By BEN LEVISOHN And DAISY MAXEY
Just one money-market fund blew up during the financial crisis. Without help from the U.S. government, the number might have been much higher, data released by the Federal Reserve show.
Nine of the 10 largest money-market fund companies at the time, with two-thirds of all money-market-fund assets under management, turned to a financial first-aid program called the Asset-Backed Commercial Paper Money-Market Mutual Fund Liquidity Facility. The funds, facing an illiquidity squeeze, sold billions of dollars of commercial paper to major banks, which in turn used money borrowed from the Fed to make the purchases.
Those companies are Fidelity Investments, J.P. Morgan Chase & Co., BlackRock Inc., Federated Investors Inc., Dreyfus Corp., Charles Schwab Corp., Goldman Sachs Group Inc., Columbia Management and Morgan Stanley. Among the 10 largest money-fund firms, only Vanguard Group didn’t use the program.
The data released by the Fed on Wednesday underscore how susceptible money-market funds still are to runs, some industry experts said. During the crisis, the Reserve Primary Fund was unable to keep its shares at the $1 level, stunning the market by “breaking the buck.”
“This was an unprecedented market environment and we believed it to be in the best interest of our shareholders to take advantage of this liquidity outlet established by the Fed,” a spokeswoman for Dreyfus said in a statement.
A spokeswoman for BlackRock said, “We thought the program was very successful and achieved its stated purpose, which is it helped prevent a run on money funds. The funds returned to normal functioning quickly after the program was introduced. The program grew in size, but then wound down on schedule and is no longer in existence, and the government suffered no losses in administrating the program.”
“Fidelity carefully reviewed the Federal Reserves liquidity facility and determined it was in the best interest of our money-market fund shareholders to participate in the program. We have been proactive in keeping our money-market funds safe and in protecting the $1 net asset value, which has always been our No. 1 objective in managing these funds,” a Fidelity representative said.
A representative for Schwab said in an email, “Although we had no liquidity issues, we did take advantage of one specific facility because it was the best option for selling positions and reinvesting the funds at the time.”
Representatives for Goldman Sachs, J.P. Morgan and Morgan Stanley declined to comment.
Representatives for Federated and Columbia couldn’t be reached for comment.
Recent regulatory changes to money-market funds, including a requirement to keep more assets in short-term paper, have made funds safer. But they don’t address the fact that it is essentially impossible to maintain the $1-a-share benchmark while also guaranteeing immediate liquidity.
“If the Fed hadn’t been standing there, the funds would have broken the buck,” said Christopher Whalen, who runs research firm Institutional Risk Analytics. “I’m wondering if funds aren’t going to have to say to investors that net-asset value will have to trade every day, and it may be below par.”
Just because a fund company used the facility doesn’t necessarily mean it needed a lifeline. Some companies tapped the program to ensure they had enough cash on hand to meet redemptions if they occurred.
The program was created after the Reserve Primary Fund failed in September 2008. The program helped money-market funds meet redemptions by extending credit to banks and bank-holding companies to buy asset-backed commercial paper from the funds.
The SEC recently issued rules eliminating the riskiest assets from money-market funds and requiring them to keep at least 30% of their assets in securities maturing in seven days or less. It also required them to disclose their holdings on a monthly basis.
“The new SEC requirements will go a long way toward having more liquidity,” said Karrie McMillan, general counsel at the Investment Company Institute, a fund-industry trade group. “If there were to be a lot of redemptions, the liquidity would help.”