Subprime Money Market Fund ? ... Toxicity spreads

Read all about it... The credit mess, courtesy of the bulge banks and brokers is fully upon us. The EU Bank (ECB) has injected more than $130 b into the EU banking system as emergency loans- this happens because the balance of loans which are tallied up every night becomes dangerously out of whack. The US Federal Bank may not far behind. France's largest bank shut down more than $2 b in its funds.

In the US, it started with the subprime mortgages- the so-called toxic wastes. Put another way, loans made to people who did not have collateral. Simple as that. First, was the New Century Mortgage, next was the three large funds at Bear Stearns- we cautioned that this "bears watching" in a post earlier this summer. Then, came the not-so-subprime, Alt-A, American Home Mortgage, which went belly up only last week. This was the wake-up call, as it meant, the subprime was not quite then subprime. It had spread to all sectors.

Now, comes the scary news that money market funds (MMF), to most people equivalent to bank savings accounts, could in danger (read Wall Street article, "Money Funds May Hold Subprime, Too", August 9, 2007). This is because, MMF hold commerical-papers, which are also backed at times by mortgage-backed bonds, so they are exposed to subprime.

But, we argue that this is just the beginning. As, James Melcher of Balestra Captial is quoted in a New York Times article (August 10, 2007) “It’s like popcorn in a kettle,” “First you have one or two pops, then it turns into a cacophony." There you have it. It may start with the subprime as the first corn to pop, but soon others will follow. This party has just begun. The night is still young. This baby has legs... you add yours here!