JP Morgan Chase's Staley Says Money Funds Biggest Systemic Risk

Head of JP Morgan Chase's investment unit, James Staley, says that money market funds are the biggest risk to the financial system now. With over $4 trillion parked in money markets, they are lightly regulated and hold no reserves should something go wrong.

He is quoted in a Bloomberg article as saying:

“What keeps me up at night most of anything we do at JPMorgan Asset Management is the money-market fund space,” Staley said at a discussion hosted today by Credit Suisse Group AG in Davos, Switzerland. “One of the things that has to come out and get a lot more attention and discussion is how do we take the systemic risk posed by money funds out of the system?”

Last September, the collapse of one of the largest money market funds, the Prime Reserve fund led to a run on money markets that was only stopped when the Fed stepped in with guarantees (what hasn't the Fed guaranteed).

Now, many are reexaming money market funds to determine just how much of a problem they pose. Money market funds are comprised of highly rated short term debt as well as cash to meet any redmpetions and ensure liquidity. They were considered a very safe investment vehicle.

But with a wave of bankruptcies predicted, even high quality, short term corporate debt may be risky. As we've learned, the ratings agencies have their own agendas and can't be fully trusted. So even if they rate a bond highly, it is not necessarily safe. The sudden collapse of Lehman Bros. led to the fall of the Prime Reserve Fund.

The Group of 30, an independent policy organization whose members include Larry Summers and Treasury Secretary Tim Geithner have proposed either forcing money market funds to either adopt banking industry controls (reserve funds, more regulation) or give up their goal of maintaining a $1 NAV. In essence, accepting regulation and reserves would make money markets into bank deposits, while not accepting would turn them into bond funds.

What does this mean for the average investor? Be cautious and investigate your money market holding. If you have free cash from your brokerage account invested in a money market fund you may want to take another look and feel comfortable with what the funds are invested. Money market fund yields continue to fall, making them a relatively poor investment compared to FDIC money market and savings rates. And unlike FDIC insured bank accounts, your money markets can lose value.