The Treasury Temporary Guarantee Program ("TGP") for money market funds has received ample publicity since its inception after the Lehman Brothers bankruptcy. According to a FAQ from the Treasury's web site, the guarantee is subject to certain limitations.
1) If an investor owned 100 shares in a specific fund as of close of business September 19, 2008, subsequently sold the 100 shares, and then repurchased 100 shares in the same specific fund prior to a Guarantee Event, the investor would be covered for 100 shares.
2) If an investor owned 100 shares in a specific fund as of close of business September 19, 2008, subsequently sold the 100 shares, and then repurchased 125 shares in the same specific fund prior to a Guarantee Event, the investor would be covered for only 100 shares.
3) If an investor owned 100 shares in a specific fund as of close of business September 19, 2008, subsequently sold the 100 shares, and then repurchased 100 shares in another fund that is participating in the program, the investor would not be covered.
Let's run through a slightly different example (not from the Treasury's web site) which essentially reflects what the FAQ explains.
On September 12, 2008, an investor owns 100 shares in a money market fund which later participates in the TGP. Lehman Brothers files for bankruptcy on September 15. Fearing that stocks will plummet and bonds will become riskier, the investor reacts over the next few days by liquidating risky assets and purchases another 400 shares in the money market fund. Now the he/she has 500 shares of the money market fund. On September 29, the Treasury opens the TGP for money market funds. However, he/she has no luck in getting the guarantee to cover any of the proceeds generated from selling securities after the Lehman bankruptcy. The investor would have had to foreseen the meltdown in the credit markets (i.e. Lehman bankruptcy) in order to get full coverage (500 shares) under the TGP. Out of the 500 shares of the money market fund, only 100 are covered under the TGP.
This example does not discredit the mission or benefits of the TGP. The money market fund does participate in the TGP in order to stabilize its investor base, thus mitigating the changes of a "run on the fund" which would subsequently hurt all investors.
Rather, only the "finer" print is being highlighted here. After the Lehman bankruptcy, many investors reallocated their investments into money market funds and other relatively safer investments. Hence, it was important for money market funds to receive some form of government support to comfort investors. However, did investors fully appreciate the impact of the September 18, 2008 cut-off?
More posts on this topic should be forthcoming.
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