"Breaking the buck" is what happens when a firms assets are no longer adequate to cover that $1 per-share value. At that point, the fund has to close up and distribute what it has left.

If you have a money market deposit account through your bank, my pet expert assures me that it is insured. However, if you have a money market fund in your brokerage account, those losses are not covered by the SIPC. The Securities Investor Protection Corporation (SIPC) has been described as the brokerage equivalent of the FDIC, which insures your bank account up to $100,000 in the event of a collapse. This is not quite accurate.



When a bank goes down, if you had $10,585 in a checking account, you're supposed to get $10,585 back with the help of the FDIC. When a brokerage folds up, it's supposed to return all your securities and cash to you. Basically, the SIPC makes accounts good if the brokerage runs out of money to pay off its clients. But it doesn't insure you against losses--all it guarantees is that you'll get back the assets (cash and securities) that you had in your account. If AT&T has dropped from $100 to $6, that is not the SIPC's problem. All they guarantee is that they will give you either $6 or a share of AT&T.

The SIPC will make investors whole up to $500,000 worth--but only by replacing assets at current market value, not the original asset value. Nor will they, as far as I can tell, compensate you if your broker's failure leaves you unable to sell a plummeting asset until it is too late.

Thus with a money market fund, the job is to make sure that you get however many shares of the fund you are entitled to. But if your 10,000 shares are now only worth $3,500, it will not give you back the $6,500 you lost.

If your fund is with a big house like Vanguard or Fidelity, this shouldn't worry you too much; even if they've got a lot of Lehman paper, their pockets are deep enough to write a check to cover the loss. And they almost certainly will, because allowing investors to lose money on their money market funds would do terrible damage to the company's reputation. However, if you've got a mutual fund with a smaller house, they might not be able to stump up the money.

That's why spooked investors are rushing to redeem shares in smaller funds, mostly the kind that institutions park their excess cash in (the fund Putnam is closing up had a minimum investment of $10 million). Most money market funds are only required to disclose their holdings once per quarter--and at that, the information is 60 days old by the time its filed. God knows what kind of toxic waste they've accumulated in the meantime. I'm told that a number of institutions have been topping up their mutual funds for months rather than let them break the buck and put the firm in line for investor lawsuits. The fund that failed the other day was apparently one of the unfortunate few that clued in its investors more often.