In the past two weeks, uncertainty and fear have reverberated through the markets. We have received a significant number of calls from our clients expressing concern about the safety of their money, especially as it relates to money market funds. While there is no way to know how the market will fluctuate going forward, rest assured that Schwab’s money market funds are completely safe and guaranteed to return all original investments.

In mid-September, Reserve Management Corp’s Primary Fund lost on a position in Lehman Brothers, after the commercial bank filed for bankruptcy. Because the position was so large, the Net Asset Value of the fund dipped below $1. Out of fear, many investors pulled money out of the fund. This only exacerbated the problem. Because a money market fund had not dipped below the $1 level since 2002, investors in unrelated money market instruments across the country began pulling their money out of their funds. When investors unexpectedly pull their money out of funds, assets must be sold to meet the cash demands. This causes the pool of funds going from money markets into the short-term paper market to decrease which in turn means there are fewer buyers of short-term financing. This is what is referred to as a “frozen” market, because there are no buyers to meet the sellers’ demands. Corporations that relied on short-term financing to meet obligations must then come up with a new way to obtain quick cash. This also heightens the concern that the underlying short-term investments will not be repaid to the fund because of the lack of liquidity in the market.

To remedy this problem, the U.S. Treasury established a guarantee program for institutional and retail money market funds. The program is in place for one year and has $50 billion in support. Charles Schwab has elected to enter the program for all of their money market funds (including Schwab Value Advantage). This means that your money market investments are completely safe, liquid and insured by the Treasury not to fall below a NAV of $1. This comes at no cost to you. There is no need to move these funds to an FDIC insured bank because money market funds still yield greater returns than bank savings or checking accounts.

The government’s guarantee applies only to money market holdings as of the close of business on September 19,, 2008. This guarantee does not apply to subsequent purchases of money market funds. However, the guarantee has re-established a higher level of confidence in the security of money market funds and hence, we would not anticipate future issues regarding the viability of these funds. If you have any questions regarding this matter or any other financial issue, please do not hesitate to call us.