Credit crisis turns spotlight on money markets

Gayle B. Ronan • E-mail

"Like money in the bank" — the phrase is synonymous with safety.  But after several weeks of headlines and turmoil in the financial markets — including televised images of depositors staging an old-fashioned run on a federally insured bank — is a new saying needed or maybe a mattress with a hidden safe in its springs?

“The big financial institutions are healthy,” Treasury Secretary Henry Paulson told CNBC last week during the thick of the financial markets’ meltdown. 

And ultimately so are the bank deposits in federally insured banks, both big and small. The Federal Deposit Insurance Corp. protects depositors against losses of up to $100,000 per account in the event of a bank failure. To access more information on deposit insurance see the FDIC’s Electronic Deposit Insurance Estimator.

Though Mr. Paulson’s reassurance about the financial system was welcome, his answer, as Chris Colvin pointed out in his MSNBC.com Daily Nightly blog, did not really address reporter Steve Leisman’s question.  What he was asked was: “Are money markets safe?”

Apparently that question also did not register with most investors. For several weeks they have been pouring money into money market funds — which are not federally insured.

Assets at money market mutual funds rose by $75.35 billion to $2.777 trillion in the week ended August 21, 2007 according to the Investment Company Institute.  This established a new record.  The previous record was set a week earlier.

Leisman’s question has been on the minds of many financial professionals.  They know that money market funds hold commercial paper, a type of security seriously impacted by the financial storm.  According to ICI, money market funds hold nearly 30 percent of all outstanding commercial paper.

“At this point, advising people to ask their brokers or call their money market funds and ask what is in the portfolio is like asking for a tour of the meat packing plant — the end product is safe, but no one needs to see how it is done,” says Peter Crane, president of Crane Data LLC,  which publishes the Money Fund Intelligence newsletter.

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