What a week! Last Sunday night's bankruptcy of Lehman Brothers triggered concerns about money fund exposure and questions over The Reserve Funds' ability to protect downgraded CP and MTN holdings in its Primary Fund. While all of the five other fund advisors with Lehman protected their holdings, Reserve's too little, too late support statement failed to slow a run on the fund. On Tuesday, this triggered just the second "breaking of the buck" since Reserve Primary, the first money fund ever, was launched in 1971. (Community Bankers U.S. Government Money Market Fund, which was liquidated for $0.96 in 1994 due to soured derivative holdings, was the first to "break the buck".)
This shocking reminder that it is possible to lose money in a money market mutual fund led to a full-scale run on all Reserve funds, and heavy redemption pressures on "Prime" or general purpose money market funds. Investors moved into Treasury funds and Treasury bills, and the commercial paper and other non-Treasury money markets seized up under the selling pressure. Events quickly became dire as Putnam Prime Money Market Institutional halted redemptions, and as outflows grew to almost $200 billion, or almost 7% of money fund assets.
A handful of other funds were also pushed to the brink. Even the largest, most conservatively managed funds were beginning to worry about the dual stress of heavy redemptions and sinking valuations on their NAVs. Though no other money funds broke the buck, some others were forced to "redeem-in-kind" and erroneous reports circulated about other "money funds," which were enhanced cash or government pools, breaking-the-buck. Moody's downgraded Utendahl's UCM Institutional Money Market Fund which had halted redemptions.
Friday the U.S. Treasury stopped the run with the announcement of a plan that would insure money market funds' $1.00 NAVs. President Bush said money market mutual funds are a "key element of America's financial system," and added, "For every dollar invested in an insured fund, you will be able to take a dollar out." The insurance will cover Prime and Tax-Free money funds and will kick in when a fund drops below $1.00. At that point, the fund will be seized and investors will be repaid their full $1.00 NAV, similar to FDIC insurance. We expect the cost of the policies to be from 1 to 5 basis points (0.01%-0.05%) and expect all funds to participate.
