Reserve Primary Fund reported losses on Lehman bonds
Event triggered massive shift to Treasury bills
T-bill yields fell to lowest levels since Pearl Harbor
Money market funds experienced bank-run like panic
Investors had previously viewed money market funds as risk-free
Media struggled to report gravity without causing more panic
Opinion
The market reaction reveals catastrophic flaws in the financial system's structure. The assumption that money market funds were completely safe led to dangerous levels of complacency, while the sudden realization of risk triggered a systemic panic that threatened the entire financial system. Most concerning is how a seemingly technical event in one fund could cascade into a system-wide crisis, demonstrating the fragile nature of modern financial markets.
Core Sell Point
The sudden collapse of confidence in money market funds, previously considered almost as safe as cash, exposed dangerous systemic vulnerabilities that could trigger similar devastating chain reactions in future crises.
This was the scariest day of the entire crisis, when the modern, highly sophisticated money market suffered what was in effect a catastrophic old-fashioned bank run. The trigger was the apparently technical news that the Reserve Primary Fund, a money market mutual fund, had had to take a loss thanks to its holdings of Lehman bonds. But as investors had treated the fund as though a loss was impossible, this triggered panic. Reporting on it, our problem was to explain how grave the situation was, but avoid being alarmist and create a self-fulfilling prophecy. As the day wore on and money kept pouring into the safety of Treasury bills and out of almost everything else, it grew difficult to keep count of the historic records that were falling. Our main story reported that investors were so scared that they had pushed T-bill yields to their lowest since Pearl Harbor.
