Some Theoretical Considerations Regarding Net Asset Values for Money Market Funds

O n Tuesday, September 16, 2008, the day after Lehman Brothers …led for bankruptcy, the Reserve Primary Fund, a large prime money market fund, announced that it would not be able to redeem investors’funds one for one. The fund had “broken the buck”mainly due to losses on its holdings of Lehman’s debt instruments. In the days that followed, out‡ows from prime money funds spiked, with investors withdrawing, in the space of a week, approximately $300 billion— roughly 15 percent of total assets invested in these funds at the time (Financial Stability Oversight Council 2012). By Friday of that week, the U.S. Treasury and the Federal Reserve would decide to implement several major interventions aimed at stabilizing the money market funds industry. While out‡ows did, in fact, slow down in the following weeks, money funds continued divesting large amounts of commercial paper and other assets for some time. The interventions announced by the U.S. Treasury and the Federal Reserve on September 19, 2008, were broad and unprecedented. The Temporary Guarantee Program adopted by the Treasury Department guaranteed that shareholders of those funds opting to participate would receive the fund’s stable net asset value (NAV) per share were the fund to suspend redemptions and fully liquidate. At the same time, the