The Money Market Fund Sector Is A $2.6 Trillion Land Mine…Don’t expect a government backstop

Tuesday, July 31, 2012
By Paul Martin

Mamta Badkar
BusinessInsider.com
July 31, 2012

While the Libor scandal has got the attention of regulators, Gillian Tett thinks America’s money market funds are the weakest link in the country’s financial system that could have major implications for global financial markets.

In a new Financial Times opinion piece, Tett points to a new Federal Reserve study that warns that the $2.6 trillion money market fund sector – funds that invest in short-term securities like U.S. treasuries, offer low returns, and are considered safe – is vulnerable to runs since investors can redeem their money whenever they want.

Tett reminds us of 2008 when a Lehman Brothers money-market fund “broke the buck” and triggered panic.

“For despite the dull-as-ditchwater reputation, the sector has an Achilles heel: unlike bank accounts, money market funds are not covered by any deposit insurance, and investors can redeem their money at will. That creates a “cliff” problem, as a recent paper* from the New York Federal Reserve says: if investors fear a fund will break the buck, they have an incentive to run, as fast as they can.

The Rest…HERE

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