The Fed's Money Market Fund Rescue

The extent of distress in Money Market Funds, which total more than $3.4 trillion, now is concernedly obvious in the latest weekly (Oct. 2nd) Federal Reserve H.4.1 Report: Factors Affecting Reserve Balances, which details the central bank's balance sheet.

A little more than two weeks after Lehman Brothers filed bankruptcy, triggering a several-day run on a number of Money Market Funds, which because of their exposure to Lehman commercial paper "broke the buck," the Fed now has extended $152.1 billion in short-term loans to facilitate a stabilization of the MMF markets, about five percent of collected MMF outstandings.

The Fed's newly established Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility has done a brisk financing business the last two weeks, allowing eligible institutions to buy troubled or illiquid commercial paper from subsidiary MMFs which the funds can then replace with better and more liquid commercial paper.

Institutions place the purchased paper as collateral with the Fed in order to borrow the money from the Fed at attractive rates. So far $152.1 billion of liquidity has flowed into the Money Market Fund universe, which largely has stemmed what could have been a debilitating run on general purpose money funds.