Money Market Funds – Preserving Systemic Benefits, Minimizing Systemic Risks

During September 2008, soon after Lehman Brothers filed for Chapter 11 protection, the Reserve Primary Fund, a large and prominent money market mutual fund, “broke the buck”: it declared a net asset value that was less that the $1 per share that is standard for such funds as a result of marking down the value of Lehman debt in its portfolio. This event triggered a large number of redemptions from money market funds with a large institutional investor shareholder base, as those investors rushed to redeem their shares out of concern that they too might fall in value below $1 per share. A significant number of large money market funds avoided “breaking the buck” and stemmed redemptions only because their managers, often affiliated with large financial institutions, injected capital into the funds by purchasing troubled assets at par. Nonetheless, the cycle of redemptions did not stop until the U.S. Treasury stepped in and guaranteed (albeit on a limited and temporary basis) money market fund shares against loss.