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September 30, 2013

Money market investors balk at reforms

For years, the leanest manufacturers have relied on “just in time” shipments of supplies from all around the globe, sometimes to the point that parts go straight from the loading dock to the assembly line.

Companies no longer waste money funding expensive stockpiles, but they are vulnerable to supply chain disruptions like the Japanese tsunami in 2011. As the supply of parts dried up following the disaster, Japanese carmakers in the US slashed production and the Federal Reserve blamed the crisis for setting back the economic recovery.

Corporations, government and investment firms have established the same kind of practices in finance, too, and one of the most important suppliers of just-in-time finance, the multi-trillion dollar money market fund industry, is urgently in need of reform. The bankruptcy of Lehman Brothers in 2008 was the earthquake that showed the modern financial supply chain is dangerously fragile.

In the US alone, more than 60m retail investors, companies and other institutions have invested $2.6tn in money market funds (MMFs). This is a giant pool of money that gets lent out at short durations, in the commercial paper market where companies borrow to cover routine expenses like payrolls, to municipalities who borrow to cover seasonal shortfalls in tax revenues, and in the repo market where hedge funds and others finance big trading bets.”


Read full Financial Times article here

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