With Sept. 15 marking the one-year anniversary of the collapse of Lehman Brothers and the shocking revelation of Reserve Funds’ $785 million exposure to the debt, fund executives are taking a retrospective look at the historical run on money funds.
In the two days following Primary Fund’s breaking the buck, investors pulled a record 7%, or $210 billion, out of the $3.5 trillion money fund industry, spurring the government on Sept. 19 to offer insurance on money funds to investment advisors for a fee, as well as an offer to buy discount notes from primary dealers, to quell a full-blown “run on the bank.”
But the pressure on money funds couldn’t be stopped; investors were demanding immense redemptions, and at the same time, managers were unable to meet them due to frozen credit markets. And with buyers in those markets frozen, fund companies faced the challenge of fair valuing their portfolios at levels below a $1 NAV, which would have caused further investor panic and additional redemption waves.
“Countless other money market funds were poised to break the buck,” Peter Crane, president of Crane Data, told MarketWatch. “The mini-run would have spread to all funds.”
“It was a shock in that the people who keep the machine going, the broker/dealers, suddenly weren’t there to keep things going,” added Mira Stevovich, manager of the Ivy Money Market Fund and Waddell & Reed Advisors Cash Management. “You weren’t sure when reinvesting that there’d be anyone behind the securities to make a market if you had to sell. There was a lot of fear, and no one knew what was going to happen.”
Were it not for the federal programs, which restored liquidity to the markets, investors and fund managers would not have seen any relied, executives said.
As MarketWatch puts it, “One year later, and the money market fund industry is roughly back to where it was just before Lehman collapsed, standing at about $3.5 trillion in assets and serving as a refuge for those on the sidelines. And some say that last year’s events may simply have to be seen as a once-in-a-lifetime event.”