![]() ![]() This is the difference the markets arbitrage away versus taxable assets. The tax-free Municipal Money Market fund's 2.15 percent before-tax return was significantly lower than the other two funds. This return is just slightly less than the Prime Money Market fund's 3.07 percent return over the same period. Notice that the Vanguard Treasury Money Market made 2.91 percent a year on a before-tax basis. The T-Bills beat out the standard money market fund by $1,956 over this time period for an advantage of $72 a year for the lower risk and very safe T-Bills. Because most funds charge higher expense ratios than a typical T-Bill fund, the returns are actually lower. Table 8.9 Fidelity Select versus T-Bills versus Industry Benchmark Money Market Fund.Īn investor taking more risk in an average money market fund only received lower performance out of the arrangement and no extra profits.īut it's even worse for the industry average money market funds. Vanguard Tax-Free Municipal Money Market Fundįidelity Spartan International Index Mutual Fundįidelity Spartan Treasury Long-Term Bond Fund Vanguard Admiral Treasury Money Market Fund ![]() After the Lehman bankruptcy, investors moved out of money market funds, and the funds, in turn, were forced to withdraw from funding banks.28Ĭontagion has become more serious since the 1990s because financial institutions have become more interconnected and more fragile than they were in the past.Ĭhallenges of, impacting financial safety The crises of the investment banks Bear Stearns and Lehman Brothers in 2008 were precipitated by the refusal of short-term lenders such as money market funds to roll over and renew their loans when they were worried about the banks’ solvency. This source of bank funding is especially susceptible to contagion and runs because neither the money market funds nor their investors are officially covered by deposit insurance. Third, much of the borrowing by banks was in the form of short-term debt from other financial institutions, particularly from money market funds. Whereas in 1997, for example, the European banks that had lent to financial institutions in Asian countries had enough equity to absorb the losses from the Asian banking crises without too many difficulties, in 2007–2009 losses from subprime-mortgage-related securities quickly threatened the solvency of institutions that held the securities.27 Many of these investments were short-term loans that the money market funds had made to banks, sometimes just for a day or a few days. The run forced money market funds to reduce their investments. Treasury offered them a scheme for government-guaranteed deposit insurance.10 The run on money market funds was stopped only when a few days later the U.S. To protect themselves, many investors abruptly withdrew their money. Within days, Reserve Primary lost some $60 billion of its $62 billion in funds, and it was closed shortly afterward.9Īt the time, investors in other money market funds, even those not directly affected by the Lehman bankruptcy, treated the fates of Lehman Brothers and Reserve Primary as a signal that other investment banks and money market funds might also be at risk. This forced the money market funds to withdraw their funding from banks. ![]() Money market fund investors suddenly wanted to move their money into safer assets, such as government bonds or even just cash. Therefore, runs can occur in two ways-the money market funds can run to withdraw their funds from the banks, and the money market funds’ investors can run to withdraw their money from the funds.Ī double run of this sort actually happened in the fall of 2008. At the same time, the money market funds’ own investors may become concerned about the money market funds themselves and rush to take their money out. They can do this by not renewing the short-term loans they gave to the bank. The Bankers' New Clothes: What's Wrong With Banking and What to Do About Itīig bang: deregulation of the City of London,Ĭredit default swaps / collateralized debt obligations, ![]()
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