This shadow system includes structured investment vehicles (SIVs), conduits, money market funds, hedge funds, and investment banks.

Money market funds perverse incentives to take on excessive risk remain largely intact.

Of course, it was bailed out along with all the other money market funds.

This, they believe, is better than the current typical default option of putting individuals money into money market funds.

These six international banks alone accounted for nearly 20 of the prime money market funds value.

Money market funds from the United States are returning, albeit cautiously, to resume funding of European bank debt.

In 2012, American prime money market funds, which buy bank and corporate debt, were worth nearly 1.5 trillion.

Money Market Resistance

There are also substantial investments by American money market funds in instruments issued by some of the exposed banks.

Remaking the Money Market

But the 2008 financial crisis showed that, when push comes to shove, the government will backstop money market funds nonetheless.

The money market funds that are perceived to be the safest, for example, are those that hold only US government debt.

Many small savers place their savings in so called money market funds that pay a premium over ordinary federally insured deposits.

And, if retail investors saw their money market funds values declining from the amount that they had invested, and if they knew that they could not get all of their money back immediately, the funds would become less attractive.

The sub prime contamination of money market funds would prove disastrous, with consequences far beyond what we have seen up to now.

Often, the default option is unsuitable for most individuals for instance, it typically allocates all savings to low return money market funds.

All money market funds then became suspect, and many investors fled withdrawing one third of a trillion dollars in a single week.

Its lobbyists told the SEC commissioners that current rules already did everything possible to ensure safety that retail investors want money market funds steady value that change would hurt all investors and that the recent Dodd Frank financial reform legislation disrupts regulators ability to bail out money market funds next time.

Money market funds take excess cash from investors and use it to purchase short term IOUs from businesses, banks, and other financial institutions.

If money market funds had to maintain capital reserves, industry representatives argued, yields to investors would decline and the industry s profits would suffer.

Since much of the money market funds assets are IOUs from the world s biggest banks, the withdrawals weakened the already shaky global banking system.

Pension funds, mutual funds, and investment banks are all long in the stock market.

There were similar fears recently when it became known that US based money market funds had lent heavily to European banks. And some leading US banks also rely on money market funding here, too, the shadows and the banks have aligned interests.

Playing the market with the company's money?

But it may be worse coordinating everyone into risky asset investments may be more dangerous than coordinating them into boring investments like money market funds.

The proposal would also have required that money market funds hold back a fraction of some redemptions, thereby making investors take some risk that funds might not have complete transactional liquidity if their investments weakened.

The Federal Reserve, seeking to stem the growing panic and stabilize the American and international banking system, promptly guaranteed the value of all money market funds.

For example, households and investment managers, reluctant to keep money in safe money market funds, instead seek to invest in securities with longer maturities and higher credit risk, so long as they offer extra yield.

Market neutral hedge funds turned out not to be market neutral and had to be unwound.

By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s.

But inflows through money market funds are not so bad for banks, which get the cash without having to set aside reserves or pay for deposit insurance.

I made some money off funds. I can do this.

They'll allocate the funds anyway. It's not their personal money.

Sami made some money from a black market business.

Today s capital markets raise money for governments, corporate clients, and individual customers, manage pension funds investments, and bet on the level of interest rates or the stock market.

The crisis affects non Europeans too for example, concern over the exposure of American banks and money market funds to troubled European banks is harming US financial markets.

There is not yet a Volcker Rule (limiting proprietary trading by banks), the rules for derivatives are still a work in progress, and money market funds remain unreformed.

The rejected proposals are thus good policy money market funds should be made safer via capital requirements and liquidity restrictions because they already receive a de facto government guarantee.

One might think that banks would counter balance the mutual fund industry s lobbying efforts, because the likely effect of forcing money market funds to pay for more of their systemic costs would be to expand funds flowing directly to banks.

The US government is now insuring, lending or spending over 10 trillion from guaranteeing money market funds to the AIG bailout to the Fed s swap lines supporting foreign central banks.

Sunstein and Thaler would have the employer choose a default option that works for most people, such as 60 in equities, 30 in bonds, and 10 in money market funds.

Today, that market is dead and the money must go elsewhere.

Hedge funds first made money betting that the crisis would worsen, but then lost money betting on a eurozone breakup.

The funds now rely heavily on investment from pension funds, and on money borrowed from banks and other non private sources.

The more choices available, the more likely they were to put all their money in pure money market accounts.