For me, the auction rate security problem was the cause of many sleepless nights. In the middle of February, my broker suddenly let me know that all of my cash which he had advised me to move into auction rate securities over the last several years, was illiquid until further notice. He told me that the auctions had failed and that I would be getting higher rates to compensate me for my loss of liquidity. He could not assure me when I would get out of these bonds which led to many sleepless nights as I needed the liquidity.

As the months rolled by, the excuses mounted, as did the obvious and clear indicators of impropriety on the parts of all of invvestment banks (see some of the earlier acticles posted by me and others on BestCashCow.com). Little by little, one by one, many of these things got called away. It started with the municipal and state issues that did not want to, or could not, pay the heavy default rates, and earlier this month, some of the major financial institutions that use auction rate preferreds to leverage their portfolios, including Nuveen, finally gave into the court of public opinion and got rid of theirs.

I understand that Pimco and Blackrock still have not agreed to refinance or refund the holders of their crooked issues. Folks at these organizations should be ashamed that they are continuing to force investors to be illiquid so that they can get higher returns. I believe that they soon will come under pressure to get rid of their auction rate preferreds, leaving these instruments to be a remnant from 2008.

The business model of leveraging credit upon credit has failed. It wasn't a Bear Stearns model, it was an industry. There were many culprits, banks without the intellectual capital to grow the business of the basis of investment banking or trading like Goldman, Morgan Stanley or JP Morgan, that just leveraged their balance sheet and kept leveraging and leverage. A crazy credit environment, a housing bubble and a strong economy all contributed to the environment. But, when you build with leverage on leverage, it doesn't take too much to bring down the house.

The house is falling now. These banks are down 10% every day. The model has failed and there is nothing left. This will continue until we see a major failure.

I believe that Citi will be bailed out by some middle eastern prince or sovereign wealth fund. I am less certain of Lehman, Merrill and Wachovia. I think that one of these banks will fail and fail soon.

However, I could be wrong so I wouldn't dream of shorting one of these.

For those with too much money to run around and try to open FDIC-insured accounts at all of the highest-paying online savings accounts, money market accounts are the best way to protect your money. These funds are not foolproof and in a real economic crisis where the underlying assets decline in value dramatically or default, money market funds could and have lost value.

Currently, the best money market rates on this site are paying just under 3%.

I have a friend who is convinced that we are headed towards a credit crisis of epic proportions and who is willing to get a lower return by investing in so-called US government money market funds. These are money market funds that invest only in US government securities and therefore have all of their assets backed by the full faith and credit of the US government. They are presumably still safer than (or at least as safe as) municipal money market funds discussed on this website, but have a higher return (offset, at least to some degree, by the absence of the positive municipal tax attributes).

Currently, I understand that the the best rate of fthe US government money market funds is approximately 2%.

My friend recently discovered that these funds aren't as safe as he had thought when he opened the prospectus for a Western US government money market fund that he had invested in. It turned out that this fund, which was being hawked by certain large investment banking firms, has large exposure to government agencies such as Freddie Mac, Fannie Mae and even Sallie Mae.

Why get 2% return to take risk that is probably as great as those taken in a standard money market fund?

If you invest in a US government money market fund, you should be especially careful in the current environment to invest only in a fund that buys US Treasuries, not these risky agency bonds.