Why Money Market Funds Stopped Lending One of the reasons the credit market has frozen is that money market mutual funds are not investing in "commercial paper" — that is, they're not making the short-term loans to businesses that those firms need to operate.
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Why Money Market Funds Stopped Lending

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Why Money Market Funds Stopped Lending

Why Money Market Funds Stopped Lending

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There's a paradox at the heart of the financial crisis. On one hand, there is money out there, and there are people who need to borrow it, but they're not always coming together. NPR's David Kestenbaum talked to some lenders about why they're giving borrowers the cold shoulder.

DAVID KESTENBAUM: Some parts of the credit market are totally frozen. This week, my colleague Adam Davidson visited the trading floor of Tradition Asiel Securities, which helps banks get sometimes billion-dollar loans. On a board, there was a list of big famous banks looking to borrow money.

ADAM DAVIDSON: Joe Cannamo (ph). Cannomo, give me a quick count. How many?

Unidentified Men: 45.

DAVIDSON: 45 banks have called you and said, we need money.

Unidentified Man: Right.

DAVIDSON: And how many do you see on the right?

Unidentified Man: Zero.

DAVIDSON: So, 45 banks need money, zero banks got money.

KESTENBAUM: So, what is going one here? Well, that scene is part of what is called the commercial paper market. It's a way for banks and large companies to borrow money temporarily just to keep daily operations going.

And something like 40 percent of the money they borrow comes from one place, money market mutual funds, which are supposed to be very, very low-risk investments. You put in some money, and you get a little interest back on it. You are never supposed to lose money. The money market funds are like huge giants. They control over $3 trillion of investment, and when they shift their weight, the world feels it. And right now, they are shifting their weight slightly away from the commercial paper market.

Deborah Cunningham is the chief investment officer at Federated Investors, which manages $270 billion worth of money market investments. I asked why they weren't lending more of it on the commercial paper market. Why weren't they helping us all out here? And she said, hey, it's not my decision. It's the shareholders, the people who are trusting them to invest their money safely, pension funds or your local bank.

Ms. DEBORAH CUNNINGHAM (Chief Investment Officer, Federated Investors): We talk to them on a regular basis, and I have not heard any single one of them ever say that they want more commercial paper.

(Soundbite of laughter)

Ms. CUNNINGHAM: In fact, it's quite the opposite. They're asking, what's your exposure? Are you increasing it? Are you decreasing it? You know, can you post it so that we can view it on a daily basis?

KESTENBAUM: So, what would convince you or what would convince, you know, money market mutual fund managers in general to go back into commercial paper?

Ms. CUNNINGHAM: I think probably time and additional confidence and maybe a turn in market sentiment from what's still pretty negative to something that's a little bit more positive or optimistic.

KESTENBAUM: But, you know, one of the things that would make people more optimistic is if people could get money in the commercial paper market, but you're not going to put...

Ms. CUNNINGHAM: It is a bit of a vicious cycle. You're right.

(Soundbite of laughter)

KESTENBAUM: Part of this is very rational fear. Cathy Roy, a chief investment officer at Calvert, manages about a billion and a half dollars in money market funds. Her job is to worry about whether the loans she makes, the bonds she buys, will get paid back.

Ms. CATHY ROY (Chief Investment Officer, Calvert): We've had things disappear in one day, companies, banks. So, you know, one day, people thought Lehman might be OK, and then they came in Monday morning and saw that it filed for bankruptcy. If you had bought overnight commercial paper on Friday, you would have been out of luck.

KESTENBAUM: In fact, she says, even before the crisis, Calvert didn't really invest in commercial paper. People like Cathy Roy also have to be prepared if you and I or the pension funds get scared and want to pull out of our money market funds. They have to be able to give us that money back. That's hard if they're holding a lot of commercial paper that they can't sell because the market is frozen. They have to be prepared for a kind of run on the bank.

Ms. ROY: It becomes, you know, sort of a death spiral. It's the same thing with a fund or anything else. If there's a run on the fund, and people are demanding their money, you have to make sure you have sufficient cash to meet those redemptions.

KESTENBAUM: Investors have pulled $100 billion dollars out of money market accounts since September. The government has tried to stop the bleeding. Its offered insurance for money market funds, just like it ensures bank deposits. But it hasn't really helped lending.

Ms. ROY: I don't think the commercial paper market is headed for the graveyard. At some point, people come back into the market and say, these are good companies. They have solid earnings. They have solid management.

KESTENBAUM: At some point, but not today. The government this past week announced it would step into the void and lend money itself on the commercial paper market. David Kestenbaum, NPR News.

SEABROOK: There's much more about the financial crisis on a blog and a podcast called Planet Money. It's at npr.org.

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