EBay customers' cash linked to risky assets

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - EBay Inc (EBAY.O) customers who park extra cash in a nearly $1 billion PayPal money market fund are exposed to the same type of assets targeted for an emergency bailout by the largest U.S. banks, regulatory filings show.

PayPal Money Market Fund, whose popularity has mushroomed with online consumers, is invested in a portfolio that contains structured investment vehicles, or SIVs, linked to troubled subprime loans and other debt.

The risk surrounding these illiquid assets has forced the largest U.S. banks to attempt to create a roughly $80 billion rescue fund to prevent SIV assets from plummeting in value.

The PayPal fund was No. 2 among 248 first-tier retail funds over the past five years as of September 30, according to iMoneyNet. Many other money market funds are also exposed to risky assets in the hunt for better returns, experts said.

The PayPal fund demonstrates the reach of complex securities packaged by large banks such as Citigroup (C.N).

SIVs are created to capitalize on the differences in yields between risky subprime loans, for example, and short-term debt like commercial paper.

PayPal's money market fund is a feeder fund that invests all of its assets in a $26 billion master portfolio run by Barclays Global Fund Advisors, a unit of Britain's third-largest bank Barclays Plc (BARC.L).

A Barclays spokesman said the fund only provides performance data to investors.

PayPal spokeswoman Amanda Pires said Barclays has a strong track record in managing the money market fund. "We continue to be confident in their abilities to manage the fund going forward," Pires said.

PayPal allows consumers to send and receive payments online.

Between transactions, money held by PayPal on behalf of U.S. consumers can be deposited in federally-insured bank accounts or put in the money market fund that generated a 4.88 percent return last year. Consumers make the decision.

EBay-owned PayPal advertises the money market fund as a high quality investment run by experts. It also notes that consumers can lose money, unlike at an insured bank account.

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At midyear, commercial paper accounted for $11.1 billion, or 43.4 percent, of the Barclays' master portfolio's assets. Investments in the portfolio include Citigroup-sponsored SIVs such as Sedna Finance Inc., Sigma Finance Inc. and Five Finance Inc.

Since the end of June, though, the market for commercial paper has dried up, forcing some SIVs to liquidate assets at steep discounts.