(Washington, D.C. : Right Commentary): The “Reserve Primary Fund”, just saw its shares fall below $1 a share. For all intensive purposes - this means that the money market fund has collapsed. This is the first, and perhaps most cataclysmic implosion following the wake of Lehman Brother’s collapse Monday morning.

The Reserve Primary Fund, managed by the Reserve Management corporation, the pioneering firm that essentially “invented” the idea of money-market funds, saw its bellweather fund implode as part of the continuing ripples through the markets and holders of Lehman Brothers commercial paper.

This is the first time this has happened to a money market fund in fifteen years. The firm alleged to have had almost $800 million in Lehman notes and commercial paper, now valued at $0 this morning with Lehman Brother’s filing of bankruptcy. This is only the second money market fund in US history to “break the buck” (fall below a dollar per share).

What the Reserve Management Corporation does is essentially help banks and businesses who have large sums of cash put that cash to work for them allowing them to leverage idle capital without having to manage it closely. These money market funds offer higher returns than traditional savings deposits and are largely considered to be low risk. Some money market funds operated by The Reserve are FDIC insured, thus, the collapse of this fund should not necessarily be equated with a belief that money you may have in a money-market fund is at risk. FDIC insured deposits are handled by a different function by The Reserve. (See this link here to understand how this firm managed FDIC sweeps separately from its other mutual fund activities.)

The Reserve company is a highly specialized niche corporation - primarily working with banks and very high-value investment portfolios - to try and put large cash sums to work in a simple and easy manner (from the perspective of small and medium-sized banks). In 2007, the The Reserve stated that it had over 120 billion dollars under its funds, 40 billion of which was FDIC insured or in FDIC sweep programs. To give you a sense of perspective, Templeton Funds, a very popular and easily recognized fund, has about 2.5 trillion dollars under its management. While perhaps small when compared that way, The Reserve’s fund FDIC portfolio is roughly the same size as the budge for the Department of Homeland Security. The other portion, the 120B, is roughly the size of last year’s supplement budget for the war in Iraq and Afghanistan.

What this means for the markets is its starting to show the complexities of the interdependence that occurred in how brokerage houses like Lehman Brothers sold the mortgage paper they originated and held. Because it was often difficult to fully understand the underlying asset profile, this paper is flying around in various derivative investments - ones that are thought to be relatively “safe” and insulated… until it explodes… like it did with Lehman Brothers yesterday.

I suspect as these banks and brokerages labor under the stress - various fund managers are scrambling to find out where their exposure is and by how much.

In response to the precipitous drop today - The Reserve announced there will be a seven day halt on any further redemptions of the RFIXX fund classes.

Stopping further contagion in the market is likely to be the primary goal of the Fed and the Treasury over the next few days. While we have to go through the process of unwinding the Lehman investments, they will seek to limit its immediate impact across the banking system. Today at the White House, the President met behind closed doors with both Bernanke and Paulson to discuss the situation. Originally, the President was supposed to make a brief address to reporters, however, shortly before the scheduled meeting time - the White House informed the Press Corps it would not make a statement in order to reduce its impact on the markets.

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