Last week I explained what a money market fund is. This week, I explain what they invest in. The money market is the market for short-term debt, which companies use to smooth out mismatches in their cash flows:
How close was the financial system to melting down?
22 Sep 2008 02:49 pm
I do not work for the Treasury, the Fed, or an investment house, so take this for what it’s worth. But my understanding is really, frighteningly close. Remember the monster that lived under your bed when you were five? Actually, mine lived in the closet. But that’s not the point. The point is, that monster was loose on the financial markets last week.
- Commercial paper: unsecured debt issued by corporations, with a duration of under 270 days, which avoids certain kinds of SEC paperwork.
- Repos: aka Repurchase agreements. Basically, the holder of a security sells that security to someone with an agreement to buy it back at a later date, usually measured in days rather than months.
- Banker’s agreements: basically, a short-term financial instrument created by a non-financial firm, but guaranteed by a bank.
- CD’s: You know what these are; you probably have one. CD’s are what paleolibertarians would like the entire banking system to look like: you loan money at a guaranteed interest rate for a set period of time.