The Fed is throwing a massive lifeline to money market funds AFTER the crisis has passed and investors are entering the pool again on their own. Consider today’s story from the Financial Times:
The US Federal Reserve on Tuesday said it would finance up to $540bn (€410bn) in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.Money market funds have faced severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper.
This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds….
“The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed said.
Lawrence Fink, chief executive of BlackRock, the asset management group, said: “This is a very big event. This is the first thawing that I really see in terms of helping the commercial paper market unravel itself.”
Under the scheme the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.
Now consider yesterday’s Financial Times article, “Record inflows into money market funds“:
Investors are pumping a record amount of cash into money market funds as they rush to the safest instruments amid the market turmoil.In spite of co-ordinated central bank action to inject liquidity into the markets and sweeping measures from governments to shore up the beleaguered banking sector, investors are still shunning riskier investments.
Money market funds, which are considered safe because they tend to buy US Treasuries, absorbed $44.4bn last week, the largest inflow since 2001, according to fund tracker EPFR Global.
Money market funds were hit last month when one fund, Reserve Primary Fund, “broke the buck”, or returned investors less money than they paid in. But this was a fund that invested in commercial paper rather than Treasuries.
Cameron Brandt, global markets analyst at EPFR, said: “Investors want something that is safe in a very volatile market, with equities swinging sharply from one day to the next.
“However, they also want flexibility and the ability to pull their money out quickly when they consider the time is right to switch into equities. This is something they can do with money market funds.”
However, in spite of the latest inflows, money market funds have not yet made up for their outflows during September – in one week last month investors pulled $200bn from the funds.
This is the one area of the money markets that is recovering nicely on its own, yet the Fed targets it for emergency action with a massive program, AFTER the Treasury has implemented a short-term insurance program.
Willem Buiter criticized the Fed at Jackson Hole for being unduly sensitive to the financial service industry’s demands. Today’s action yet again proves him right.
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Yves-
There is an interesting distinction between assets available for purchase between the CPFF (Commercial Paper Funding Facility) and the newly minted MMIF.
The CPFF can only buy the CP of domestic issuers, while a (very) careful reading of the MMIF press release from the Fed appears leaves open the possibility of purchasing non-domestic issuers. Many of the large money funds are 25-40% invested in European bank CP and have exposure to term (not overnight) maturities.
I wonder if this facility was created to buy the MM Funds out of their European bank paper?
Otherwise, why bother? Why a second facility? My theory is that the MM Fund industry was in the process of not rolling over European Bank CP, and this facility was created to act as a bridge to the European Banks so that they would not have funding problems. The initial CPFF is not flexible enough to handle such an issue.
I know that if I were managing a large MM Fund (which I did many years ago), I would not want to be exposed to ANY European names right now.
A lot of folks are focused on the SIV-like nature of the structure, but I think that is a misdirection. The structure is a incidental detail that is overshadowed by the original reason to create the facility.
This action leaves me concerned regarding the ongoing precarious state of the money markets, notwithstanding the recent easing in Libor rates and TED spreads.