FYI Bruce Bent and the Money Market Mutual Fund Panic of 2008 Bruce Bent, one of the originators of money market mutual funds, almost brought down the industry during the subprime financial crisis in...

FYI Bruce Bent and the Money Market Mutual Fund Panic of 2008

Bruce Bent, one of the originators of money market mutual funds, almost brought down the industry during the subprime financial crisis in the fall of 2008. Mr. Bent told his shareholders in a letter written in July 2008 that the fund was managed on a basis of unwavering discipline focused on protecting your principal. He also wrote the U.S. Securities and Exchange Commission in September 2007, When I first created the money market fund back in 1970, it was designed with the tenets of safety and liquidity. He added that these principles had fallen to the wayside as portfolio managers chased the highest yield and compromised the integrity of the money fund. Alas, he did not follow his own advice, and his fund, the Reserve Primary Fund, bought risky assets so that its yield was higher than the industry average. When Lehman Brothers went into bankruptcy on September 15, 2008, the Reserve Primary Fund, with assets of over $60 billion, was caught holding the bag on $785 million of Lehman s debt, which then had to be marked down to zero. The resulting losses meant that on September 16, Bent s fund could no longer afford to redeem its shares at the par value of $1, a situation known as breaking the buck. Bent s shareholders began to pull their money out of the fund, causing it to lose 90% of its assets. The fear that this could happen to other money market mutual funds led to a classic panic in which shareholders began to withdraw their funds at an alarming rate. The whole money market mutual fund industry looked like it could come crashing down. To prevent this, the Federal Reserve and the U.S. Treasury rode to the rescue on September 19, 2008. The Fed set up a facility to make loans to purchase commercial paper from money market mutual funds so they could meet the demands for redemptions from their investors. The U.S. Treasury then put in a temporary guarantee for all money market mutual fund redemptions and the panic subsided. Not surprisingly, given the extension of a government safety net to the money market mutual fund industry, there are calls to regulate this industry more heavily. The money market mutual fund industry will never be the same.