If treasurers aren't already having trouble sleeping, a Moody's Investors Service report on the effects of the financial crisis on money market funds could well lead to insomnia. Moody's says that between 2007 and 2009, as volatility and illiquidity spread through the financial system, no fewer than 36 money market funds in the U.S. and another 26 in Europe failed to maintain a constant net asset value (CNAV). Those events, coupled with Lehman Brothers' bankruptcy in September 2008, led to the collapse of the Reserve's Primary Fund and redemption restrictions on 31 other money market funds.
"The Reserve Primary Fund breaking the buck was a watershed event," says Lance Pan, director of investment research at Capital Advisors Group. Pan says treasurers are getting pickier about where to park their money, but he worries that they may end up relying on a money fund's logo rather than performing their due diligence. "There was a misconception that the money funds were safe because no other fund had broken the buck, but that was not true," says Pan.
Moody's research underscores that point, noting that even prior to the financial crisis, no fewer than 146 funds would have broken the buck over the past 30 years if fund sponsors hadn't intervened.
"The report highlights the importance of parental support when it comes to the preservation of the $1 net asset value," says Henry Shilling, a senior vice president at the rating agency. During the latest crisis, sponsors pumped $12.1 billion into money funds to prop up share prices, even though they were under no legal obligation to do so.
Shilling says that with credit or liquidity events or interest-rate spikes occurring about once every three years, finance departments need to do their homework. "The key factors are portfolio credit quality, liquidity profile, susceptibility to market risk and the investment manager's credit evaluation and risk management practices," he says. "And along with those, the capacity and willingness of the management firm to provide support--because support may be necessary from time to time."
Shilling says managers have come to realize that transparency can avert a run. When the European sovereign risk issues arose in May, he says, management firms "reached out to investors to let them know what they held and what the thinking was behind it."