Money Market Mayhem

Is it over the top to be predicting the end of the financial world?  I would have thought so two months ago

Last week there was a run on money market funds: According to AP. investors pulled $224 billionin the seven-day period ended Thursday. On Wednesday alone, about $89 billion was taken out, and another $56 billion was withdrawn on Thursday  The industry has a total asset base of $3 trillion according to that AP article.

Money market assets are constantly rolled over in the commercial paper market, providing the short-term working capital that AAA-credits like GE and IBM need to make payroll.  The Journal :

Without [money market] funds participation, the $1.7 trillion commercial-paper market, which finances automakers lending arms or banks credit-card units, faced higher costs. The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve, the largest weekly decline since December.

Without commercial paper, factories would have to shut down, people would lose their jobs and there would be an effect on the real economy, says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group.

It seems this may have scared the Feds more than anything to date. Instantly, Paulson offered deposit insurance on money market assets in order to prevent further flight.

This may have been a big reason why Paulson explained to lawmakers that we’re literally maybe days away from a complete meltdown of our financial system. with all the implications here at home and globally. (Hat tip CR )

In all the talk about the mother-of-all-bailouts. no one seems to be mentioning that Treasury has committed yet more taxpayer dollars to insure risky assets.  And he did it up to $50 billion per fund .  I havent had time to dig in, but I wonder how that would work.  So if there is a run on assets in any money fund, whatever cash investors arent able to pull out will be backstopped by Treasury?

While the move is stabilizing short-term (i.e. Friday), it may be destabilizing long-term (the next few weeks).  Folks with money in FDIC-insured banks may feel they can go shopping for money market yields now that such funds come with their own guarantee.  That could cause capital to bleed off the balance sheets of banks that sorely need it.

Any fire Paulson puts out seems to ignite another.