains last year, growing by more than 30% to $3 trillion, according to the South Florida Sun-Sentinel.

The agencies that rate the creditworthiness of top investments didn’t lower the ratings quickly enough to alert fund managers to the impending debt crisis, so many funds weren’t aware an investment was undervalued, Don Cassidy, president and founder of the nonprofit Retirement Investing Institute told the newspaper.

Another problem was that money fund managers were trying to improve the yields on their funds, he said, but many of the yields were too good to be true.

“If your fund is paying 6% and all the others are paying 4.25%, there’s got to be something in there,” he said.

Peter Crane, president of Crane Data, a money market research firm, said that doesn’t necessarily make money market funds risky instruments.

Ten major fund advisers have agreed to step in to help the funds stabilize, including Bank of America, Crane said.