Are Money Market Funds Safe?

http://news.yahoo.com/s/ft/20080124/bs_ft/fto012420081806104743;_ylt=AsExbMm7k5ZPWyOvPPCLNfn2ULEF
Uncertainty over the fate of the embattled bond insurance industry has in recent months caused some sleepless nights for US money market fund managers.

For decades, money market funds have bought municipal bonds and, more recently, structured finance securities that have been insured by companies such as MBIA, Ambac, FGIC and SCA.

"The potential problem of the money market funds is what is really scaring people now," said one senior investment banker on Thursday.

One senior regulator said on Thursday: "In the old days, what we had to worry about was the idea of runs on banks in terms of retail deposits. But there is a prospect that we could see a run centred around the money market funds of the type we have not seen before - this is generating a lot of concern."

If there were widespread losses in money market funds, policymakers fear the political heat will ratchet up as retail investors start screaming and, worse, it could precipitate a widespread withdrawal of cash from money market funds, which could cripple the entire short-term funding market.

The wave of selling from Mr Shachat and other such investors has already pushed prices for insured securities much lower than those for comparable uninsured securities. Mr Shachat says this has created a "two-tiered market" in which yields for insured securities are up to 350 basis points higher than those for uninsured securities - in a dramatic reversal of conventional pricing.

As this last paragraph points out spreads have already widened trading as if these things are unwrapped but more downgrades / bad news for the monolines could cause panicky selling among the money market fund managers causing the spread to become much wider and break the buck on many market funds causing even more selling. The panic this could cause, which this news story alludes to, could have a catastrophic domino impact on our financial system.

In early December I moved all of personal and funds cash out of high yielding money market funds into low yield short term treasury funds. Better safe than sorry.