U.S. money funds seen at risk from Europe's debt storm

Sun Nov 20, 2011 7:19am EST
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By Mark Felsenthal

WASHINGTON (Reuters) - When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never "break the buck," Washington rushed to limit the damage.

But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry.

"We've done a lot to prepare the banking sector," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Wednesday. "I'm less confident about the money market funds and their ability to weather major problems at European institutions."

Senior U.S. officials are alarmed by the deepening of the European debt crisis. Its spread to Italy, the euro zone's third-biggest economy, is seen as inevitably leading to spillovers across the Atlantic, in part through the holdings of money market funds of European securities.

Many investors believe money funds are as safe as lower-yielding bank accounts even though it is common knowledge that that they are not backed by the federal insurance that protects bank deposits.

During the chaos of 2008, dozens of money funds struggled to maintain $1 per share, but only one, Reserve Primary Fund, reported a net asset value below that level.

Less well known, and of concern to U.S. officials, is that the money funds cannot count on the protection measures that were pulled together to help them in 2008.

NO EASY OPTIONS   Continued...