Meet The 28 Other Money Market Funds That Broke The Buck After (And Before) Lehman

Tyler Durden's picture

Everyone knows that one of the immediate catalysts of the near systemic collapse in the aftermath of the Lehman bankruptcy, one which set in motion the sequence of events that led to Bernanke increasing the Fed's balance sheet fourfold, was when the Reserve Primary Money Market Fund announced on September 16 that the value of its shares had dropped to 97, sparking an epic run on money market funds, and requiring an immediate bailout first from its sponsor, and then the Federal Reserve and US government. What is far less known is that the Reserve Primary Fund was just one of many money market funds that got locked out and was in danger of collapse following the decision to let Dick Fuld hang. How many? According to a research note released by the NY Fed itself, at least 28 more!

As Marco Cipriani et al report, "at least twenty-nine MMFs had losses large enough to cause them to break the buck in September and October 2008 despite significant government intervention and support of the sector. Five funds or more experienced losses exceeding the 3 percent reported by Reserve, and one fund reported a loss of nearly 10 percent. Among the twenty-nine funds that would have broken the buck without sponsor support, the average loss was 2.2 percent.

The NY Fed report continues by suggesting what is well-known: that in a time of crisis, nobody wants to point out that the emperor is naked, or that the money market fund has broken the buck:

Yet, the losses for twenty-eight of these MMFs may have gone unnoticed during the crisis, as neither their shareholders nor almost anyone else could have observed their magnitudes at the time. As in other episodes in which MMFs suffered significant losses, the losses were absorbed—and hence obscured—by voluntary financial support from MMF sponsors (the MMFs’ asset management firms or their parent companies). The extensive record of sponsor support for MMFs does allow us to look back to the 2008 crisis and other periods of strain for indirect evidence about funds’ losses. In a 2010 report, Moody’s found 144 cases in which U.S. MMFs received support from sponsors between 1989 and 2003. Brady, Anadu, and Cooper (2012) documented 123 instances of support for seventy-eight different MMFs between 2007 and 2011, including thirty-one cases in which support was large enough that it probably was needed to prevent funds from breaking the buck. Still, these data only allow estimates of what MMF losses must have been to motivate sponsors’ actions.

Alas, the "sponsor support" was not sufficient, and required a wholesale bailout. The report continues:

In contrast, the data we describe are market-based values of MMF portfolios reported confidentially by the funds themselves during the crisis to the Department of the Treasury (“Treasury”) and the Securities and Exchange Commission (SEC). In general, these “shadow” net asset values (NAVs) are invisible to investors and the public, as MMFs are permitted to round their reported share values to $1 so long as the shadow NAV remains above $0.995. Only if the shadow NAV drops below that threshold does the fund break the buck—unless it receives sponsor support. During the crisis, many MMFs did receive such support, so their shadow NAVs remained invisible. However, any MMF with a shadow NAV below $0.9975 that participated in Treasury’s Temporary Guarantee Program for MMFs was required to report to Treasury and the SEC what its shadow NAV would have been without some forms of sponsor support, such as capital support agreements. Since virtually the entire industry participated in the program, these data provide an unprecedented record of MMFs’ portfolio losses at the time.

Said otherwise, the primary investment vehicle for some $3 trillion in assets suddenly found itself insolvent. And this is merely the first thing that Bernanke, Paulson, the bank CEO and everyone else failed to grasp when less than a week prior they decided to let Lehman brothers fail. Of course, since nothing has changed since then but merely the amount of excess liquidity sloshing in the system, any questions about "invisible" underwater asset managers will remain unanswered until the next liquidity crisis drags not only the MMF industry but everyone else down. Because despite what Yellen, Bernanke, Greenspan et al wish to tell us, a credit bubble is never fixed with another credit bubble: it merely delays the day of reckoning while making its severity that much worse.

So before the government had to step in, what were the immediate actions by sponsors to mitigate the inevitable disaster:

Even so, the NAV data do not reflect the full extent of losses that might have occurred without sponsor interventions. Some of the reported shadow NAVs were likely boosted by common forms of sponsor support, such as direct cash infusions and sales of securities to sponsors at above-market prices. Of course, the data also do not reflect portfolio losses that might have occurred in the absence of Treasury’s guarantee program and other government support for MMFs in 2008. 


In the table below, line 1 shows that seventy-two MMFs reported shadow NAVs at least once from September 5 to October 17, 2008, indicating that their shadow NAVs dipped below $0.9975 at some point in this period. Although some funds reported data daily, all funds with shadow NAVs below $0.9975 were required to report at least weekly, and the number of reports jumped each Friday. Line 1 lists the number of funds reporting shadow NAVs on each Friday, which ranged from nineteen to sixty-three. Line 2 shows that on most Fridays the majority of reporting MMFs had shadow NAVs of $0.9975 or less.



Twenty-nine MMFs reported a shadow NAV below $0.995—low enough to break the buck, absent sponsor support—at some point during this episode (line 3). As many as eleven MMFs on any particular Friday reported shadow NAVs below 99.5 cents, including five funds that reported NAVs below this level before the Lehman Brothers bankruptcy. Average shadow NAVs for all reporting funds, excluding the effects of guarantees, dropped to $0.993 on October 3 and October 17 (line 4). Among funds with NAVs falling below $0.995 at some point, minimum shadow NAVs averaged $0.978 (line 5, column 1). That is, these funds lost, on average, at least 2.2 percent during the crisis.

In other words, money markets were insolvent on the days before the Lehman bankruptcy crashed the system, but they became really insolvent after.

The scale and scope of the losses in 2008 also highlight the significance of sponsor support for MMFs. After all, what made the Reserve Primary Fund unique in 2008 was neither its exposure to Lehman Brothers nor its portfolio losses, but the fact that its sponsor could not absorb its losses. However, the industry’s reliance on implicit recourse to sponsors is systemically risky because it creates channels for transmitting destabilizing strains between sponsors and their “off-balance-sheet” MMFs, and because uncertainty about whether sponsors will come to funds’ rescue may precipitate runs (McCabe 2010). Hence, the data we have described underscore the need for robust and effective MMF reforms that would provide a form of stability to the MMF industry not predicated on voluntary and uncertain support from sponsors.

But why is the Fed admitting that everything beneath the surface (of the Fed's liquidity tsunami) is rotten? Simple: this latest "expose" on Money Markets is merely the latest attempt to restructure the money market industry: a process that started long ago with the Group of 30, the SEC, and Federal Reserve. Why restructure? Because at last check, retail and institutional money markets held just under $2.5 trillion in assets, read cash. And with QE forced to end sooner or later, for the simple reason that the Fed is now monetizing 0.4% of all 10 year equivalent bonds per week (since there is no taper in a reduced deficit environment), what would the Fed want more than anything? Why a brand new wave of "asset rotations", one originating from the Money Market industry - so famously loathed by the status quo - and used to buy, what else, stocks. Preferably at their all time highs.

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Ness.'s picture

The algo's are fist fucking themselves right now.  Funny to watch these "markets" in action.


This will not end well.

knukles's picture

Why today even, some MMMF's are still footnoting that they're carrying obligations are some sort of Mark to Sophistry.... just read the prospecti.
A whole bunch of 'em
And no, I'm not going to mention names.
I value my sanity.
And bunches and bunches of others parent/sponsoring organizations swapped out the bad paper injecting cash to keep the funds "whole" whatever that might be/have been calculated.
So, a bunch of 'em had the same problems.
Bunch of 'em dodged the bullets by self administered healing so as to keep the funds and clients intact.

Now, anybody wonder why Little Dickie "The Gorilla" Fuld was hung out to dry?
Anybody wonder why the Reserve Fund?

Piss some people off?  Not have the connections?  Not part of the "team"?

bank guy in Brussels's picture

From the classic ZeroHedge article,

'How The World Almost Came To An End At 2PM On September 18':

« On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today ... »

Joe Davola's picture

Praise be the Beard and Tiny Timmah for saving us!

Ned Zeppelin's picture

That story is pure urban legend and complete poppycock.  Just take 2 seconds to think about.  How many people at 11 am were "suddenly and quietly" withdrawing such sums (do the math and you'll it would take a lot of people acting at once to do that) and second, if people were doing that, do you really think they were soothed by an announcement that accounts under $250,000 were protected, and how did they all get the news of this "protection" simultaneously?? 

If the average account were $100,000, that is 5,500,000 people all acting in a very short space of time to move their money.  Physically impossible. 

Another Hank Paulson lie. The only world that was coming to an end that day was the world of the Hank Paulson's and his Wall Street, Goldman Sachs buddies.  He should be up on charges of treason. 


Urban Redneck's picture

As recounted by a financial lilliputian congress critter it doesn't add up... But neither does your refutation. The earth is a sphere and it is not not 11am everywhere at the same time. While happy hour can postponed, there is a finite window for holding staff late to execute an executive-level repositioning, since the 0830ET Fed announcement failed to stem the tide. Furthermore, the 250,000 was the FDIC depositor/muppet backstop, not the institutional backstop and off-take of MMF-owned worthless Freddie and Fanny paper.

However, the numbers cited make no sense from a gross redemption standpoint, and there was no disclosure of a follow-on deleveraging calculation. But you shouldn't be looking for 5M people, more like five (or ten) with enough AUM to trigger a bank run...

The Econ Ideal's picture

"If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. "


Right. This BS was used as a Red Herring by Paulson et al. to provide cover for the enormous bailout of bad banks. 

Urban Redneck's picture

I am vaguely familiar with the research papers underlying the article- they form the bulk of the argument for adding GATES to MMFs... What I don't recall is whether the self-serving, two-faced, scum analysts of the FED pointed out that in ADDITION to seeking sponsor support AND and unlimited FED backstop, several MMFs imposed gates (rather than be forced to realize losses instead of marking to myth) in effort to prevent breaking the buck de jure. If they failed to document these gates in the papers, and how results varied between the MMFs that imposed gates and those that didn't (in addition to seeking sponsor support) then you can draw your own conclusions about the integrity of the analysis...

(Un)fortunately- I don't have the time to suffer those papers again right now.

disabledvet's picture

having said "Lehman brothers really wasn't the problem with the RPF" (my understanding is that in fact is a total falsehood with the Reserve Primary Fund...but i could be mistaken...that's what was reported) the author then goes on to explain some unknown "counterparty." that may be true (AIG? Goldman Sachs? JPM?) but it all still begs the question...where is the recovery to create the demand for the market in the first place? "spotty at best" comes to mind on that front so outside of a huge price increase "creating demand" (ala 2004) what else is going on here? "not much" i would argue. might be time to bail on the dollar about to get whacked? are Tesla's the real deal or are they all about to be exploded? more "normal" day today...but the month of October has just begun so we'll see..

bnbdnb's picture

It is in your best interest, we promise.

GMadScientist's picture

And MMFs aren't the only dingleberries living by the skin of their repo'd gold teeth neither. :p

Rainman's picture

Sadly, the sheep believe their MMFs are full faith and credit cash and can't be stolen.  

Kirk2NCC1701's picture

Even so, in the Asset Pyramid, Stocks (shares in a business) are secondary wealth, whereas fiat, Bonds and other (derived) debt-notes are tertiary wealth.  When TSHTF, holding Primary and Secondary wealth will be key.

csmith's picture

You said we'd "meet them"; where are the names?

Seasmoke's picture

But Golman Sachs was ok , correct ?

Bangin7GramRocks's picture

When you rule the world, you are always OK. Those motherfuckers probably have bunkers, islands and safe houses ready to go. The only people swinging from light poles will be the low level slobs that they feed to the mob just before boarding the helicopters.

Muppet's picture

If this much is known, where is the list?    Name some names.   What MMFs? 

Landrew's picture

What I had heard that day, my pension fund Tiaa-Creff was the largest fund to break the buck rule.

n.d.v.'s picture

I am not sure what's the take-away of this article. That they should've bailed out Lehman? Really?

0b1knob's picture

More "Fed saved the world" propaganda.   The only thing saved was the ability of banks and companies like GE credit to borrow money at zero percent interest.   

orangedrinkandchips's picture

we need names of these funds!!!


numbers dont mean jack shit....I worked for STIFs.....give us the names!

Catullus's picture

I'm so glad this liability is off balance sheet and not made clear on my bank's financial reporting. I also appreciate the fact they keep track of the actual NAV with a "shadow NAV" that they don't disclose to anyone until they've already broken the buck. If there's anything I like more than not having an accurate accounting, it's having two sets of numbers floating around. I also appreciate internal auditors who are fully aware of this but give me assurances otherwise.

"Prove it", right, Greenspan?

HL Shancken's picture

BAC said to be feature of negative article to be published tomorrow by major financial publication. Implicated as well in criminal conduct is Urban Lending Soutions.


There is no justice in this world, I know. Just thought I'd pass it on.

notadouche's picture

Now this might explain why Fidelity has called the last two days asking me about my cash held in MM fund and if I understood the opportunity cost that I'm missing by not being more fully invested.  

The Econ Ideal's picture

Suggestion: Pull your money from Fidelity. 

max2205's picture

The new bail in 

Handful of Dust's picture

'nother example of, "If you don't hold it...."

The Econ Ideal's picture

More Red Herring BS from the NY Fed to try and convince the ignorant of how "crucial" the Fed is to the survival of markets. Don't believe everything you read, folks. Yes, this BS is propaganda and a diversion from Trillions+ bailout of the banks, which were the primary problem!