Although the bulk of the $2.5 trillion of money market fund assets are invested in Treasury bills, certificates of deposit and short-term commercial debt, money market funds have put $11 billion into collateralized debt obligations (CDOs) backed by subprime mortgage loans this year, Bloomberg reports.

Among those with the largest amount in CDOs are money market funds run by Bank of America, Credit Suisse, Fidelity Investments and Morgan Stanley, which collectively had more than $6 billion in such CDOs in June.

The dangers of CDOs containing subprime loans came to light in June, when two Bear Stearns hedge funds with such holdings collapsed.

It is now apparent that the funds’ manager, Ralph Cioffi, also ran $13 billion in CDOs, some of which are owned by AIM Investment Service, Putnam Investments and Wells Fargo.

Then, on Aug. 9, BNP Paribas froze withdrawals on funds containing CDOs because it couldn’t properly value them.

“This creates tremendous risk for today’s money market investors,” said Joseph Mason, a finance professor at Drexel University. “Right now, I’m not comfortable investing anything in CDOs.”

Bruce Bent, who created the first money market fund in 1970, called it “inappropriate” for any money market fund to hold subprime debt since they are designed to offer “immediate liquidity, safety and a reasonable rate of return.”

“I don’t think the typical money market investor, in his wildest dreams, would assume he has exposure to the risk of subprime CDOs,” said Satyajit Das, an author of 10 books on debt analysis. “They may be in for an unpleasant surprise.”

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