U.S. money market fund guarantee, R.I.P.
After today, money market mutual fund accounts no longer will have the backing of the U.S. Treasury. Uncle Sam is betting that fund investors won’t care -- or won’t notice.
The Treasury is allowing its year-old guarantee of money fund assets to expire, in one of the first big reversals of the government’s involvement to stem the financial crisis.
The unprecedented backstop was put in place a year ago after one of the nation’s biggest money funds, the Reserve Fund, suffered a run on assets because of losses tied to Lehman Bros. IOUs that it owned.
The government’s blanket guarantee of fund accounts had the desired effect: After a record outflow of $120 billion in the week ended Sept. 23, fund assets quickly stabilized. Confident investors soon began adding more cash to the funds -- even though the Treasury’s guarantee only covered industry assets as of Sept. 18.
After hitting a record high of $3.85 trillion in January money fund assets have been gradually declining, reaching $3.45 trillion this week. But the slide more likely is the result of investors pulling cash to invest in riskier assets (i.e., stocks and bonds) than because they’re worried about the U.S. guarantee expiring.
With the Federal Reserve committed to holding short-term interest rates near zero indefinitely, the funds are earning little on the short-term corporate and government debt they buy. Their investors, in turn, are earning next to nothing, even though most funds are waiving all or most of their management fees: The average taxable money fund pays an annualized yield of just 0.06%, according to IMoneyNet Inc.
Pete Crane, editor of the Money Fund Intelligence newsletter, notes that even though the guarantee program is disappearing many of the debt securities that money funds own retain some kind of government or Federal Reserve backstop, thanks to the alphabet soup of lending programs put in place amid the credit crisis last fall.
Under one program, for example, the Fed would finance bank purchases of certain money fund assets if the funds needed to sell quickly to meet redemptions.
The bigger issue on the horizon: proposals to revamp the basic structure of money funds, to make another emergency situation less likely. The Securities and Exchange Commission is sorting through a raft of ideas aimed at boosting money fund safety. The President’s Working Group on Financial Markets will issue its own proposals by Dec. 1.
The most hotly debated question: Should the funds be forced to float their share prices rather than maintain the $1-a-share constant value that has been the industry hallmark for nearly 40 years?
A year ago it was Reserve Fund’s warning that it would "break the buck" because of heavy redemptions that triggered the run on other funds. In theory, if money fund investors knew their principal value could fluctuate slightly from day to day they couldn’t be stunned by another Reserve Fund-like episode.
Not surprisingly, however, the money fund industry is loathe to give up the accounting mechanics that allow funds to commit to a constant $1 share value, even though they can’t explicitly guarantee that they'll honor that price if you want your money back.
Stable pricing provides "enormous benefits to money market fund investors," said Paul Schott Stevens, head of the Investment Company Institute, the trade group for mutual funds. That's true. But for millions of people and companies, stable pricing also is critical for keeping money funds competitive with guaranteed bank deposits. Take away the constant share value and I'd bet many money fund investors would head straight for the bank.
-- Tom Petruno
Photo: The Treasury building in Washington. Credit: Chip Somodevilla / Getty Images