What Is the Treasury's Guarantee Program in Relationship to Money Market Funds?
- "Breaking the buck" is a term used to indicate that a money market fund's net asset value has dropped below its expected principal value of $1 per share. Absent any conceivable risk of default by the issuers of money market securities that a fund holds, the fund expects to redeem fund shares for investors in the amount of their invested principal, plus any interest earned. During the 2008 financial crisis, however, securities issued by Lehman Brothers went into default, and the reverse fund that held them was forced to break the buck, causing investment losses for its fund investors and panic effects on other funds and investors of money market funds in general.
- On Sept. 19, 2008, the U.S. Treasury implemented a temporary guarantee program for money market funds aimed at stabilizing the money market for investors, funds and issuers. Because of the panic caused by Lehman Brothers' default and the subsequent reverse fund's breaking the buck, investor withdrawals from money market funds had increased substantially, forcing funds to liquidate their holdings all at the same time at potentially further losses. The Treasury's guarantee program provided participating money market funds the access to Treasury's money to meet any shareholder redemptions, reducing market selling, stabilizing securities prices and helping maintain fund value.
- In the event of a fund's breaking the buck by an issuer's default, the Treasury's guarantee program would provide coverage to fund shareholders in the amount of the fund's original net asset value as of the date specified in the program. The Treasury's guarantee program was announced in Sept. 19, 2008, and funds had to decide whether they would like to participate and would pay a fee for the program. For shareholders of a participating mutual fund, any shares they owned as of Sept. 19, 2008, would receive the Treasury's guarantee if their fund lost value afterward. Any shares bought after Sept. 19, 2008, would be redeemable at the fund's then net asset value without Treasury's guarantee. The program expired on Sept. 19, 2009.
- Money market funds are major participants in the money market, which plays an important role in providing short-term liquidity to both governments and businesses. Price declines of money market securities not only result in investor losses but also hurt issuers as a depressed money market increases borrowing costs and may potentially shut off liquidity for issuers. The Treasury's guarantee program helped restore investor confidence and stemmed potentially massive investor withdrawals, which in turn ensured necessary credit flow to governments and businesses for sustaining ongoing operations.