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.Components may not add to the total because of rounding.Source: Investment Company Institute 2009 Investment Company Fact Book, Tables 37 and 38.Second, the federal insurance applied only if the money mar-ket fund was liquidated and its shareholders lost money.Mostmoney market funds have not come close to breaking a buck and, in thoserare instances in which a fund broke the buck, it almost always was rescued 192 t oo bi g t o s a ve ?by its manager.The three instances in which the manager did not rescueits money market fund involved funds that were dominated by institu-tional investors, who should be able to fend for themselves without federalinsurance.Third, the SEC almost certainly will adopt stricter rules formoney market funds.51 As will be described later, the new rules willreduce the average maturity of all money market funds, prohibit thesefunds from investing in second-tier commercial paper, and increase theliquidity buffers of the funds.As a result of these new restrictions, chancesof a money market fund breaking a buck will become even lower.Money Market Funds at Zero YieldsUnfortunately, the yields on government money market funds droppedto almost nothing when the Federal Reserve reduced its target rate toclose to zero.For example, the average monthly return for Treasurymoney market funds was.013 percent at the end of 2008, as comparedto over 2 percent in 2007.52 As Treasury bills matured after December2008, their yields dropped further, and the total returns for governmentmoney market funds came close to zero; they did not drop below zeroonly because their managers absorbed most of their expenses.At thebeginning of 2009, a number of well-known managers (e.g., Fidelity,Schwab, and Vanguard) stopped accepting new investors into their gov-ernment money market funds.53Let s consider the implications of a zero policy rate for a retailmoney market fund holding 30-day U.S.Treasury bills with a grossyield before expenses of 10 basis points (10/100 of 1 percent).Themanager of a retail money market fund on average charges 35 basispoints to manage the fund.In addition, the fund has other expensescustodial, audit, and registration fees, as well as check writing, reporting,and other service expenses that usually cost another 15 basis points.So the total expenses of a retail money market fund could easily be 50basis points (35 for management and 15 for other expenses).Even if the manager waives its management fee, the fund willstill have 15 basis points of expenses with only 10 basis points ofgross yield.In other words, in order to attain a zero rate of return forthe money market fund, the manager will not only have to waive its Insuring Deposits and Money Market Funds 193management fee but also will have to subsidize 5 basis points of expenses(15 basis points of other expenses minus a gross yield of 10 basis points on30-day U.S.Treasury bills).In a government money market fund with $10billion in assets, this means that the manager is paying fund shareholders$5 million per year for the privilege of running the fund for free.Money Market Funds Need Tighter SEC RestrictionsThe Group of 30, a nonprofit association of fi nancial experts fromaround the world, has proposed that all money market funds shouldbecome special-purpose banks. If money-market funds providebank-like services, then they should be organized like banks, saidthe executive director of the Group of 30.54 In their view, money mar-ket funds should be subject to similar capital and reserve requirementsas banks; and like banks, money market funds should be insured bythe FDIC.55With all due respect to the Group of 30, money marketfunds should not be regulated like banks.Instead, the federalgovernment should try to preserve competition by offer-ing savers different types of vehicles for short-term investing.Money market funds promote competition by offering savers higherinterest rates for certain maturities in certain economic environments.For example, a taxable money market fund could pay an annualizedinterest rate of 3 percent, when monies kept in various types of savingsaccounts with limited or no checking could pay 1 percent or 2 per-cent interest.Indeed, on a nightly basis, many banks sweep excess cashfrom low-interest transaction accounts to higher paying money marketfunds.Investors, provided they receive fair disclosure of the risk, maywell prefer to incur the remote risk of breaking the buck in order torealize that higher return.Tax-exempt money market funds provide a unique way for savers toreceive interest income that is exempt from income taxes at the federal,state, and city levels.In places like New York or California, these dou-ble or triple tax-free funds are especially attractive to investors.By con-trast, bank deposits cannot offer tax-exempt income to investors becausebank deposits do not pass through the tax-exempt feature of any ofthe bank s own portfolio holdings.To obtain tax-exempt income in a 194 t oo bi g t o s a ve ?Table 8.4 Selected Money Market Instruments (December 2008)Total Money Market FundHoldingsBillions of Billons of PercentageDollars Dollars of TotalAgency securitiesa $ 1,748 $ 774 44%Commercial paper 1,599 629 39Treasury securitiesb 2,473 591 24Repurchase agreementsc 2,381 552 23Certificates of depositd 2,192 353 16Eurodollar depositse 1,489 132 9Total Taxable Instruments $11,882 $3,031 26%Total Tax-Exempt Instrumentsf 750 491 65aDebt issued by Fannie Mae, FreddieMac, and the Federal Housing Finance Board due to mature bythe end of December 2009: category excludes agency-backed mortgage pools.bMarketable Treasury securities held by the public due to mature by the end of December 2009.cRepurchase agreements with primary dealers: category includes gross overnight, continuing, andterm agreements on Treasury, agency, mortgage-backed, and corporate securities.dCertificates of deposit are large or jumbo CDs, which are issued in a amounts greater than $100,000.eCategory includes claims on foreigners for negotiable CDs and non-negotiable deposits payable inU.S.dollars, as reported by banks in the U.S.for those banks or those banks customers accounts.Valuesfor customer accounts are for September 2008.fCategory includes VRDNs, ARSs, TOBs, and other short-term debt
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