"Broke the buck" is a financial term that refers to money market mutual funds. These funds do not enjoy the same federal protection in the United States that savings accounts do, but they are generally considered to be safe. Through a process of careful investment, money market fund managers are expected to maintain a certain value per share or net asset value (NAV). If the value of each share in a fund drops below $1 US Dollar (USD), it is said to have broke the buck. Many funds came close to breaking the buck, or did so, during the financial crisis of the late 2000s.
Money market funds, which can also be called money funds, are a type of highly liquid mutual fund managed by brokerages and sometimes also banks. They are typically considered to be highly reliable, since they are limited to investments that are considered safe. In the United States, there are specific regulations in place that govern what money market fund managers can invest in. Some of the items that money market funds often invest in include Treasury bills and other supposedly reliable debt securities.
Fund managers who deal with money market accounts are expected to maintain the value of a fund, and if any dividends are earned they are typically paid back to the shareholders, sometimes as additional shares. Since these funds are not traditional deposit accounts, they are typically not guaranteed by any governmental backing and can potentially lose money. Despite the lack of any guarantees, very few funds broke the buck prior to 2008 as a result of following the set guidelines.
If a money market fund's net asset value falls below a nominal value, such as $1 USD, it has in effect broke the buck. This refers to the colloquial use of the term "bucks" to refer to dollars. There are many ways money funds can arrive in this financial situation, from mismanagement to exterior financial forces. If a large financial institution becomes insolvent, it is possible for any debts it had issued to a money fund to be written off. This type of event can result in previously safe investments becoming worthless, which in certain cases can cause the net asset value of a fund to drop below $1 USD.
Money market funds were first instituted in the United States in 1971. Prior to the financial crisis that occurred during the late 2000s, only one money fund ever broke the buck. During that financial crisis, several funds suffered from supposedly safe investments that suddenly became bad, and others were very close to breaking the buck. Despite the fact that these funds are not protected by the Federal Deposit Insurance Corporation (FDIC), the United States government offered to insure funds that were in danger.