Earlier this year, ICI, the national association for investment companies, released its Report of the Money Market Working Group (http://www.ici.org/pdf/ppr_09_mmwg.pdf)
with recommendations for new regulatory and oversight standards for money market funds. Retaining the basic framework for money market funds while strengthening regulation of these important investment products is key. The Obama Administration recognized the importance of striking this balance in its recent white paper (http://www.financialstability.gov/docs/regs/FinalReport_web.pdf) on financial services regulatory reform. It advised the SEC and the President's Working Group on Financial Markets to carefully consider ways to mitigate any "potential adverse effects of such a stronger regulatory framework,” such as investor flight into less regulated products.

ICI’s money market fund members are implementing the ICI Money Market Working Group’s changes voluntarily until the SEC finalizes its proposed rules to strengthen money market funds. Investors and markets will be best served by reforms that strengthen money market funds, not by measures that would fundamentally alter them and jeopardize this crucial source of financial and cash management. For more information on recent policy developments in this area, visit: http://www.ici.org/mmfs

Thanks for the opportunity to comment — Ianthe Zabel, ICI media relations

This crisis is about excess credit, both its issuance and its application. Money Market Funds have played a pivotal role in the extension of excessive credit. The extension of that credit was undertaken without adequate regard of inherent risk; consider Bear Stearns.

The recurring problem in all of this is that there exists a huge amount of debt that cannot be serviced. The yield curve is artificially low and savers continue to be penalized. Yet, it is savings that will ultimately lead to a platform for prosperity, debt won't get you there!

But bear in mind that money market funds represent a vast pool of money hungry for yield; and that "wherever the corpse is, there will the vultures gather." The SIVs–not much worse than CDOs–were successfully able to tap the money market fund pool, and it was a small mercy that they blew up relatively early, allowing the mess to be cleaned up before the broader market blew up (although MMF sponsors quietly dropped billions of dollars into the MMFs to make up for SIV losses.)

The other area to watch would be repos–Ginger Yellow is correct, the MMFs are deep into the repo market, and in some cases (like Treasury repos) practically *are* the repo market. One area of concern is "other" repos–repurchase agreements backed by unknown collateral, certainly including instruments that do not meet the eligibility for MMFs. The repo is considered eligible based on the short-term credit rating of the counterparty rather than the collateral, but that's small comfort, as top-rated companies (like Lehman) have been going bust in this downturn.

Further regulation is clearly called for, the only question is of urgency.

In "House of Cards" William Cohan (too briefly) recaps the role that two money market funds played in Bear Stearns' collapse:

"For instance, Fidelity Investments, the mutual fund giant based in Boston, had been lending Bear Stearns $6 billion a day, every day. But that week, Fidelity pulled its overnight funding. Federated Investors, another large mutual fund company, based in Pittsburgh, provided Bear with $4.5 billion in overnight funding on Monday, and then nothing the rest of the week. ("House of Cards," p. 33)

The current 7-day yield of Fidelity's Cash Reserves MMF ($138bb in assets) is 0.34%; the YTD return is 0.54%; the expense ratio is 0.39%.

Lenders like Fido & Federated are not getting their shareholders an appropriate return for the risks they absorb.

But the repo market is money market funds. Not entirely, of course – there's plenty of interbank repo and private bank-central bank repo. But money market funds are among the biggest providers of liquidity to banks via repo.