I was critical of the Securities and Exchange Commission’s new rule on money market funds. To me it seemed like it was trying to fix a problem that didn’t exist, and in the process made things more complicated. For criticism to be correct, I need data. After review a paper on the Stability of Prime Money Market Mutual Funds, maybe I was wrong.
Steffanie A. Brady, Ken E. Anadu, and Nathaniel R. Cooper looked at money market funds from 2007 to 2011 for evidence that they could have “broken the buck.” The most famous instance was when the Reserve Primary Fund did the unspeakable in September 2008 because of its exposure to Lehman debt securities.
The authors were looking for instances where money market funds could have broken the buck, but the sponsor stepped in to prop up an ailing fund. Their paper presents a detailed view of the non-contractual support provided by sponsors during the recent financial crisis. They looked at public SEC financial statement filings to find evidence of problems.
They found at least 21 money market funds would have broken the buck without sponsor support during the Great Recession. They found frequent sponsor support during that period with at least $4.4 billion of support to 78 of the 341 funds reviewed.
The largest support relative to a fund’s AUM was the $336.8 million (6.3% of AUM) support for the Russell Money Market Fund.
“On September 14, 2009, the Lehman Securities were purchased by Frank Russell Company from the Fund at amortized cost of $402,764,934 plus accrued interest of $775,756.”
Perhaps money market funds are riskier than I thought. Fund sponsors have repeatedly, voluntarily stepped in to stabilize these funds. The SEC’s rule will make these money market funds less attractive as a safe haven for cash. But maybe they are not really as safe as I thought.
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