A report released today by the Federal Reserve Bank of Boston highlights the significant role of sponsor support in maintaining the perception of stability in money market mutual funds (MMMFs). The authors focus on support observed through the recent financial crisis and itemize it in detail – and they assert that such support has obscured the degree of credit risk that is taken by these funds.
The report, The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011, uses information gleaned from audited financial statement filings with the U.S. Securities and Exchange Commission (SEC). The authors examined these public records for 341 prime MMMFs, and provide in the report a complete data set of the direct support instances and related amounts.
The authors find that 78 prime MMMFs disclosed support received from their sponsors – in the form of a cash contribution, or the purchase of securities at an amount in excess of fair market value – during the period 2007 to 2011. Of the 78 MMMFs that received this form of sponsor support, by conservative measure at least 21 MMMFs would have “broken the buck” (meaning their net asset value per share would fall below $1) without support from sponsoring firms, parents, and affiliates.
In these 21 cases the support received in a single year was significant enough relative to assets under management to show that the MMMFs would have broken the buck, absent the support. These 21 cases involve support exceeding 0.5% of the fund’s assets under management. When viewed through a different lens – looking at multiple direct support amounts in aggregate for each fund, over the full period of the study – the authors note that the same data set may also support a conclusion that no less than 31 MMMFs would have broken the buck absent sponsor support.
In short, from 2007 to 2011, sponsor support was frequent, and was significant to many funds. These examined forms of support alone totaled at least $4.4 billion.
Support detailed in the paper was largely necessitated by the funds’ holdings of defaulted structured investment vehicles (SIVs) and Lehman Brothers obligations in 2007 and 2008. But the authors note that MMMFs are still susceptible to risks related to permissible portfolio holdings that may be vulnerable to downgrades or defaults – even subsequent to 2010 SEC rule changes. Given the credit risk that is still permitted within MMMFs, and the possibility that sponsor support might not be possible in some circumstances, the authors call the current model “concerning.”
The report is co-authored by Steffanie Brady, Ken Anadu, and Nathaniel Cooper (Brady and Anadu of the Risk and Policy unit of the Supervision, Regulation, and Credit function at the Federal Reserve Bank of Boston; Cooper formerly of the unit and Northeastern University).
The report is available on the Bank’s web site, bostonfed.org. The link to the report is
http://www.bostonfed.org/bankinfo/qau/wp/2012/qau1203.htm. Excel versions of report figures 1 and 2 can be made available for analysis, upon request.
The report complements and documents the analysis and observations in public remarks by Boston Fed president Eric Rosengren, made on April 11 and June 29, 2012 (and available, respectively, on the Bank’s website at (http://www.bostonfed.org/news/speeches/rosengren/2012/041112/index.htm and at http://www.bostonfed.org/news/speeches/rosengren/2012/062912/index.htm).
Our Financial Structures – Are They Prepared for Financial Instability?
Remarks by Boston Fed President Eric Rosengren, June 29, 2012
Money Market Mutual Funds and Financial Stability
Remarks by Boston Fed President Eric Rosengren, April 11, 2012