Is The Treasury Out To Kill Money Market Funds?

Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, on schedule, this September 18.

While I am for any reduction in the government's role in the economy, this decision is pretty interesting. Why would they do it now, when even a cursory examination of the real economy shows that things are shaky and rocking the boat on investor confidence seems a bit of a gamble?

I will try to answer that question, but only after stepping back to 2008 when I was told by a friend of mine in the most rarified air of high finance that he and all his peers had pulled all their cash out of money market mutual funds in March of 2008. They had done so because of the large quantities of suspect paper littering the portfolios of the funds, much of it anchored to commercial real estate and syndicated portfolios of consumer loans.

As of mid-year 2008, 40% of outstanding corporate paper was held by money market mutual funds. The funds had taken on this paper as a way of trying to boost their yields and therefore gain a competitive advantage.

Another friend, an executive of a very large mutual fund company, confirmed that what lurked under the hood was ugly indeed.

In September of 2008, these concerns were made tangible when one of the largest U.S. money market funds, the Reserve MMF, "broke the buck." Which is to say that the fund's net asset value had fallen below the $1.00 benchmark that money market funds traditionally hold the line on. When the news broke, the public started heading to the exits, which is why the government had to step in with a deposit guarantee.

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