Money Market Mess Ends In GE Board Seat For SEC's Schapiro

NEW YORK (TheStreet) -- As Securities and Exchange Commission head, Mary Schapiro couldn't fix the $2.7 trillion money market system. Now she'll be joining it.

Schapiro will become a member of General Electric's Board of Directors as an independent director. Her nomination stands out as an ironic end to the former regulator's quest to reform money market funds -- a crucial if little followed cog in the U.S. financial system.

Money market funds buy short-term debt such as commercial paper from highly rated companies like General Electric, in an effort to return a yield slightly beyond the savings rate.

Instead of successfully enacting provisions that could help money markets withstand a credit crunch, Schapiro is becoming a director for an industrial conglomerate that was nearly felled in a 2008 money market freeze by its financial services arm, GE Capital.

A cynical take on the newest spin in the revolving door between Washington regulatory circles and Wall Street might be that Schapiro's role at GE is a buffer for the company in the event of another money market freeze, given a lack of prudential post-crisis reform.

GE, as it turns out, had the most on the line when the system nearly collapsed in 2008 and put corporations that relied on overnight funding, such as commercial paper, into a state of crisis.

Money markets seized up with the failure of investment bank Lehman Brothers in September of 2008. After Lehman collapsed, a major money market fund, the Primary Reserve Fund, wrote down the value of its Lehman holdings to zero causing its assets fall to less than $1.00 a share in value, meaning it had "broken the buck."

Investors quickly fled money market funds putting major players in short-term debt markets, including banks and asset managers such as Fidelity, Vanguard and Charles Schwab , in retreat. The withdrawals put issuers relying on short-term debt markets, such as GE, CIT Group and even corporations as ordinary as McDonald's , into a severe cash crunch.