From Megan McArdle…..

What happened last week is that one money market firm advertised its entire portfolio, including a large chunk of Lehman paper worth slightly less than 2% of the total fund assets. Spooked investors, who did not want to lose out if the fund “broke the buck” started withdrawing as fast as their little fingers could punch the buttons on their phones. Now, this money market fund had tens of billions worth of assets; if it started dumping them on the market, it would drive the price down, leaving them even less money to hand back to their shareholders. But there’s a reason investors herd in a bank run: the first people out get all their money back. The rest get trampled in the stampede. The fund–incidentally, the same company that founded the money market industry–“broke the buck”; that is, its shares became worth less than a dollar. It’s as if the value of your bank account suddenly dropped below the amount you’d put in.

This, by the way, is probably not the only fund this happened to, but it was the only fund that a) advertised its holdings and b) was not attached to an institution large enough to easily make good the loss.

Thus was touched off a general run on money market funds that held money for institutions–the kind that require buy ins of a couple million or more. Institutional managers have a strong incentive to do stupid, destructive things, as long as everyone else is doing them. It’s the same reason that IT managers used to buy IBM–not because it was necessarily the best solution, but because as long as you did it, no one could blame you when things went south. “I bought IBM!” troubled CTOs would say when the server crashed. “The whole market is down!” cry money managers when the financial system crashes.