Raw Finance

The Federal Reserve Board on October 21, 2008, announced the creation of the Money Market Investor Funding Facility (MMIFF).  The program is designed to both prop up money market mutual funds and provide additional liquidity to the commercial paper market in order to spur lending.

Money market mutual funds generally invest in commercial paper and government debt instruments.  In September, when investors became increasingly concerned about the credit crisis and its impact on the commercial paper, they began pulling their assets from money market mutual funds.  As described in my original post, money market mutual funds are not covered by the Federal Deposit Insurance Corp., like their money market deposit account cousins.  (For more on this, please link to my previous post here.)

In order to satisfy the redemption requests, money market mutual funds needed to sell the commercial paper they were holding.  But since the commercial paper market had frozen up along with the rest of the credit market, the funds were unable to do so, and in some funds, the value of one share dropped below $1.  These funds are designed such that one share is always worth $1, and the earnings are paid to investors as dividends.  The drop in the value of the shares of certain funds below $1, a phenomenon known as “breaking the buck,” created more fear among fund investors, leading to a money market mutual fund panic.  Because they are big buyers of commercial paper, money market mutual funds could not be allowed to fail, as that would only exacerbate the ongoing credit crisis.

In response, the Federal Reserve has announced credit facilities and programs that attempt to resolve the money market mutual fund problem from two directions: facilities designed to unfreeze the commercial paper market, and direct intervention in money market mutual funds through guarantees and purchases of assets.  First, on September 19, 2008, the Fed announced the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds.  Then, on September 21, 2008, the Federal Reserve, announced that it would guarantee deposits in money market mutual funds until December 31, 2009.  On October 27, 2008, the Fed will implement the Commercial Paper Funding Facility (CPFF), which will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers.

The MMIFF will complement these efforts by authorizing the Federal Reserve Bank of New York (FRBNY) to provide senior secured funding in an amount up to $540 billion to five “special purpose vehicles” set up to buy certificates of deposit and commercial paper from money market mutual funds.