Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Would the Government Bail Out Money Market Funds?


Money market funds have no explicit guarantee from the US government.

In their prospectuses and in marketing materials, they always warn investors that money invested in the funds is at risk.

But would the government let major money market funds fail? If investors began a run on the funds, would the government step in again to guarantee the funds?

In other words: Is there an implicit guarantee on money market funds?

Both regulators and money market professionals say that no such implicit guarantee exists. They insist on this point.

What’s more, they say that rules put in place by the Securities and Exchange Commission have tightened controls on money market funds.

These controls should not only make it less likely that the funds would suffer dramatic losses—they should reassure investors enough to prevent panic withdrawals.

I’m not convinced. Public confidence in money market funds could still be shaken by a sudden, Lehman-like credit event. Little-understood regulations are not a guarantee against panic.

The government would likely intervene if it believed the markets were becoming unhinged.

Does that mean the government would certainly backstop money market funds? Of course not. Many people believed the government would support Lehman Brothers. That belief turned out to be wrong.

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