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Biggest Outflow From Money Markets Since Lehman

Money markets had their biggest outflows since the collapse of Lehman Brothersas panicked investors worried about a U.S. debt downgrade and sliding stock market.

In the week ending August 3, $70 billion was pulled from money markets, the biggest redemption since the nearly $140 billion pulled during the height of Lehman's collapse at the end of 2008, according to EPFR Global, an asset allocation tracking firm.

"Lehman money market funds' outflow was driven entirely by commercial paper and other non-government security outflows reflecting extreme corporate credit crunch," wrote Michael Hartnett, Bank of America Merrill Lynch global chief equity strategist. "This week’s MMF outflows were caused by redemptions of very short-term government securities which accounted for almost half of outflows (meaning) more sovereign fear this time."

Congress passed a two-step plan Monday to raise the debt ceiling , taking the bipartisan battle literally down to the wire. Investors are still waiting to see whether the plan is enough for Standard & Poor's to keep the U.S. AAA rating. Bonds for Italy and Spain have plummeted this week as investors await some sort of bond-buying plan from the European Central Bank, similar to what was seen from the U.S. during the Lehman crisis.

"Major fear of a market meltdown and the government downgrade/default possibility really scared the daylights out of a lot of people," said Anthony Scaramucci, managing partner of SkyBridge Capital.

Investors fled other risky assets as outflows from equities numbered $11.2 billion. Commodities received record inflows, according to EPFR, with most of that going into gold .

BNY Mellon said this week that it would begin charging a fee of 0.13 percentage point on certain large accounts, adding to some of the uneasiness of keeping most of your short-term money with a large depositor, investors said.

"Money-marketsare not cash," said Mike Khouw, senior equity derivatives trader at Cantor Fitzgerald. "They are very short-dated paper, they are a source of liquidity and not the same as cash. Cash must be kept somewhere, and wherever it is there may be risks: a bank may fail or if you keep it in or under your mattress, perhaps your house burns down."

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On Aug 5, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Steve Grasso owns (AMD); Steve Grasso owns (ASTM); Steve Grasso owns (BA); Steve Grasso owns (BAC); Steve Grasso owns (C); Steve Grasso owns (D); Steve Grasso owns (JPM); Steve Grasso owns (LIT); Steve Grasso owns (LPX); Steve Grasso owns (LVS); Steve Grasso owns (MAR); Steve Grasso owns (MHY); Steve Grasso owns (NDAQ); Steve Grasso owns (PFE); Steve Grasso owns (PRST); Steve Grasso owns (UAL); Steve Grasso owns (XHB); Steve Grasso owns (XLB); Steve Grasso owns (XLI)

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