Today's Wall Street Journal writes "Some U.S. Money Funds Exposed to European Banks". The article says, "Some of the largest U.S. money-market funds hold billions of dollars in securities issued by Spanish and Italian banks, highlighting the risk that further deterioration in Europe could have broad impact. Many European banks have long been dependent on investors for funding because their deposit base is too small relative to their loans outstanding. U.S. money-market funds have been a major source of that cash. Money-market funds in the U.S. hold about $400 billion of their $2.8 trillion in assets in foreign banks, according to J.P. Morgan."

The Journal piece says, "Among the major U.S. funds, Fidelity Cash Reserves, the largest retail money fund, held $4.2 billion, or 3.5% of its assets, in certificates of deposit issued by Spanish bank Banco Bilbao Vizcaya Argentaria SA, or BBVA, and Italian banks UniCredit SpA and Intesa Sanpaolo SpA as of Oct. 31. Schwab Cash Reserves, the third-largest fund, had $1.5 billion in securities from Banco Santander SA, BBVA, UniCredit and Intesa. Western Asset Money Market Fund, owned by asset manager Legg Mason Inc., the ninth-largest fund, holds $848 million in Banco Santander, BBVA and Intesa. The banks remain highly rated by the major bond-rating firms. Analysts said the bigger risks in Spain are smaller savings banks, not the big commercial firms."

The piece adds, "The money funds that hold their debt, meanwhile, remain in solid shape, said analysts. They hold short-term commercial paper and certificates of deposit, among other assets, and the short maturities reduce the risk of default."

Legg Mason spokeswoman Mary Athridge comments, "We are comfortable with the position; it is relatively small, the maturities are short, we are comfortable with the creditworthiness of the institutions, and that is augmented by the fact that there are liquidity facilities available from the [European Union] and [European Central Bank]. We will continue to carefully monitor the situation." Fidelity spokesman Adam Banker told the Journal, "We can tell you that we are very comfortable with all of our funds holdings in foreign banks."

The article quotes Peter Crane, president of Crane Data LLC, a money-market-fund research firm, "The funds may be backing away from European banks, but it's not a real threat to money-market investors in the U.S.." The Journal says, "The problems at two large Irish banks in recent weeks and the subsequent bailout of Ireland's financial system have rekindled fears that European banks are in poor health. Investors have been wary of European banks for at least the past year because, like Lehman, they depend heavily on wholesale commercial borrowing.... Money-market funds stopped buying securities issued by Irish banks in the past two to three months, Mr. Crane said."

Finally, the WSJ piece adds, "In the wake of the Reserve Primary Fund debacle, new money-market rules were put in place to reduce systemic risk. Funds are now required to hold 30% of their assets in securities that mature in seven days or less. Regulators also placed limits on credit quality, to ensure that money-fund managers hold only the most-liquid assets. The new rules haven't been tested during a major global selloff, but analysts said they should help money funds weather the failure of a large institution much more easily than in 2008."

Note that the Journal article references last month's portfolio holdings, the majority of which have already matured. November 30 holdings won't be published until December 7th. Portfolio holdings of the largest money market funds are now available to subscribers of Crane Data's Money Fund Wisdom database query website. E-mail Pete to request a look at the most recent holdings.

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