Friday, September 18, 2009

Guarantee Program for Money Market Funds ends today

Little noticed today was the U.S. government step to end the program under which they guaranteed money market funds. One year ago, the Reserve Primary Fund (a large money market fund) who held significant positions in commercial paper issued by the recently bankrupt Lehman Brothers was forced to "break the buck"-- meaning their money market positions were no longer worth the customary $1 for each $1 invested.

As a result of the unusual step by Reserve Primary Fund, money market holders began a massive withdrawal of funds as they fled into US T-Bills. Business felt this very quickly, as money market funds are a chief purchaser of commercial paper issued by US industry to fund short-term cash needs. To stop money from continuing to flee money market funds, and attempt to stabilize the commercial paper market, the US Treasury pledged $50 billion from the Exchange Stabilization Fund to back their guarantee of money market funds.

We can remember many conversations with clients as to why their money market fund investments were safe given this government guarantee.

What a difference a year makes! The expiration of the government guarantee for money market funds is about a page 3 story at best. Government has concluded (and we would concur) that holders of money market funds no longer feel the need for a government guarantee to protect their investment.

We can only hope that as other government support for markets is withdrawn it will be the non-event that this was. We still have significant concern that may not be the case.