Study: 78 money market funds were at risk of breaking buck

ByABC News
August 13, 2012, 9:11 PM

— -- A study by the Boston Federal Reserve Bank says that 78 money market mutual funds had to seek help from their sponsors to keep from having their share prices drop below a dollar from 2007 to 2011.

Of the 78 money funds that asked for help from their management firms, 21 would have broken the buck without that assistance, according to the Fed study. And 32 funds needed help more than one time.

Money funds are not insured, but keep their share prices at $1 per share to preserve principal. Their main attraction is safety and easy access, much like a bank account. "Breaking the buck" means that investors would lose money in a fund sold as being extremely safe.

Officially, only two money funds have broken the buck. The first was a small institutional fund in 1994. The collapse of the Reserve Fund in September 2008, triggered by the Lehman Bros. bankruptcy, sent investors fleeing the fund and similar ones, worsening the situation.

The market for commercial paper, short-term IOUs issued by corporations to meet daily cash requirements, froze in the wake of the Reserve Fund's collapse. The Treasury and the Federal Reserve ultimately had to step in to calm the commercial paper market and slow money fund redemptions.

But the Boston Fed study suggests the problem was more serious than most people knew. The study will likely bolster the argument for stricter regulation of money funds, currently being considered by the Securities and Exchange Commission. The SEC is reviewing a proposal to let money funds' share price float, as other fund share prices do. Another would impose capital requirements, which would act as a buffer against losses.

The Investment Company Institute, the fund industry's trade group, opposes the proposals, arguing on its website that they would "severely damage the value of money market funds for investors and the economy."

Peter Crane, publisher of Crane Data, which tracks the funds, says the number of funds that would have broken the buck is unknowable. "The fact is, they didn't break the buck," Crane says.

And, says Crane, the collapse of Lehman Bros. and its subsequent fallout were exceptionally unusual events. "If Lehman Bros. hadn't collapsed, there would have been zero money fund defaults," he says.

The Fed study notes that many management companies came to their funds' aid, but also says not all have the wherewithal to do so. The current system gives investors a sense of safety, the report says, but not all companies can deliver it.