Just like you never want to hear a doctor say "oops" in the operating room, you never want to see a going-concern statement in a financial report about a company you own. Accountants throw these in when they've been over the books, talked to customers, and checked the horoscopes and have concluded there is "substantial doubt" about a company's ability to remain in business. In short, don't blame the accountants if the company files for bankruptcy protection.

You¿d reckon that a going-concern statement would be enough to send investors running to the exits, but it's not. True, many large institutions automatically bail when an existing company gets slapped with one of these, but many individuals (often wrongly) take a chance they know more than the bean counters.

During the tech boom of the late 1990s, many companies actually went public even though they had been hit with going-concern statements. Many of those companies subsequently disappeared. Enough said.

Home / Markets / Economy

Friday, September 19, 2008

Analysis

Money Fund Plan Could Avert Panic

Email this Story | Respond to Editor | Print

Dunstan Prial

FOXBusiness

The Treasury Department’s plan to shore up money market mutual funds is – hopefully – a precautionary measure aimed at restoring confidence in shaken markets and preventing a run on the beleaguered investment vehicles, financial advisers said Friday.

“They’re doing it from a confidence standpoint rather than it really needing to be done due to a crisis in money market funds. said Chris Ciovacco, head of Atlanta-based money management firm Ciovacco Capital Management." I don’t believe there is a crisis that is imminent that’s going to sweep across the money market industry,”

Ciovacco said he hasn’t moved any money out of his clients’ money market funds, which are managed by Charles Schwab.

As part of a comprehensive plan to create liquid markets for financial institutions desperate for credit, the Treasury Department said Friday it will use a $50 billion pool called the Exchange Stabilization Fund, created during the Depression, to insure both retail and institutional money market funds, widely regarded as a safe haven for cash.

“Maintaining confidence in the money market industry is critical to protecting the integrity and stability of the global financial system,” Treasury officials said in a statement.

The move came four days after a money market fund, Reserve Primary Fund, reported that losses primarily due exposure to investments in Lehman Bros. (LEH) pushed the value of its shares below $1.

When shares of a money market fund fall below $1 – ‘breaking the buck’ in Wall Street jargon – investors in the fund lose money, an almost unheard of occurrence because money market funds invest primarily in ultra-safe securities such as certificates of deposit and short-term Treasury bills.

Primary Fund’s announcement sent shock waves through an already terrified market.

Fearing a run on their own money market funds, a number of big name financial institutions issued statements declaring their funds safe. Others said they would support their funds if exposure to bad investments threatened to push their shares below $1.

Peter Crane, president of Crane Data, which tracks the money market industry, said earlier this week that Primary Fund’s losses were likely an anomaly caused by that fund’s attempts to create high yields for its investors.

High yield funds attract investors willing to take bigger risks, Crane explained. Those same investors are also likely to flee at the first sign of danger, he added.

Unless investor panic sets in, financial advisers believe Primary’s misfortune will be an isolated incident.

“Should people be concerned? I believe they should be, and they should keep their ear to the ground on this,” said Ciovacco. “An imminent crisis — no. But is that subject to change rather rapidly in the world we live in today? It is -- there’s no question.”

The Treasury Department is determined to avert that.