Financial Armageddon reached into the world of money market mutual funds on Tuesday night. The once- $62 billion Reserve Primary Fund did the "unthinkable" and closed with a net asset value of 97 cents per share. It also froze investor’s money for seven days. That's called "breaking the buck." It's not supposed to happen with money market mutual funds that are sold as cash equivalents. There was a hope that the Reserve Fund would be an anomaly. It wasn't. Yesterday, Putnam was forced to freeze withdrawals from its high yield Prime Money Market Fund and there was a similar run on a Bank of New York Mellon Corp money market. Clearly, any high yielding fund without deep pockets was going to be in for trouble.
The pull-out from money market funds was mostly by institutional investors, the "smart money." According to Crane's Data, investors pulled a record $89.2 billion from money-market funds on Wednesday. Most of that money was withdrawn by institutional investors, supposedly the "smart money." Clearly, Treasury felt the urgency to stop the panic run on money market funds before individual investors lost money. So for the next year, the treasury will insure the holdings of both retail and institutional money market mutual funds.
In its press release, the Treasury said "This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss." It also says investors will be notified if their fund triggers the insurance program.
Now banks are worried they might lose deposits to money market accounts. The Treasury plan has no limit on the insurance, while FDIC insured deposits are limited to $100,000.
Like others problems in the financial markets, the run on money market funds, while shocking, shouldn't have been a complete surprise. While technically, only 1 money market fund had ever "broken the buck," in reality, many funds would have broken the buck if they didn't have deep pockets to draw on to keep that from happening. As I reported in August, during the past year, at least 17 money market management firms quietly unwound their riskier investments to prevent breaking the buck, including Bank of America, Wells Fargo, and Suntrust. Perhaps investors would have better understood the risk if those moves were disclosed in bold next to the yield in money market fund advertising.
Comments
I do business at Schwab and have my sweep money in a MMF that holds only US government paper to avoid toxic waste. I take a big penalty in interest income for doing that, and would switch to another, higher-yielding MMF if it were US-insured.
I called Schwab several times, most recently yesterday (9/25) and was told that the government insurance thing has not yet taken effect.
Yet there are many references, including yours above, that imply that it has. What gives?
I guess we did not need to know the risk.
Now I know I had good reason to be suspicious about the sudden drop in money market yields at the beginning of this year.