Friday, November 20, 2009

Treasury TGP = Sticky Situation

In the last two postings, I discussed how the Treasury's Temporary Guarantee Program (TGP) for supporting money market funds favored shareholders who held positions on or prior to September 19, 2008 (the "Cut-Off Date"). The TGP served to preserve the perceived safety of participating money market funds for existing covered investors and possibly new uninsured investors.

More specifically, the TGP offered money market funds a few key competitive advantages.

1. Normally, FDIC-insured bank deposits are the dominant means for saving cash under a federal guarantee program. The TGP placed money market funds on a more even playing field, which probably was merited given the alternative of having investors en masse pull out of money markets funds. In response, the American Bankers Association warned that investors would be encouraged to withdraw bank deposits to take advantage of the TGP. As a result of this concern, the Treasury decided to limit the guarantee to shares held as of the Cut-Off Date.
2. If investors wanted to transfer funds out of a money market fund after the Cut-Off Date, the guarantee would cease to apply to the transferred funds. However, it seems that an investor could transfer funds back into the same money market fund and continue to benefit from TGP coverage up to the eligible balance as of Cut-Off Date. Therefore, money market funds became a convenient place to park funds (a sort of "safe haven") any time investors became worried about systemic risk in other assets or markets.
3. The "safe haven" status might have also encouraged investors to stay in a specific fund family. In other words, an investor could hop around different mutual funds within the same fund family where the money market fund provided coverage under the TGP. A decision to switch to another fund family would most likely involve a choice to close an account and abandon the insurance, unless an investor was a shareholder in money market funds at multiple fund families. As long as an investor never closed an account which provided coverage under the TGP ("Covered Account"), he/she could have transferred funds in and out of that account without losing the applicable insurance.
Given the last item, fund sponsors probably benefited from the "non-portability" of TGP insurance. (Remember when cell phone numbers in the U.S. could not be transferred between different carriers?) In contrast, FDIC insurance was always "portable", because the FDIC would insure bank deposits regardless of when and from where the money arrived. Although the Treasury specified a Cut-Off Date to prevent investors from moving their funds out of seemingly weaker institutions into safer money market funds, the Cut-Off Date and customer service representatives probably encouraged investors to think twice before leaving a fund family.

Combined with numerous press releases announcing participation in the TGP, marketing departments at fund families were handed a powerful tool for mitigating customer attrition - and possibly attracting new customers and assets (see "Exposed Assets" in the November 13 posting).

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