Lawrence Carrel
Money market mutual funds are supposed to be a safe place to stash your cash and get a better return than a savings bank account. But lately some investors have been questioning just how safe they really are.
While most of the nearly $3 trillion in these funds is held in things like Treasury bills and certificates of deposit, many also hold short-term commercial paper that, while highly-rated, is backed by some pretty risky assets -- including subprime mortgages. Asset-backed commercial paper, or ABCP, is typically issued by special purpose vehicles set up by hedge funds, private equity firms and investment banks. The conduits use the proceeds of this paper to buy various kinds of securities that serve as collateral. The maturities of ABCP -- up to 270 days -- are much shorter than the maturities of the assets that serve as collateral, so issuers typically rely on the proceeds of newly issued commercial paper to pay down previously issued commercial paper as it matures. This process is referred to as "rolling" the commercial paper. Rising defaults on subprime mortgages have roiled the capital markets as hedge funds and other big mortgage investors sell other assets to raise cash. As a result, ABCP programs have been receiving more scrutiny, even if the mortgages they hold aren't troubled, or they don't hold any mortgages at all.
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