October 9, 2013.
Twenty-Eight Money Market Funds That Could Have
Broken the Buck: New Data on Losses during the 2008 Crisis
Marco
Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe
During
the financial crisis in 2008, just one money market fund (MMF) “broke the
buck”—that is, its share price dropped below one dollar. The Reserve Primary
Fund announced on September 16 that the value of its shares had dropped to
97 cents. As we discussed in a previous post, Reserve’s announcement helped spark
a widespread, damaging run on MMFs that slowed only when the federal government
intervened three days later to backstop the funds.
But new data that we first published in a New York Fed staff report and discussed in a Brookings paper show that at least
twenty-nine MMFs had losses large enough to cause them to break the buck in
September and October 2008 despite significant government intervention and
support of the sector. Five funds or more experienced losses exceeding the 3 percent
reported by Reserve, and one fund reported a loss of nearly 10 percent. Among
the twenty-nine funds that would have broken the buck without sponsor support,
the average loss was 2.2 percent.
Yet, the losses for twenty-eight of these MMFs may have
gone unnoticed during the crisis, as neither their shareholders nor almost
anyone else could have observed their magnitudes at the time. As in other
episodes in which MMFs suffered significant losses, the losses were
absorbed—and hence obscured—by voluntary financial support from MMF sponsors
(the MMFs’ asset management firms or their parent companies). The extensive
record of sponsor support for MMFs does allow us to look back to the 2008
crisis and other periods of strain for indirect evidence about funds’ losses.
In a 2010 report, Moody’s found 144 cases in which U.S. MMFs received support
from sponsors between 1989 and 2003. Brady, Anadu, and Cooper (2012) documented
123 instances of support for seventy-eight different MMFs between 2007 and
2011, including thirty-one cases in which support was large enough that it
probably was needed to prevent funds from breaking the buck. Still, these data
only allow estimates of what MMF losses must have been to motivate sponsors’
actions.
In contrast, the data we describe are market-based values of MMF portfolios
reported confidentially by the funds themselves during the crisis to the
Department of the Treasury (“Treasury”) and the Securities and Exchange
Commission (SEC). In general, these “shadow” net asset values (NAVs) are
invisible to investors and the public, as MMFs are permitted to round their
reported share values to $1 so long as the shadow NAV remains above $0.995.
Only if the shadow NAV drops below that threshold does the fund break the
buck—unless it receives sponsor support. During the crisis, many MMFs did
receive such support, so their shadow NAVs remained invisible. However, any MMF
with a shadow NAV below $0.9975 that participated in Treasury’s Temporary
Guarantee Program for MMFs was required to report to Treasury and the SEC what
its shadow NAV would have been without some forms of sponsor support,
such as capital support agreements. Since virtually the entire industry participated
in the program, these data provide an unprecedented record of MMFs’ portfolio
losses at the time.
Even so, the NAV data do not reflect the full extent of
losses that might have occurred without sponsor interventions. Some of the
reported shadow NAVs were likely boosted by common forms of sponsor support,
such as direct cash infusions and sales of securities to sponsors at
above-market prices. Of course, the data also do not reflect portfolio losses
that might have occurred in the absence of Treasury’s guarantee program and
other government support for MMFs in 2008.
In the table below, line 1 shows that seventy-two MMFs
reported shadow NAVs at least once from September 5 to October 17, 2008,
indicating that their shadow NAVs dipped below $0.9975 at some point in this
period. Although some funds reported data daily, all funds with shadow NAVs
below $0.9975 were required to report at least weekly, and the number of
reports jumped each Friday. Line 1 lists the number of funds reporting shadow
NAVs on each Friday, which ranged from nineteen to sixty-three. Line 2 shows
that on most Fridays the majority of reporting MMFs had shadow NAVs of $0.9975
or less.
Money
Market Funds’ Reported “Shadow” Net Asset Values in 2008
Excluding Effects of Guarantees from Sponsors
|
ate
|
Sept. 5-Oct. 17
|
Sept. 5
|
Sept.12
|
Sept. 19
|
Sept. 26
|
Oct. 3
|
Oct. 10
|
Oct. 17
|
|
1.Number of reporting funds
|
72
|
19
|
31
|
46
|
46
|
50
|
63
|
28
|
|
2.With shadow NAV < $0.9975
|
72
|
8
|
17
|
27
|
43
|
47
|
53
|
25
|
|
3. With shadow NAV <$0.995
|
29
|
3
|
5
|
8
|
11
|
9
|
11
|
6
|
|
|
|
|
|
|
|
|
|
|
|
Average shadow NAVs
(dollars per share)
|
Minimum for each MMF, Sept. 5-Oct. 17
|
Sept. 5
|
Sept.12
|
Sept. 19
|
Sept. 26
|
Oct. 3
|
Oct. 10
|
Oct. 17
|
|
4. All
reporting MMFs
|
0.989
|
0.997
|
0.996
|
0.995
|
0.994
|
0.993
|
0.994
|
0.993
|
|
5. Shadow
NAV <$0.995
|
0.978
|
0.987
|
0.989
|
0.985
|
0.984
|
0.975
|
0.977
|
0.977
|
|
6. Minimum reported shadow NAV
|
0.903
|
0.980
|
0.980
|
0.979
|
0.975
|
0.903
|
0.929
|
0.964
|
Sources
U.S. Department of the Treasury; Securities and Exchange Commission
Note: Reported shadow net asset values (NAVs)
may include some forms of sponsor
support, such as direct cash infusions to the money market fund (MMF) or
outright purchases of securities from the fund at above-market prices.
Twenty-nine MMFs reported a shadow NAV below $0.995—low enough to break
the buck, absent sponsor support—at some point during this episode (line 3). As
many as eleven MMFs on any particular Friday reported shadow NAVs below 99.5
cents, including five funds that reported NAVs below this level before
the Lehman Brothers bankruptcy. Average shadow NAVs for all reporting funds,
excluding the effects of guarantees, dropped to $0.993 on October 3 and October
17 (line 4). Among funds with NAVs falling below $0.995 at some point, minimum
shadow NAVs averaged $0.978 (line 5, column 1). That is, these funds lost,
on average, at least 2.2 percent during the crisis.
These new data on shadow NAVs represent a significant
contribution to our understanding of MMF risks and the 2008 crisis. By lifting
the veil of sponsor support, the data reveal how large and extensive MMF losses
actually were. Indeed, one fund reported an NAV of $0.903, almost 10 percent
below its “stable” $1 NAV! This information is useful for designing reforms to
mitigate the risks that MMFs pose to financial stability. For example, the
magnitudes of potential losses are important for calibrating the size of a
capital buffer or minimum balance at risk to protect MMFs
from runs.
The scale and scope of the losses in 2008 also highlight
the significance of sponsor support for MMFs. After all, what made the Reserve
Primary Fund unique in 2008 was neither its exposure to Lehman Brothers nor its
portfolio losses, but the fact that its sponsor could not absorb its losses.
However, the industry’s reliance on implicit recourse to sponsors is
systemically risky because it creates channels for transmitting destabilizing
strains between sponsors and their “off-balance-sheet” MMFs, and because
uncertainty about whether sponsors will come to funds’ rescue may precipitate
runs (McCabe 2010). Hence, the data we have
described underscore the need for robust and effective MMF reforms that would
provide a form of stability to the MMF industry not predicated on voluntary and
uncertain support from sponsors.
Disclaimer
The
views expressed in this post are those of the authors and do not
necessarily reflect the position of the Federal Reserve Bank of
New York or the Federal Reserve System. Any errors or
omissions are the responsibility of the authors.
Marco Cipriani is a senior economist in
the Federal Reserve Bank of New York’s Research and Statistics Group.
Michael
Holscher is an assistant vice president in the Bank’s Financial Institution
Supervision Group.
Antoine Martin is a vice president in the
Research and Statistics Group.
Patrick
McCabe is a senior economist at the Board of Governors of the Federal Reserve
System.
