Following days of concern about illiquidity in the commercial paper markets and outflows from Prime money market funds, the U.S. Treasury sought approval from Congress to launch a program to guarantee money market mutual funds for the second time in history. The Federal Reserve also stepped in with another support program. While details are scant, they should be forthcoming in coming days, and this, along with the launch of the new MMLF lending facility, should put an end to the budding run. The Wall Street Journal broke the news in its brief, "Treasury Department Asks Congress to Let It Backstop Money Markets." Subtitled, "Officials want to relieve strains in financial sector seen as safe place to park cash temporarily," they explain, "The Treasury Department is seeking authority from Congress to temporarily backstop money markets amid intense strains in the financial sector -- as part of a broader fiscal package to bolster the economy due to the coronavirus pandemic. In a memo outlining the administration's proposal, The Treasury Department said it is asking lawmakers to temporarily suspend restrictions on its Exchange Stabilization Fund so it can develop guarantee programs for the money-market mutual fund industry." (See also the Fed's MMLF statement here.)
The Journal piece states, "Money-market funds are investments designed to be a safe place to park cash temporarily with little risk of taking a loss. The program would last until the White House terminates the national state of emergency President Trump declared on March 13, 2020, according to the memo viewed by The Wall Street Journal. In 2008, the Treasury intervened to guarantee money-market funds after the collapse of Lehman Brothers spooked investors, who pulled out more than $200 billion from the funds over two days. The U.S. backstop calmed investors, who generally consider money-market funds as safe as cash, but an uproar over Wall Street bailouts led Congress in 2010 to prohibit Treasury from issuing such guarantees in the future."
The Washington Post, in its "Senate passes bill" news update, comments, "The White House is also looking for Congress to allow it to temporarily backstop money market mutual funds, a sign that government officials are worried that an investor panic could lead to a run on these funds. A similar structure was used during the Great Recession, but lawmakers had sought to block its future use."
The Treasury memo, in a section on "Appropriation to the Exchange Stabilization Fund for Specified Uses," contains a section to "Temporarily Permit Use of the Exchange Stabilization Fund to Guarantee Money Market Mutual Funds."
It is meant to, "Temporarily suspend the statutory limitation on the use of the Exchange Stabilization Fund (Section 131 of the Emergency Economic Stabilization Act of 2008) for guarantee programs for the United States money market mutual fund industry." The memo adds a, "Sunset date: Terminate authority to establish any new MMMF guarantee program upon the conclusion of the National Emergency Concerning the Coronavirus Disease 2019 (COVID-19) Outbreak declared by the President on March 13, 2020."
Bloomberg, who also broke the news, writes in their article, "Treasury Proposes to Guarantee Money Funds in Stimulus," that "The U.S. Treasury Department proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News. In a proposal sent to lawmakers early Wednesday, the department laid out plans to temporarily permit use of its exchange stabilization fund to guarantee money markets, according to the document."
They quote, "Peter Crane, president of money fund tracking firm Crane Data LLC, said outflows from institutional funds this week were putting those vehicles under stress as investors rush into cash and government debt holdings. A Treasury guarantee is 'probably not necessary today, but who knows tomorrow,' Crane said. 'A blanket guarantee is sometimes the only thing that can stop these runs.'"
Bloomberg explains, "A slew of actions from the Federal Reserve earlier this week have helped ease the squeeze for funding that had reached levels not seen since 2008. But Treasury backstopping money market mutual funds, that have trillions in assets, could be essential if conditions worsen.... Reforms to the industry passed in 2016 forced a tiering of investments into funds with differing levels of safety and segregated retail customers from institutional. Much of the industry's assets are now held in Treasury-only funds that remain stable." Only [prime] vehicles are coming under stress, Crane said."
They add, "The Treasury took a similar step during the global financial crisis when a run on money funds helped cripple credit markets. Under Secretary Henry Paulson, the department guaranteed more than $3 trillion of fund holdings against losses for almost a year using its Exchange Stabilization Fund. In the backlash against government bailouts, Congress subsequently stripped Treasury’s ability to repeat that program."
Finally, the piece says, "While the 2016 reforms may have made funds safer, some of the new rules may still make some funds vulnerable to runs. For example, when funds drop below certain liquidity thresholds, they may impose restrictions or extra fees on withdrawals. In an unsettled market, that could incentivize investors to pull out money before gates and fees are imposed.
Also, the New York Times writes that the "Fed will offer emergency loans to money market mutual funds." They tell us, "The Federal Reserve said late Wednesday night that it would offer emergency loans to money market mutual funds, its latest in a series of steps to keep the financial system functioning and prop up the economy as it spirals toward recession during the coronavirus pandemic. Officials said they would establish a so-called Money Market Mutual Fund Liquidity Facility, which would be backed by $10 billion from the Treasury Department. That facility joins a similar lending program for banks, established earlier this week."
The Fed's statement says, "The Federal Reserve Board on Wednesday broadened its program of support for the flow of credit to households and businesses by taking steps to enhance the liquidity and functioning of crucial money markets. Through the establishment of a Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. Money market funds are common investment tools for families, businesses, and a range of companies. The MMLF will assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy."
In related news, ignites wrote, "Fed Acts to Thwart Possible Run on Prime Money Funds," which tells us, "The Federal Reserve on Tuesday morning responded to growing fears that businesses and retail investors strapped by the coronavirus pandemic would stampede out of prime money market funds. Amid bank analyst warnings of a potential run on such funds, the Fed announced it had established a Commercial Paper Funding Facility to 'provide a liquidity backstop' to companies that issue commercial paper for their financing needs. The Fed also established a similar commercial paper facility in October 2008, at the height of the financial crisis. It was wound down about two years later."
They also write, "Retail and institutional prime money funds represented about $797 billion in combined assets as of March 11, according to Investment Company Institute data. Those funds bled more than $54 billion over the past week, including $17 billion on Monday, Crane Data reports. The bulk of those redemptions were from institutional prime funds. The outflows are 'big but not near record levels or worrisome,' [writes] Peter Crane.... The redemptions would be 'problematic if they accelerate,' he adds, 'but I'd expect the Fed's actions to stop any budding run.' Prime money funds held about $237 billion in commercial paper as of the end of February, ICI compilations of SEC data show. That represents 21% of the $1.1 trillion in outstanding commercial paper."
For more on the previous version of the Treasury Guarantee Program for Money Funds, see these Crane Data News stories: "Money Fund Outflows Minimal Following Treasury Guarantee Expiration" (9/22/09), "Treasury Guarantee Ending Friday, But Plenty of Support Remains" (9/17/09), "Dechert on Suspending Redemptions Under Treasury Guarantee" (6/11/09), "Government Money Funds Ditch Treasury Guarantee Writes ignites.com" (4/17/09), "Largest Money Funds All Renew Treasury Guarantee for Prime Funds" (4/15/09), "Fidelity, Federated, AIM Renew Treasury Guarantee; Drop Govt Funds?" (4/14/09), "An(other) Offer Funds Couldn't Refuse: All Renew Treasury Guarantee" (12/7/08), "JPMorgan, UBS Add Treasury Guarantee; 9 of 11 Largest Now Signed" (10/3/08), "Treasury Guarantee Program for Money Funds Live, Fee Is One Bps" (9/29/08).
