Financial Crisis During 2008 Hit The Economy, People Panicked

Ewelina Cachro Professor Bateman Fin 320 3 November 2014 Assignment 2 When the financial crisis during 2008 hit the economy, people panicked. In an attempt to stabilize the market, the government took action. The various actions taken in 2008 by the Department of the Treasury and the Federal Reserve Bank, as well as the new regulations proposed and implemented by the Securities and Exchange Commission, were generated to reduce and mitigate the systemic risk created by the Money Market Mutual Funds. These actions and regulations, as well as the systemic risk created, will be addressed during the upcoming paragraphs. Money Market Mutual Funds are investments whose purpose is to provide investors with a safe place to invest. They are†¦show more content†¦It did not matter what type of security it was; the crisis affected the entire market. However, different classes of assets are affected in different ways. To figure out the systemic risk of a particular industry, security, or portfolio, and to see how that systemic risk compares to the overall market’s systemic risk, investors and others use beta. A large financial firm presents systemic risks due to its â€Å"interconnectedness, leverage, and its tendency to finance long-term assets with short-term debt.† The systemic risk associated with Money Market Mutual Funds, became glaringly obvious when Reserve Primary Fund, a MMMF, had â€Å"broken the buck†. This drop in value of shares from $1.00 to $0.97 spread panic to other MMMFs and created the systemic risk that â€Å"the failure of a single entity†¦can cause a cascading failure† of the entire financial system. Another systemic risk posed by MMMF is that associated with the withdrawals by investors from MMMFs that would lead to a freezing of the markets. This was especially prominent in the short-term investment markets. When $200 billion were withdrawn from â€Å"prime MMMFs†, the short-term interest rates immediately spiked. This spike in short-term interest rates posed another systemic risk in that these interest rates affect the entire mar ket and not just one industry or entity. Another systemic risk issue that arises from MMMFs stems from the very essence of these instruments. MMMFs attract risk-adverse