Are Money-Market Funds Enemy #1?

: The $4 trillion money-market fund industry is the “greatest systemic risk” to the financial system, James “Jes” Staley, head of JPMorgan Chase & Co.’s investment unit, said today at the World Economic Forum in Davos, Switzerland.

Money-market funds, not banks, were responsible for the collapse of Lehman and the near bankruptcy of Bear Stearns Cos. last year, he said. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble, he said.

“The people who brought down Lehman and almost Bear Stearns weren’t the banks, they were the money funds,” Staley said at a lunch discussion hosted by Credit Suisse. “You have this huge industry with $4 trillion of capital, immediate intraday liquidity to the client who wants it with no capital behind that statement and no insurance behind that statement.”

This makes a lot of sense, and we know it’s basically true. The breaking of the buck at the Reserve Fund, when Lehman collapsed, was a key event. That being said, it’s a testament to how bad we and regulators are judging risk that before things got really bad, all of the concern was over hedge funds, and the potential for them to destroy the economy. Even after the collapse, it was hedge fund managers they brought up to Capitol Hill. Cause in their thinking money markets are conservative, and hedge funders fly around in private jets, so it’s the latter that must be problematic.

(via Alea)

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