By Thomas Cooley and Kim Schoenholtz – The run on U.S. MMMFs in September 2008 was a critical moment in the financial crisis. It underscored the extent to which these funds, an important part of the shadow banking system, created systemic risk that indirectly threatened the financing of even the healthiest U.S. firms. To end the run, the U.S. Government guaranteed MMMF liabilities, sustaining the funds’ promise to pay $1 for every share.
That guarantee stopped the run, but it also created enormous moral hazard. Were a similar threat to arise today, we can safely assume that taxpayers would remain on the hook to rescue the MMMFs. This uncompensated, rainy-day backstop constitutes a subsidy to the MMMF industry — and to its investors and borrowers.
- Money Market Funds – A Bad Deal Is About To Get Worse | LearnBonds.com (learnbonds.com)
- Bernanke: Money Market Funds Still at Risk of Runs (blogs.wsj.com)