Ratings agency Moody’s doesn’t seem all that convinced that the Wall Street bailout will do the job. Bloomberg reported this morning that a senior Moody’s executive told a conference call overnight that the $US700 billion plan to buy troubled assets may only provide short-term relief for borrowers aiming to tap the credit markets.

Bloomberg quoted Moody’s Chief Credit Officer, Richard Cantor as saying that “These latest government actions may prevent an extreme credit crunch, but we still expect credit conditions will tighten further for corporate borrowers over the near term.”

That’s hardly a ringing endorsement for the plan, which is still mired in a Washington swamp of conflicts of interest, political expediency and greed. An overshadowed part of last Friday’s drama was the announcement that the $US3.4 trillion money market fund sector would be backed by the Fed.

On Friday the US Treasury announced the establishment of a temporary guarantee program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

The assets of the Exchange Stabilization Fund up to $50 billion to guarantee the payment from the funds for the next year, according to Friday’s statement from the Treasury. This will work in tandem with the Fed’s moves.

Well, the money market funds will need that support after a report in the Financial Times this morning that US investors withdrew an estimated $US197 billion from money market funds last week.

The problem was set off by one fund “breaking the buck” by being forced to pay out investors 97 cents in the dollar (for every dollar invested) after it lost hundreds of millions of dollars in bonds issued by the collapsed Lehman Brothers. Other funds reported similar problems, or were closed to prevent redemptions to prevent being forced to sell investments into poorly priced and illiquid markets where big losses could have been taken.

Hence the Fed support which will effectively finance the purchase of asset backed paper by banks and other financial groups from money market funds: the Fed money will be effectively passed through to the fund concerned as a cheap rate of interest (but no doubt with some fat fees clipped along the way).

The FT said the huge outflow, which was close to 6% of all funds in the $US3.4 billion industry, “marked a new development ” in a situation that could see funds forced to sell their securities into illiquid bond markets.

The FT said the single biggest outflow was from institutional prime (non-government) funds, which had outflows of $US130 billion last Wednesday alone, according to iMoneyNet, which tracks the industry. Total industry net outflows added up to $US197 billion over the whole week.

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW