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June 27, 2011 at 03:37 PM
Trillions of dollars of money market funds are the subject of growing concerns about European debt contagion, especially as Greece’s economy wobbles under the weight of its problems, but experts caution the situation may fall well short of a systemic risk problem.
At issue is whether the as much as 50% exposure of money market funds to European debt securities make those funds vulnerable to “breaking the buck,” which in turn could lead to a run on the funds. On Friday, the House Financial Services Committee held a hearing on the issue and The Wall Street Journal devoted its lead editorial to the topic on Monday.
Michael Krasner, managing editor of research firm iMoneyNet, which tracks money market funds, notes that only one fund — the Reserve Fund — broke the buck (it’s value fell to 97 cents per share rather than the $1.00 a share expectation of money market investors) as a result of the Lehman Brothers securities it held. The bigger concern, he stated in an interview with AdvisorOne, was the fear this caused among investors.
“Other funds that may have held Lehman securities had more resources to deal with the situation and did not break the buck, though many suffered redemptions in what became a run on the funds in general — whether they had exposure to Lehman or not,” Krasner said.
“That‘s when the Treasury stepped in with the guarantee program, which was never tapped, by the way,” Krasner added. The failure of just one money market fund in the Lehman crisis — and one other in the early ’90s unrelated to Lehman — compares favorably to the number of bank failures in the past 40 years, he said.
Christopher Thornberg, an economist and forecaster with Beacon Economics, was dismissive of the panic over money market funds. “I don’t see a systemic threat to the money markets,” he said in a phone interview. Thornberg, the founding partner of the Los Angeles-based firm, added that “the issue with Lehman failing was more because no one expected Lehman to fail. Nobody is any way, shape or form confused about the Greek situation. Various financial institutions are working to inoculate themselves against that situation.”
Taxable institutional money market accounts total close to $1.7 trillion in net assets, with taxable retail accounts adding an additional $700 billion. These funds are some 50% invested in European debt instruments — CDs and commercial paper — according to Fitch Ratings, though iMoneyNet’s Krasner says the funds “seem to be rolling off such holdings as they mature and not buying new ones.”
