U.S. investors in money market funds were breathing a sigh of relief yesterday after their government announced a plan to restore shaken confidence in an investment that was once deemed to be as safe as cash.
The U.S. Treasury announced it would temporarily guarantee money market funds against losses up to $50-billion (U.S.).
And the U.S. Federal Reserve is offering banks cheap loans to buy asset-backed commercial paper from money market funds.
The program is aimed at stemming a flood of withdrawals from money market funds by investors worried about their investments holding bad debt in the wake of the current financial crisis.
"Investors at least know that their cash investments are secure again," said Don Phillips, managing director of Chicago-based Morningstar Inc.
"The prospect of millions of investors fleeing their money market funds at the same time could have been crippling to the global financial scene."
The U.S. government moves came on the heels of a decision on Thursday by Putman Investments, a U.S. unit of Canada's Great-West Lifeco Inc., to close its $12-billion Prime Money Market Fund, and return investors' money. Institutional clients were pulling cash out of the fund even though it had no exposure to troubled firms like Lehman Brothers Holdings Inc.
A wave of withdrawals from money market funds was sparked after Reserve Primary Fund, which catered to institutional and retail investors, said earlier this week that its net asset value had fallen below $1 a share.
The fund held debt from Lehman Brothers, which had filed for bankruptcy protection.
"If this fear of a bank run on money market funds had continued into this weekend, and into next week, then you might have seen this panic behaviour spread to individual investors," Mr. Phillips said.
In Canada, there have been no similar woes so far since a handful of companies bought back troubled asset-backed commercial paper last year from their money market funds, fund analysts said.
Money market funds typically invest in short-term investments like government securities, but may buy commercial paper to boost yield.
While these funds are marketed as cash-like vehicles, they differ from bank deposits insured in the United States by the Federal Deposit Insurance Corp., and here by the Canada Deposit Insurance Corp.
The U.S. government guarantee against losses in money market funds is the "equivalent of the FDIC for deposits," said François Bourdon, a portfolio manager at Montreal-based Fiera Capital.
The problem was that some U.S. money market funds might have had to sell liquid securities like government Treasury bills to meet redemptions, leaving them stuck with less liquid corporate securities, he said. "Some funds would then have ended with withdrawals greater than their liquidity."
Independent fund analyst Dan Hallett said he could not find Canadian money market funds holding bad debt after checking their top holdings.
"I couldn't find any Lehman holdings," he said.