EBay Inc 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.

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.

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.


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.

Cheyne Finance LLC, a SIV run by British hedge fund Cheyne Capital Management Ltd., had $145 million of its commercial paper in the Barclays-run money market master portfolio at midyear. Since then, Cheyne Finance has liquidated assets and wound down operations just weeks after its AAA-rated ratings were affirmed.

Michael Ehrlich, a finance professor at New Jersey Institute of Technology, said money market funds have sought out low-grade assets with AAA-ratings to give them a competitive edge over rivals when yields on safer bonds were near historic lows.

SIVs fund themselves by selling commercial paper and medium-term notes. The proceeds are then used to invest in assets such as subprime mortgages that are given to people with weak credit.

It is unlikely PayPal customers, or other money market investors, read the fine print of a prospectus and know how their cash is invested, said Steven Davidoff, a law professor at Wayne State University who studies capital markets.

PayPal handled $23.05 billion in total payment volume during the first half of 2007. Among U.S. and British online shoppers, one in three uses the electronic payment system.

Since the end of 2001, assets in the PayPal Money Market Fund have grown more than 10-fold to $932.6 million, as of June 30, according to filings with the U.S. Securities and Exchange Commission.

The PayPal fund's performance corresponds directly to the performance of the master portfolio, the regulatory filings show. The portfolio's net assets increased $18.6 billion during the first half of this year, largely from contributions to the master fund.