Since late 2008, when the $3.5 trillion money fund industry was left reeling in the wake of the Reserve Primary money market fund’s failure, a number of regulators have warned against systemic risks that institutional money market funds still pose to the financial system. In September 2008, as the tidal wave of news spread about potential exposures to Lehman Brothers, terrified money market fund investors incited an exodus from prime funds that likely would have led to many more fund failures. The Treasury Department intervened to stop the run with a full guarantee of the $1.00 net asset value of all registered money funds for a period of 12 months. Dodd-Frank makes future rescue efforts more difficult, which amplifies the importance of averting future panics.
SEC Chairwoman Mary Schapiro recognized this and has worked on additional modifications to reduce the risk of shareholder runs for several months, but in late August, as it became clear that Shapiro lacked the necessary votes for passage, a planned vote on her recommendations for additional reform was cancelled. The largest money market fund companies spent at least $16 million in the first half of 2012 to lobby against further reforms, and their efforts appear to have worked – the risk that investors could repeat the exodus of September 2008 during a crisis is largely undiminished. The Financial Stability Oversight Council or the Fed may still have something to say on the matter, but in the meantime, there are measures that investors can take on their own to reduce shareholder risk.
Some cash investors fled prime money market funds in favor of government funds to reduce risk exposure, and have remained in government funds ever since. It is important to note, however, that the panic in 2008 was not isolated to funds that held Lehman debt; most funds had been avoiding Lehman exposures for some time. The stampede for fund redemptions in 2008 highlighted the inherent unpredictability of shareholder activity – the most conservatively managed prime funds were impacted by the run, as well. Credit quality of fund holdings had little to do with interruptions in access to liquidity; redemptions were halted on all 18 of the Reserve’s money market funds in September 2008, including their government funds. Many other Treasury money market funds closed their doors to new investors in the wake of the Lehman collapse due to the precipitous drop in Treasury Bill yields. In 1994, long before the Reserve failure, the Community Bankers U.S. Government money market fund broke the $1.00 NAV. Unfortunately, it’s clear that shifting to a fund with a more conservative credit profile does not eliminate shareholder risk.
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