Treasury Proposes to Guarantee Money Funds in Stimulus

(Bloomberg) -- The U.S. Treasury Department proposed to temporarily guarantee money market mutual funds with taxpayer dollars as part of its coronavirus stimulus plan, according to a document obtained by Bloomberg News.

In a proposal sent to lawmakers early Wednesday, the department laid out plans to temporarily permit use of its exchange stabilization fund to guarantee money markets, according to the document.

Treasury proposed terminating the authority when President Donald Trump ends the national emergency declaration he announced Friday.

Under Stress

Peter Crane, president of money fund tracking firm Crane Data LLC, said outflows from institutional funds this week were putting those vehicles under stress as investors rush into cash and government debt holdings.

A slew of actions from the Federal Reserve earlier this week have helped ease the squeeze for funding that had reached levels not seen since 2008. But Treasury backstopping money market mutual funds, that have trillions in assets, could be essential if conditions worsen.

A Treasury guarantee is “probably not necessary today, but who knows tomorrow,” Crane said. “A blanket guarantee is sometimes the only thing that can stop these runs.”

Industry Reforms

Households, businesses and other institutions use money funds to park cash they may need in the short term. Reforms to the industry passed in 2016 forced a tiering of investments into funds with differing levels of safety and segregated retail customers from institutional. Much of the industry’s assets are now held in Treasury-only funds that remain stable. Only second-tier vehicles are coming under stress, Crane said.

The Treasury took a similar step during the global financial crisis when a run on money funds helped cripple credit markets. Under Secretary Henry Paulson, the department guaranteed more than $3 trillion of fund holdings against losses for almost a year using its Exchange Stabilization Fund.

In the backlash against government bailouts, Congress subsequently stripped Treasury’s ability to repeat that program.

Breaking the Buck

Money market mutual funds proved a crucial weak spot in 2008 after the industry’s largest fund, the Reserve Primary Fund, suffered losses on debt issued by investment bank Lehman Brothers. When its share price fell below the stable $1 promised to customers, investors began scrambling out of most other money funds, forcing their managers into a fire sale of assets.

While the 2016 reforms may have made funds safer, some of the new rules may still make some funds vulnerable to runs. For example, when funds drop below certain liquidity thresholds, they may impose restrictions or extra fees on withdrawals. In an an unsettled market, that could incentivize investors to pull out money before gates and fees are imposed.

(Updates with comments from analyst in fourth paragraph.)

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