From Bloomberg we have the following:
The U.S. government backed away from insuring all domestic money-market funds as a run on the $3.29 trillion industry slowed and banks complained that they would be hurt by the Treasury’s plan.
Investors pulled $5.2 billion from the funds on Sept. 19, compared with $133.3 billion in the previous two days combined, according to data compiled by Money Fund Report, a newsletter based in Westborough, Massachusetts. The exodus began after the $60 billion Reserve Primary Fund became the first money fund in 14 years to fail to cash out investors in full because of losses on Lehman Brothers Holdings Inc. debt.
The Treasury, seeking to prevent a broader run, announced Sept. 19 that it will reimburse investors for losses for a year. Officials scaled back the plan yesterday, saying it will only cover investments in money-market funds at the end of that day, meaning future deposits will not be insured. The change came after banks warned they would lose depositors.
Ugh–this does not inspire confidence either–KSH.
“Ugh–this does not inspire confidence either”
Right indeed. The authors of this bailout say it’s urgently necessary to prevent a global financial panic. Yet the proposal itself reflects a political panic. I question whether its authors know what they’re doing.
For example, creating a federal insurance program for the trillions of dollars investment in money market funds would be profligate and unwise. It would encourage those funds to take additional risks and thus end up creating more problems than it solved.
The recent failure of the Reserve Primary Fund (in which investors still received 98 cents on the dollar) is probably an isolated case. Most money market funds have sponsors strong enough to make good the loss and enable to fund to remain in business.
A prudently run fund keeps the average maturity of its portfolio very short: e.g., 30-45 days. That helps minimize the risk that portfolio securities will default. It also means that those funds’ portfolios will have substantially turned over since the Fannie, Freddie, and Lehman failures: e.g., half the securities in the portfolio will have been repaid and the funds will have invested the proceeds in new securities. The funds will have had ample opportunity to be extra careful about what the buy. When money market funds take higher-than-average risks, it’s often because they’re trying too offset higher-than-necessary operating expenses. We don’t need government insurance to be subsidizing foolish or inefficient fund managers.