Thursday, January 8, 2009

Money markets backed by the Treasury and the Fed; the Fed expands

Yesterday the Fed announced two changes to the money market investor fund facility (MMIFF), initially authorized by the Board of Governors on October 21, 2009. The biggest change to the MMIFF program is: that the Fed increased the scope of the program's eligible participants beyond just U.S. money market funds. Why? Not because the program was so popular, but because to date, it has not been accessed - the balance is $0.

In the wake of the September crisis, when the share value for the Prime Reserve Fund (money market fund) fell below $1, the Fed and the Treasury instituted new programs to ensure the ongoing health of money market funds. The Treasury announced a temporary insurance program on September 19, while the Fed announced the MMIFF program on October 21. To date, the Fed’s MMIFF program has not been accessed by any eligible funds, as those same institutions are already backed by the Treasury's guarantee.

The Treasury’s money market program, TGPMMF

On September 19, 2008, the Treasury announced the Temporary Guarantee Program for Money Market Funds (TGPMMF ); the details of the program are listed here. The TGPMMF insures eligible money market funds for a small fee, where the eligible funds are those regulated by Rule 2a-7 of the Investment Company Act of 1940, and the fee is nominal (around 1.5 basis points). I imagine that most funds buy the insurance.

The Fed’s money market program, MMIFF

On October 21, 2008, the Fed announced a new money market program, the MMIFF. The program is designed to facilitate the redemption of money market shares without eligible funds having to sell assets; this keeps the supply, and thus the price and spread, of said assets stable. Here is Goldman Sachs’ write up about the program:
BOTTOM LINE: Fed comes out with another facility that provides support to short-term funding markets. The Money Market Investor Funding Facility (MMIFF) is aimed at helping money market funds deal with redemptions by providing a destination for paper that they sell to meet redemptions, though it may be extended to help other institutions as well. It is structured as a series of private special purpose vehicles (PSPVs), financed by a combination of asset backed commercial paper (10%) and loans from the MMIF (90%).
KEY POINTS:
1. Turning to the next bottleneck in short term paper markets the Fed has announced a new facility that will “purchase eligible money market instruments from eligible investors using financing from the MMIFF.” The MMIFF appears designed to address problems that money market funds are having selling assets to meet redemptions. This selling pressure, which puts a great deal of supply on the market, is one of the issues pushing spreads higher. Now, instead of selling at lower prices, funds will be able to sell assets to through the MMIFF.
The program has begun, but the Fed currently holds no assets ($0) through the MMIFF program. To date, none of the eligible money market funds – those U.S. funds that are that are regulated under Rule 2a-7 of the Investment Company Act of 1940 – have accessed the program.

The Treasury's and the Fed's program are not exact substitutes: the Fed’s program is designed to prevent problems in the money market industry from passing through to the asset markets of which comprise the money market portfolios. The Treasury’s program offers insurance to prevent problems in the money market industry itself.

The most plausible explanation for the Fed’s changes to the MMIFF program is: that the TGPMMF made the MMIFF extraneous. Therefore, the Fed increased the list of eligible participants to include those funds that are similar to the regulated funds under Rule 2a-7 of the Investment Company Act of 1940, but are not insured under TGPMMF.

I honestly don’t know if this is a bad sign or no sign at all. It could be that the Street sees a potential run on these non-insured funds. It could also be that the Fed sees its program as extraneous, and therefore, in its attempts to employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”, has modified the program to help drive down spreads in some credit markets.

We will see on future Fed balance sheets. But my overall understanding is that credit markets have improved, although conditions – the recession – have worsened significantly.

Rebecca Wilder

2 comments:

  1. The member CBs could continue to lend even if it's depositors ceased to hold savings altogether.

    Contrariwise, money market funds are financial intermediaires. An outflow of funds from MMFs is called “disintermediation”, where the intermediaries shrink in size, but the size of the CBs remains the same. I.e., the non-banks are the customers of the commercial banks.

    The collapse of the non-banks and the transfer of savings from the MMFs to the CBs reduces the volume of loan-funds, increases long-term interest rates, shrinks aggregate demand and therefore produces adverse effects on GDP and the level of employment.

    Anyway, the account holder's perception of the MMFs safety might be influenced by their MMF's participation in this program.

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  2. Last year, the Reserve "broke the buck" with respect to two funds and suspended redemptions on over 15 others.

    Interestingly, the Treasury Department program refused to guarantee ANY of the Reserve's muni bond funds, not withstanding the fact that they maintained a NAV of 1.00. http://www.ther.com/pdfs/Press%20Release%20TreasGuarantee%20Result%202008_1126.pdf

    It seems that the Treasury Department doesn't want to guarantee muni bond funds or those that might actually need the guarantee.

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