Moody's joined S&P and Fitch in downgrading leading municipal bond insurers MBIA and Ambac from its former AAA rating late last week. While tax-exempt money market funds have been bracing for and dealing with bond insurers losing top ratings for months now, the action still should cause some turmoil and consternation among fund managers. As with previous market events, however, most of the risk will be pushed away from money funds and towards other guarantors, this time brokerage firms lending their liquidity to tender-option bonds and variable rate demand notes.

Though we think it's minimal, we'll be researching the potential threat to funds via exposure to MBIA and Ambac more thoroughly in coming days. While money funds continue reducing their exposure, initial indications show that reliance on muni bond insurers has decreased dramatically in 2008. One of the few firms to disclose their monoline insurer exposure, Federated Investors, shows an average holding of 8.2% backed by MBIA Insurance Corp. and an average of 4.2% backed by AMBAC Assurance Corp as of April 30, 2008 across all their tax-exempt money funds. Federated also shows growing allocations to new AAA raters, such as Berkshire Hathaway Assurance Corp.. Last year, before concerns surfaced about municipal bond insurers surfaced, over half of all municipal debt was backed by insurance.

Here we list the 10 Largest Tax Exempt Money Funds (as of 5/31/08), which represent $148 billion of the $500 billion total (444 funds) tracked by our Money Fund Intelligence. These include (with NASD ticker symbol and assets in millions): Vanguard Tax Exempt MMF (VMSXX) <f:vmsxx) $23,557; `Fidelity Municipal MM Fund (FTEXX) $22,550; Merrill Lynch Instit Tax Exempt (MLEXX) $18,851; JPMorgan Tax Free MM Instit (JTFXX) $16,669; Fidelity Instit MM: Tax Exempt I (FTCXX) $11,990; Morgan Stanley Active As Tax-Free (AATXX) $11,712; Goldman Sachs FSq T-F MMF In (FTXXX) $11,271; Merrill Lynch CMA Tax Exempt (CMAXX) $10,801; Western Asset Municipal MM (TFMXX) $10,350; and Federated Tax-Free Obligs IS (TBIXX) $10,242.

We also list the Top-Yielding Tax Exempt Money Funds. These include (with 7-day yield as of May 31): `Alpine Municipal MMF Y (AMUXX) 2.19%; Dreyfus Basic NJ Muni MMF (DBJXX) 2.05%; Lehman Brothers Nat Muni MF Re (LBMXX) 2.02%; USAA Tax Exempt MMF (USEXX) 2.02%; Reserve Interstate Tax-Ex Inst (RIFXX) 2.01%; Reserve Interstate Tax-Ex Liq I (RIEXX) 1.99%; Federated Municipal Obligs IS (MOFXX) 1.97%; Marshall Tax-Free MMF I (MFIXX) 1.97%; `Columbia Municipal Res Z (CRZXX) 1.92%; and Columbia Municipal Res Capital (CAFXX) 1.92%.

Additional coverage includes: Bloomberg's "Insured Short-Term Muni Bonds Surge as High as 9%" and MarketWatch's "Bond insurer downgrades reignite write-down fears".

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