Morgan Stanley admitted yesterday that its own investors had become so panicky last month, they had withdrawn $46 billion (£30 billion) from the US bank’s money market funds.

The rush of redemptions forced the bank, led by John Mack and valued in the stock market at just $15 billion, to buy up other assets in order to absorb the wave of demands.

Savers became nervous about money market funds after the collapse of Lehman Brothers triggered a surge of redemptions that overwhelmed fund managers. US authorities were forced to step in and inject capital into the market to underpin confidence in the securities and prevent a run on other funds.

In a filing to the Securities and Exchange Commission, the financial regulator, Morgan Stanley said that it had had to buy $23 billion worth of liquid assets such as commercial paper and US Treasury bonds to keep itself afloat amid the rush of withdrawals.

The filing came as the US Treasury began transferring $125 billion of taxpayer funds to buy stakes in nine American banks as part of the $700 billion Wall Street bailout recently approved by Washington. While the nine will receive their share of the rescue money this week, second-tier lenders and regional banks are battling to be named on the select list of those also included in the bailout package.

Of the first group of nine recipients, Bank of America will get $25 billion, of which $10 billion has been set aside for its new acquisition, Merrill Lynch. Citigroup, JPMorgan Chase and Wells Fargo will also receive $25 billion each. Goldman Sachs and Morgan Stanley will both benefit by $10 billion, while Bank of New York will receive up to $3 billion. The final $2 billion to $3 billion might go to Wachovia.

The Treasury has now started apportioning funds to the second-round applicants, believed to total 22 smaller banks. Wall Street analysts believe that the Treasury will continue to leverage the lure of the bailout to force ailing banks into consolidation. It is widely thought that National City, the mortgage lender, was refused a capital injection unless it agreed to a distressed takeover by PNC.

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