[NVDave]

No, it wasn’t “engineered” or set up. The explanation for the collapse of the Reserve Primary Fund was rather simple. Here’s the executive summary:

The Reserve Primary Fund was a money market fund that was used by broker/dealers/hedge funds as a money market fund. They owned paper from a large number of banks and financial institutions as the basis of the Primary Fund. When Lehman tipped over, they declared the $785 million in Lehman paper to be “worthless,” which causes the NAV of the Reserve Fund to fall below $1.00/share, or in street lingo “break the buck.”

Suddenly, people realized that after 40 years or so of growing to think of money market funds as being “safe as cash,” they were not, and that the widening gyre on Wall Street was breaking a LOT of assumptions about how the debt markets worked. If money market funds were no longer free of exposure to liquidity risk, then nothing was. A stampede ensued to start pulling money out of money market funds.

Now, the way these fund work is that they have a nice cushion of cash, but that they maintain a regularly rolling ladder of short-term debt paper.

Have a look at the portfolio of the Reserve Primary Fund in the report below and you’ll see what I mean. See how short-dated those bonds are? They’re rolling 10’s to 100’s of millions of any particular type of paper in a month.

http://www.reservefunds.com/pdfs/pgtannual.pdf

Ah, but if suddenly everyone wants to cash out at once... well then, the fund is sunk. They would have to sell into a crashing market, with low return of capital because no one wants the stuff. The investors would be taking some serious losses. And that would hold true for most all money market funds, not just Reserve’s.

On that week in September, we came within a few hours of complete melt-down of the markets in the US. There was no enough cash or “slack” in the system to allow the redemption of that much money in so short a time. As the demand for cash-outs would have increased, the liquidity risk would have multiplied in most all instruments, which would have spread the failure out beyond just the debt markets to all other markets - in effect, re-creating the crash of 1907 in some aspects.

[Zeneta]

I agree

The MM crises was real and would have had profound effects.

I find it curious that only one of many Reserve MM funds “Broke the Buck”.

Do you think they rolled ALL of there Lehman holdings into one fund ?

Losing 1 percent on cash is a really big deal.

I'm curious as to how much cross investment in money markets is really going on.

If there is any uncertainty in these investments among the Banks and their counter parties, we should see it in the TED Spread.

Best of luck

[groanup]

A couple of other things to add to your very insightful post. The auction rate market went no bid overnight. That meant that billions of dollars of short term loans would have to be paid back in just a few weeks instead of a few years.

Also, Lehman brothers was one of the biggest commercial paper hangers on Wall Street. They placed more CP daily than almost any other firm. Suddenly that conduit was closed. So when the outstanding CP came due Lehman wasn't there to roll it. A lot of stuff happened very quickly and can be called a perfect storm of defaults.

[OafOfOffice]

On that week in September, we came within a few hours of complete melt-down of the markets in the US. There was no enough cash or “slack” in the system to allow the redemption of that much money in so short a time.

So what is your take on this article? Is this new rule to stop this from happening again?

[malkee]

In other words, should we pull our money out of money markets while we still can, or sit tight?

[Eagles6]

So it appears that it was more of a perfect storm for the dems and one world commies. A crisis that couldn't be allowed to go to waste.

Thanks all.