Tax Exempt Money Funds Sheltered From Ambac, MBIA Downgrades. Concerns have escalated in the municipal bond market over the possible downgrade of bond insurers Ambac and MBIA, which, until recently insured as much as half of all municipal debt issuance (now about 1/3 -- see article). As we noted in December, some have speculated that the $470 billion municipal money fund market, via their tender option bond and variable-rate demand note holdings, may be adversely impacted by this turmoil. Muni funds have been taking steps to extricate themselves -- "putting" back TOBs and VRDNs to dealers and seeking amendments to liquidity provisions to exclude any reliance on the insurers -- but funds appear immune from any serious fallout for several reasons. Money funds don't require a AAA rating; they merely need a "First Tier" (top short-term) rating (A-1, P-1). Contrary to rumors, funds also don't need to act following any downgrades (save a default), they just cease buying new issuance. Plus, tax-free money funds tend to be "retail" money (62%), which is much slower to react to market concerns. Finally, money funds have multiple layers of protections via high quality requirements, assuring that underlying collateral too is of the highest quality, and via ultra-short maturities and extreme diversity. (See Bloomberg's "Ambac's Insurance Unit Cut to AA From AAA by Fitch Ratings".)

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