Tuesday, August 21, 2007

Money Market Funds: infected by mortgage loans


Money market funds were invented 37 years ago to offer investors better returns than bank savings accounts while providing a high degree of safety. Most of the $2.5 trillion sitting in these funds is invested in such assets as U.S. Treasury bills, certificates of deposit and short-term commercial debt.

Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail. Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans.

CDO's are packages of bonds and loans, and almost half of all CDO's sold in the U.S. in 2006 contained subprime debt, according to a March report by Moody's Investors Service. U.S. money market funds run by Bank of America Corp., Credit Suisse Group, Fidelity Investments and Morgan Stanley held more than $6 billion of CDO's with subprime debt in June, according to fund managers and filings with the U.S. Securities and Exchange Commission. Money market funds with total assets of $300 billion have invested in subprime debt this year.

$300 billion in money market funds could be infected by CDO's. That's really sweet. No wonder there's a rush to buy T-bills

4 Comments:

Anonymous Anonymous said...

More accurately, no one knows the exact extent of the problem. CDOs are organized into tranches, and, if the banks and the rating agencies and mortgage brokers had been doing their jobs, there would be organized into safe tranches (AAA) and a wide variety of less and less safe tranches. in that safer version of reality, investors could choose their own level of risk, an d the bundled securities would connect capital markets right down to the retail level, benefiting everyone.

however, in the real reality, now everyone who owns these fucking things has to make sure all the models and data are correct as stated, and that what they have on the books is remotely like what it can sell for in the market, and is not some toxic waste backed by greed and stupidity instead of real assets.

short term, there's no market for these securities while some frantic refiguring is happening.

12:27 AM  
Anonymous Amit C said...

By speculating it to be 300 B, you put all their assets into subprime, right?

12:03 AM  
Anonymous Anonymous said...

It's worse than that. At Fidelity, for example, over 25% of the MM fund is composed of repurchase agreements with major investment banks that's collaterlized with corporate debt. America has been unwittingly financing all these leveraged buy-outs.

The whole commercial paper market has been a game of musical chairs. Each institution passes (i.e. lends) this crap from one to the next hoping they're not the one left holding it when the music stops. Well, the music stopped.

What's the value of a security there's no market for anymore? We're about to find out. And when money market funds start getting marked down 70 cents on the dollar there's going to be some unhappy people.

5:35 PM  
Blogger Adam Smith said...

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11:55 AM  

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