November 14, 2007 (LPAC)--Banks are now in emergency mode, pouring billions of dollars into money market funds, and absorbing losses from those funds, rather than permit investors to pull their money from those funds en masse. Currently, millions of investors-- some large institutions, but mostly average citizens-- have invested $3 trillion into U.S. money market funds, which are supposed to be ultra-conservative and safe.
Money market funds take in money from investors, investing that money into financial paper that has a maturity, on average, of 90 days or less. The invested-in financial paper must have a credit rating of AAA, and not be risky. On that basis, tens of millions of households trusted money market funds, just as they do their bank savings accounts: money market funds and bank savings accounts are the two principal ways that households save.
Over the past several years, to get higher yields, money market funds have invested their funds into primary speculative investments, such as offshore Structured Investment Vehicles (SIVs), offshore conduits, Collateralized Debt Obligations (CDOs), all of which invested their funds, in turn, into Mortgage-Backed Securities, mortgage-backed commercial paper, etc.. For a brief while, the primary speculative investment instruments, such as SIVs and conduits, carried AAA ratings. Now, many are losing money hand over fist, which losses are passed on to the money market funds.
The money market funds are supposed to pass the losses onto to the millions of investors who invested in them. This would mean losses for millions of people. However, the banks can't afford to let that happen: once people see that money market funds are not safe and sound, they would withdraw their money in droves, imploding the entire money market fund sector.
According to the New York Times Nov. 14, the Bank of America has poured $600 million into several money market funds run by its subsidiary Columbia Management, which purchased large amounts of debt issued by SIVs, which debt is now worth less than the money market funds paid for it. Credit Suisse bought $125 million in unrealized losses off the books of its money market funds. Legg Mason Securities put together a $238 million credit line, to shore up two of its money funds. There is only so long that the appearance of money market solvency, and thus 'normalcy' in the banking system, can be kept.
