At least 21 money market mutual funds would have “broken the buck,” or fallen below a stable value of $1 per share, in the wake of the financial crisis, if the firms that run them hadn’t provided additional cash to support their value, the Federal Reserve Bank of Boston said in a report Monday.
The Fed found that 78 money market funds in total received $4.4 billion in support from the firms that run them from 2007 to 2011. In some cases, the firms made cash contributions to the funds; in others, they bought securities from the funds at prices higher than fair market value. Many times, this assistance was just to ensure the funds’ safety during the financial crisis. But in 21 cases, if the companies had not provided support, the funds would have broken the cardinal rule of money markets — making sure investors relying on them as a safe haven don’t lose money.
The Fed report said the support from the firms “has served to obscure the credit risk taken by these funds.” In other words, while investors look to money markets as the safest of vehicles, these funds are taking some investment risks to provide returns. And in the event of market shocks like the Lehman Brothers’ failure in 2008, firms have varying abilities to provide large doses of support for their funds.
“If this is the only backstop for these funds, it’s not a fully reliable one,’’ said Steffanie A. Brady, one of the report’s authors. Without changes to the system, she said, in a future crisis, “It could be a much more common occurrence to have funds breaking the buck.”
Only two money market mutual funds have ever “broken the buck” in the past. The most recent occurrence was in September 2008, when a major money market fund, Reserve Primary Fund, had a huge exposure to the Wall Street firm Lehman Brothers. That in turn sparked a run on other money market funds, as investors sought to secure their cash. The other was the Community Bankers US Government Fund in 1994, which lost money on derivatives.
The sheer size of the money market business means that trouble in these investments can have a ripple effect on the economy. The 2008 run on prime money market funds caused further stress in the short-term corporate debt market, the Fed report said. The Treasury and the central bank had to intervene with billions to shore up confidence and slow down redemptions in money market funds.
The new Fed report comes as US and international regulators are debating whether the $2.6 trillion money market business needs stricter rules to ensure it has enough capital to withstand another crisis. Fidelity Investments in Boston, the nation’s largest manager of money markets, is among those opposing more regulation.
Fidelity, with manages $415 billion in money markets, argues that new rules already require more cash on hand by money markets and are sufficient to have strengthened the system. Fidelity did not need to provide support for its money market funds during this period, according to the Fed report.
But many others did. Firms that provided infusions to their funds, according to the Fed, included the Columbia funds, part of Bank of America Corp.; Dreyfus, which is part of Bank of New York Mellon Corp.; Charles Schwab & Co.; and T. Rowe Price.
T.Rowe Price spokesman Brian Lewbart said the firm contributed $16.4 million to some of its money market funds in the fourth quarter of 2010 to offset cumulative losses in recent years.
“As we said at the time, the firm took this action to allay any shareholder concerns or confusion” as new government rules were implemented, Lewbart said. The funds’ $1 net asset values “are stable, and the funds have never ‘broken the buck’ or redeemed shares at a loss to shareholders.”
Bank of America declined to comment; the other firms could not be reached.
Because investors in money markets count on the liquidity of the funds, “these investors are prone to run during a financial crisis,’’ the Fed report concluded. It called the current model of protecting funds “concerning,”because firms are taking risk in money markets and yet may not be in a position to bail out the funds in a pinch.
Boston Fed president Eric Rosengren has said he supports Securities and Exchange Commission chairwoman Mary Schapiro’s proposals to allow money market shares to fluctuate in value below a $1, or else to require firms to keep a capital cushion against losses. Schapiro also has proposed firms impose fees on large institutional investors that want to sweep billions out the door all at once.
The authors of the new Fed study examined public records for 341 prime money market mutual funds.