Broken bucks: money funds that took taxpayer guarantees in 2008
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ORIGINAL ARTICLE
Broken bucks: money funds that took taxpayer guarantees in 2008 Linus Wilson1 Revised: 4 June 2020 / Published online: 3 August 2020 © Springer Nature Limited 2020
Abstract This is the first study to look at the characteristics of funds accepting the $2.7 trillion taxpayer guarantee of money market mutual funds during the 2008 financial crisis. Fund shares that benefited from Federal Reserve’s asset-backed commercial paper program were significantly more likely to get bailed out by taxpayers and sponsors. The paper tests if funds adhering to the SEC’s 2010 liquidity reforms prior to their enactment were less likely to be bailed out in 2008. Finally, it examines if funds subject to the 2014 floating NAV regulations were more likely to be bailed out in 2008. Keywords Breaking the buck · Bailout · Dodd–Frank · DLA · Exchange rate stabilization fund · Floating NAV · Financial Stability Oversight Council (FSOC) · Guarantees · Liquidity · Money market mutual funds · Regulation · SEC · Reserve Primary Fund · Securities and Exchange Commission · U.S. Treasury · WAL · WAM · WLA JEL Classification G01 · G18 · G22 · G23 · G28 · H12 · H81 · L5
Introduction This is the first study to analyze the characteristics of funds accepting the U.S Treasury’s Temporary Guarantee of Money Market Mutual Funds (TTGMMMF). Indeed, this paper is the only source that provides a complete list of fund families participating in this unprecedented guarantee of money market mutual funds. Here, it is estimated that this guarantee of money market mutual funds from September 19, 2008, to September 18, 2009, guaranteed $2.7 trillion in money market mutual fund assets from its onset. Kim (2019) looks at redemption behavior of investors before and after funds reported accepting taxpayer guarantees. That paper does not look at the characteristics of funds receiving and not receiving U.S. Treasury backing as the present paper does. Moreover, because it identifies participants by announcements, its sample is much smaller than this study which obtained a complete list of funds by way of a Freedom of Information Act (FOIA) request. The present study has identified 146 fund sponsors receiving U.S. Treasury guarantees to Kim (2019)’s 75 fund sponsors accepting TTGMMF guarantees. Moreover, unlike Kim (2019), * Linus Wilson [email protected] 1
University of Louisiana at Lafayette, Lafayette, USA
which does not mention the SEC’s regulatory responses to the money fund bailouts, that is the focus of this study. The financial industry has been the target of greater regulation since the financial crisis of 2007-to-2009 and the money market mutual fund industry is no exception. Money market mutual funds are unique among investment companies because under rule 2a-7 because they are allowed to maintain a stable net asset value (NAV) of $1.00 per share. That means that investors can redeem fund shares for $1.00 even if the NAV falls to $0.995 as explained by Fisch and Roiter (2012) and Birdthistle (2010). SEC (2014) required institutional
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