MONEY MARKET MUTUAL FUNDS and Sheila Bair (1).docx - MONEY...

This preview shows page 1 - 2 out of 3 pages.

MONEY MARKET MUTUAL FUNDS – Liquidity Crisis in 2008 This is an extract from “Bull By the Horns”, by Sheila Bair Sheila Bair was formerly the Chair of the FDIC. The FDIC is the Federal Deposit Insurance Corporation. If any bank in the United States becomes insolvent, the FDIC must compensate the bank’s customers for their losses (up to the limit of $250,000). Therefore the FDIC naturally would like to minimise the chance that banks will go bankrupt. From time to time, the FDIC sends bank examiners to check up on each bank. During the Global Financial Crisis, Money Market Mutual Funds faced a liquidity crisis. The Secretary of the Treasury, Hank Paulson, decided to help out the MMMFs by providing a guarantee. You should read the extract from his book, “On the Brink”, which explains Paulson’s decisions. As soon as Sheila Bair heard about this guarantee, she worried about the impact on banks. August 2007 Page 73-74 explains the links between the subprime debt market (for home loans), the money market funds, and banks. Though our regulatory colleagues viewed us as being alarmist over the growing subprime crisis, in fact, even I did not fully appreciate at the end of 2007 how deeply some large financial institutions were exposed to mortgage-related losses, how badly some of them had been managed, and how cataclysmic the consequences would be. My first clue was the structured investment vehicle (SIV) fiasco, which occurred in August 2007. That was when the canary in the coal mine started gasping for breath. A number of large financial institutions, led by Citigroup, started having trouble accessing enough funding to support their mortgages and Mortgage Backed Securities investments. Citi and a few other large banks had set up

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture