How often have sponsors had to intervene to prop up money market funds?
If you answered once, with the breaking of the buck by the Reserve Primary Fund still fresh in mind nearly four years after the fact, you'd be ... wrong.
Securities and Exchange Commission Chairman Mary L. Schapiro says it has happened 300 times, since these open-ended mutual funds that invest in U.S. Treasury bills and commercial paper arrived four decades ago as a vehicle to compete with bank deposits. Safety (albeit not insured) with a higher yield was the ramrod opening investors' wallets.
The 300 instances of intervention came as something of a shock to the Investment Company Institute, which is the voice of the mutual fund industry. And whose top executives, including president Paul Schott Stevens and ICI general counsel Karrie McMillan, are staging an unusually aggressive defense of the turf won by the money fund industry, which now holds $2.6 trillion in institutional and retail investor capital.
Once the chairman made her pronouncement before the Committee on Banking, Housing, and Urban Affairs of the United States Senate on June 21 that "sponsors have voluntarily provided support to money market funds on more than 300 occasions since they were first offered in the 1970s,'' the ICI tried to shoot the number down.
"The SEC has not released its analysis," said Sean Collins, the ICI's Senior Director of Industry and Financial Analysis. "So we do not know precise dates or what exactly is being measured or counted. Nevertheless, we believe the estimate of 300 occasions is highly misleading.''
ICI turned to Moody's Investors Services, for its countering numbers.
Collins cited an August 9, 2010, Moody's report that identified, instead, 181 cases in which U.S. funds had received "support" from their sponsors.
The time frame: 1980 to August 2009.
Of these, 137 occurred before 2000. And 108 before 1994.
"In other words, they took place either before the SEC significantly tightened the risk-limiting provisions of Rule 2a-7 in 1991 for taxable funds, or before it tightened the application of Rule 2a-7 to tax-exempt funds in 1996 and 1997,'' Collins wrote.
Rule 2a-7 of the Investment Company Act of 1940-the primary legislation guiding the operations of mutual funds-calls for money market funds to invest in the highest-rated form of debt that matures in under 13 months. In general, a fund portfolio must maintain an average maturity of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.
"Drawing observations from a history that reaches back to the 1970s strikes us as having no relevance to today's policy debate,'' said Collins.
But Schapiro was looking to the future. She has drawn a line in the sand and said, in effect, the government can't rescue money market funds again, as it did in 2008.
"The tools that were used to stop the run on money market funds in 2008 are either no longer available or unlikely to be effective in preventing a similar run today,'' she testified on June 21.
Investors pulled $300 billion out of money market funds during the week of September 15, 2008, after the Reserve Primary Fund could not uphold the primary objective of money market funds: That the net asset value of each share of a fund will be maintained at a dollar. That fund had invested heavily in Lehman Brothers assets that could not be unwound, fast enough, when it went belly up that fall.
In that month, September 2008, the Treasury Department used the Exchange Stabilization Fund to fund the guarantee program. But in October 2008, Congress specifically prohibited the use of this fund again to guarantee money market fund shares, Schapiro testified.
She also noted that the Federal Reserve Board's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility expired on February 1, 2010. And that the facility could give "little benefit to money market funds today.''
The 300 instances of sponsors stepping in to support the finances of their money market funds also did not come out of thin air, Chairman Schapiro's staff would later note.
The chronology of interventions was developed by a "comprehensive review,'' it would tell Money Management Executive, of documents filed by investment companies with the commission. These included semi-annual reports prepared by money market mutual funds, using a form known as N-SAR, as well as a review of reports by those funds to their shareholders and other documents on file.
To bolster her argument and anticipate attempts to undermine the validity of the 300 count, Schapiro said that some of the credit events that led to the need for sponsor support included "the default of Integrated Resources commercial paper in 1989, the default of Mortgage & Realty Trust and MNC Financial Corp commercial paper in 1990; the seizure by state insurance regulators of Mutual Benefit Life Insurance (a put provider for some money market fund instruments); the bankruptcy of Orange County in 1994; the downgrade and eventual administrative supervision by state insurance regulators of American General Life Insurance Co in 1999; the default of Pacific Gas & Electric and Southern California Edison Co. commercial paper in 2001; and investments in SIVs, Lehman Brothers, AIG and other financial sector debt securities in 2007-2008."
Chairman Schapiro noted, in addition, that more than 100 funds needed to be "bailed out by their sponsors" in September 2008.
ICI's Collins challenged that figure as well. "Without having seen the SEC staff's spreadsheet, we cannot verify this figure,'' he said. "The Moody's study indicates that 36 U.S. registered money market funds received sponsor support during the period 2007 to August 2009."
The 100 number was not new. In 2009, when the SEC first was proposing reform of money market funds' operation, the proposing release noted: "Many money market fund sponsors took extraordinary steps to protect funds' net assets and preserve shareholder liquidity by purchasing large amounts of securities at the higher of market value or amortized cost and by providing capital support to the funds."
In a footnote, the commission noted that its staff "provided no-action assurances allowing 100 money market funds in 18 different fund complexes to enter into such arrangements during the period from September 16, 2008 to October 1, 2008.''
That was the height of the credit crisis. Those no-action assurances are still on file at the SEC, at the Division of Investment Management, while a draft of a new set of reforms for money market funds circulates through the agency.