Money market funds

Regulators, too, would have reason to fear the investor panic this might cause. With so much at stake, it is probably not surprising that a few sponsors of money market funds have stepped in to provide capital support if needed. Bank of America (NYSE:BAC) detailed such a step yesterday, totalling $600m for both money market and institutional funds.

The issue is the funds' exposure to commercial paper issued by structured investment vehicles - which are rapidly losing their raison d'etre. SIVs, it turns out, are exposed to a whole lot more refinancing risk than anyone supposed. And the unravelling of the SIV sector is hard to contain neatly.

That is made worse because, since SIVs do not benefit from vast back-up lines of credit, they have to move fast to sell assets if their troubles become too pronounced.

Still, while the SIV sector is under fire, the potential hit to money market funds does look like one contagion story too far. First, the exposure is small: Bank of America research estimates about 5 per cent of the assets under management of prime money market mutual funds are invested in SIVs. Second, asset managers are able to take action to ward off panic. The fact that some are taking proactive measures now actually reduces the need for a rescue plan, along the lines of a super SIV, currently being worked up by a number of banks. Third, they are benefiting from good industry trends right now, as shown by strong asset inflows.