'Money Market Substitutes' Get Hit by Subprime Woes

It is my understanding it is not mortgage paper that the MM are holding that is in trouble but AA paper for banks in their name that was being rolled every 90 days over. But since mortagages cannot be resold right now noone is willing to relend the money to the bank at AA rate. Therefore the only asset that is left to back the commercial paper the bank can no longer obtain is depreciated mortgage paper. As a for instance a German bank has losses of 4.5 billion on a default from subprime mortgage paper and may not be able to get it's commercial paper rolled over. Therefore the bank if forced cannot come up with the money to repay the commercial paper and will have to sell assets it has on hand to meet obligation which is the subprime paper. Since it is no longer at par the MM will be repaid at less than par unless the bank eats the difference.

If this were to spread to more common areas it would be an ugly scene.....

I understand the first part- this bank is having difficulty rolling paper. But their only way out of paying is bankruptcy- the bank is the credit behind the paper held by the MMF, not whatever asets the bank may hold. If the bank defaults, the MM is in trouble. But the bank can't just say- "Hey, I need a discount on that amount I owe you. At least they can't in the US.

...He also pointed to the "Sentinel" MM failure story as being false (it was not a MM fund that was having problems) to make his point. ...
two further points perhaps worth considering with Sentinel:
1) they catered to hedge funds (roosting chickens)
2) although by "objective" a short-term fund, it held many floaters (>80% of portfolio), some with maturities as long as 30+ years
as noted, hardly a MM fund.
Now seems as good a time as any to move some of my money market money around. Currently it is in the Prime at vanguard. I live in NYC, so in my tax bracket, it might make sense to park it in the New York Tax-Exempt Money Market Fund.

This is the credit breakdown:

MIG-1/SP-1+ 82.9%
A-1/P-1 12.5%
AAA/AA 4.0%
MIG2 0.0%
A 0.6%

Average Maturity 33.0 days
Average Quality MIG-1

What do you guys think? Will I run into more credit risk with these bonds? (I assume mostly munis and such)

Or should I just go with the taxable Federal Money Mkt Fund or Admiral Treasury Money Market instead?


The NY tax-exempt money market fund does have some credit risk, although, as for the VG prime money market fund, the risk should be quite low since they invest in the highest quality debt available.
If you want to truly remove credit risk, then you have to invest in debt instruments fully backed by the US government. The VG Federal Money Market fund has zero credit risk, and pays an interest rate close to what the prime money market fund pays.
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