Former Fidelity Investments President Robert Pozen wrote an Opinion piece for MarketWatch entitled, "What to know about how the coronavirus crisis will impact your money market fund," which tells us that "Government intervention should be enough to keep your money safe." He comments, "As the coronavirus pandemic topples stock markets, many U.S. investors have sought safety in money market funds. They may be forgetting that during the financial crisis of 2008, the net asset value of one large money market fund dropped below $1 per share. This event, called 'breaking the buck', triggered a stampede out of money market funds -- except for those investing primarily in U.S. Treasurys."
The piece asks, "Are money market funds any safer now for investors? The debt markets are being riled by the threat of defaults and illiquidity. Yet in my view, the answer is definitely yes, money market funds are safe -- not only funds investing only in U.S. government-guaranteed securities, but also funds investing in top-quality commercial paper and funds investing in top-quality municipal securities."
It continues, "On the other hand, the risks to investors in both prime- and muni money market funds are greater than those in government money market funds. The most significant risk is that several securities in the fund's portfolio may default or, more likely, drop sharply in price due to concerns about the creditworthiness of the issuer. SEC rules prohibit these money market funds from investing more than a specified percentage of their assets in the securities of any one issuer. Nevertheless, if several of a fund's largest holdings experience a sharp price drop at the same time, this could result in the fund 'breaking the buck.'"
Pozen writes, "To address this risk, the COVID-19 legislation reinstated the U.S. Treasury's authority to offer government insurance against shareholder losses in a U.S.-based money market fund. However, the new Treasury authority for money market fund insurance expires at the end of 2020. Moreover, the scope of the government insurance offered by the U.S. Treasury is limited to 'the value of a shareholder's account in the participating fund as of the close of business on the day before the announcement of the guarantee.'" (Editor's Note: We think this last statement is from the 2008-2009 Treasury Guarantee program, and don't think the current one has been activated or has had terms discussed yet.)
Finally, he adds, "In short, these extraordinary steps recently taken by the federal government should effectively protect shareholders of all types of money market funds. Under the COVID-19 legislation, the Treasury will soon offer federal insurance against losses for shareholders in money markets. The Fed has created a major facility to help money market funds sell illiquid assets for cash. And the SEC has allowed sponsors and managers of money market funds to purchase troubled or illiquid assets from their own funds."
The recent passage of the "CARES Act," also known as the "Coronavirus Aid, Relief, and Economic Security Act," lists its mission, "To provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic." Its "Section 5001," states, "Non-applicability of restrictions on ESF during national emergency. Section 131 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5236) shall not apply during the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.)."
The bill explains, "The Emergency Economic Stabilization Act of 2008" (12 U.S.C 5236) previously mentioned states, "The Secretary shall reimburse the Exchange Stabilization Fund established under section 5302 of title 31 for any funds that are used for the Treasury Money Market Funds Guaranty Program for the United States money market mutual fund industry, from funds under this chapter.... The Secretary is prohibited from using the Exchange Stabilization Fund for the establishment of any future guaranty programs for the United States money market mutual fund industry."
For more see these Crane Data News articles: Treasury to Temporarily Guarantee Money Mkt Funds; Fed Adds MMLF (3/19/20), 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), "Money Market Funds Tackle 'Exuberant Irrationality'" Says S&P (10/1/08), Treasury Guarantee Program for Money Funds Live, Fee Is One Bps (9/29/08).
In other news, Crane Data has moved the dates for its "big show" Money Fund Symposium from June to August due to the coronavirus pandemic and widespread corporate travel bans. Crane's Money Fund Symposium is now scheduled for August 24-26, 2020, at the Hyatt Regency Minneapolis. (It had been scheduled for June 24-26.) We'll continue to watch events carefully in coming weeks, and we'll be prepared to move again (perhaps to Nov. 18-20), to cancel, and/or to webcast if the pandemic persists. In the meantime, our planning goes on.
The latest agenda is available and registrations are still being taken at: www.moneyfundsymposium.com. (Registrations for the June show have been transferred to the new August dates, and June hotel reservations were cancelled if you made them through our room block.) Full refunds or credit will be given for anyone who needs to cancel or isn't sure about travelling, and we'll keep you updated on our plans.
We're also making preparations for our next European Money Fund Symposium, which is scheduled for Sept. 17-18, 2020, in Paris, France. But we'll be watching travel restrictions to Europe closely in coming months (and may have to shift or cancel this too). Let us know if you'd like more details on any of our events, and we hope to see you in Minneapolis (or Paris) late this summer!
Finally, mark your calendars for next year's Money Fund University, which will be Jan. 21-22, 2021, in Pittsburgh, Pa, and our next Bond Fund Symposium, which is scheduled for March 25-26, 2021 in Newport Beach, Calif. Watch for details in coming months, and let us know if you're interested in sponsoring or speaking, and contact us if you have any feedback or questions. Attendees to MFU and Crane Data subscribers may access the latest recordings, Powerpoints and binder materials here: https://cranedata.com/publications/mfuniversity-2020.
