The battle over what happened during the bouts of money fund bailouts escalated again yesterday as the Federal Reserve Bank of Boston released a study claiming that a number of money funds would have "broken the buck" during the latest crisis. A press release entitled, "Boston Fed Report Finds at Least 21 Money Market Mutual Funds Would Have "Broken the Buck" Absent Sponsor Support during the Financial Crisis," says, "A report released today by the Federal Reserve Bank of Boston highlights the significant role of sponsor support in maintaining the perception of stability in money market mutual funds (MMMFs). The authors focus on support observed through the recent financial crisis and itemize it in detail -- and they assert that such support has obscured the degree of credit risk that is taken by these funds. The report, "The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011," uses information gleaned from audited financial statement filings with the U.S. Securities and Exchange Commission (SEC). The authors examined these public records for 341 prime MMMFs, and provide in the report a complete data set of the direct support instances and related amounts."
The release explains, "The authors find that 78 prime MMMFs disclosed support received from their sponsors -- in the form of a cash contribution, or the purchase of securities at an amount in excess of fair market value -- during the period 2007 to 2011. Of the 78 MMMFs that received this form of sponsor support, by conservative measure at least 21 MMMFs would have "broken the buck" (meaning their net asset value per share would fall below $1) without support from sponsoring firms, parents, and affiliates. In these 21 cases the support received in a single year was significant enough relative to assets under management to show that the MMMFs would have broken the buck, absent the support. These 21 cases involve support exceeding 0.5% of the fund's assets under management.... In short, from 2007 to 2011, sponsor support was frequent, and was significant to many funds. These examined forms of support alone totaled at least $4.4 billion."
The release continues, "Support detailed in the paper was largely necessitated by the funds' holdings of defaulted structured investment vehicles (SIVs) and Lehman Brothers obligations in 2007 and 2008. But the authors note that MMMFs are still susceptible to risks related to permissible portfolio holdings that may be vulnerable to downgrades or defaults -- even subsequent to 2010 SEC rule changes. Given the credit risk that is still permitted within MMMFs, and the possibility that sponsor support might not be possible in some circumstances, the authors call the current model "concerning.""
It adds, "The report is co-authored by Steffanie Brady, Ken Anadu, and Nathaniel Cooper (Brady and Anadu of the Risk and Policy unit of the Supervision, Regulation, and Credit function at the Federal Reserve Bank of Boston; Cooper formerly of the unit and Northeastern University).... The link to the report is: http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1203.htm.... The report complements and documents the analysis and observations in public remarks by Boston Fed president Eric Rosengren, made on April 11 and June 29, 2012 (and available, respectively, on the Bank's website at http://www.bostonfed.org/news/speeches/rosengren/2012/041112/index.htm and at http://www.bostonfed.org/news/speeches/rosengren/2012/062912/index.htm.
The paper's summary says, "It is commonly noted that in the history of the Money Market Mutual Fund (MMMF) industry only two MMMFs have "broken the buck," or had the net asset value per share (NAV) at which they transact fall below $1. While this statement is true, it is useful to consider the role that non-contractual support has played in the maintenance of this strong track record. Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs. This paper presents a detailed view of the non-contractual support provided to MMMFs by their sponsors during the recent financial crisis based on an in depth review of public MMMF annual SEC financial statement filings (form N-CSR) with fiscal year-end dates falling between 2007 and 2011. According to our conservative interpretation of this data, we find that at least 21 prime MMMFs would have broken the buck absent a single identified support instance during the most recent financial crisis. Further, we identify repeat instances of support (or significant outflows) for some MMMFs during this period such that a total of at least 31 prime MMMFs would have broken the buck when considering the entirety of support activity over the full period."