On September 18, 2009, the Treasury's Temporary Guarantee Program ("TGP") ended. This program provided a form of government insurance on participating money market funds. A few posts in November 2009 reviewed the manner in which payments to the Treasury (insurance "premiums") were calculated and charged by participating money market funds. The primary focus here is who paid for the insurance and who could have received any payments from the coverage.
While premiums were paid directly by the funds, the funds used their fees assessed to all money market fund investors, including any investors who did not qualify to receive a monetary benefit from the insurance. Investors in a participating fund would be covered by the TGP capped at the invested balance as of September 19, 2008 (the "Cut-Off Date"). In other words, even though premiums were charged at the fund level, coverage was defined at the specific account level and based on a specific time. This arrangement is akin to paying premiums for a mandatory employer-sponsored group insurance plan but not being covered if the employment started past a certain date.
Even people who invested in a money market fund as of the Cut-Off Date would not necessarily be fully covered by the TGP. If such an investor held $1,000 on the Cut-Off Date but subsequently invested another $2,000, only the initial $1,000 would be covered. In fact, coverage is not transferable across different funds. If the same investor redeemed the initial $1,000 which was covered and used the proceeds to invest in another money market fund, coverage would not apply to the new investment. An earlier post more clearly explains the details of how coverage was extended with respect to the Cut-Off Date.
The data to track who individually invested in money market funds, including when and by how much, is not publicly available. Even brokers possessing this information would probably require a non-trivial amount of effort and expense to retrieve such data. In order to demonstrate the monetary cost to investors who paid for the TGP but were not covered, we can utilize public data on cash flows for money market funds and derive some useful estimates from a model.
Based on the monthly sales and redemptions for registered money market funds, the model estimates how much of the fund balances originated from investments made before and after the Cut-Off Date. The results below exclude funds which invest primarily in Treasurys and Government debt. Several such funds decided not to participate in the TGP for the full term since, by investing in only Federal government-backed debt, the Treasury guarantee was implicit, hence additional insurance was deemed redundant. Therefore, the sample population of funds in this analysis comprises those which invest in CP, corporate bonds, municipal bonds, RMBS, ABS, and repurchase agreements, in addition to some possible amount of Treasurys and Federal agency debt. In order to expedite the modeling process, only funds with assets over $1 billion are included, and we assume such funds represent a majority of the population.
The results are broken down by three main scenarios. Across all scenarios, investors are assumed to redeem from money market funds in proportion to their balances. For example, if $100 million were invested in a money market fund prior to the Cut-Off Date, out of a total balance of $400 million for the same fund, then the model would assume that 25% of redemptions would be deducted from the $100 million portion. Of course, this "ratio" changes over the modeled time period, from September 19, 2008 through September 18, 2009, depending on how many investors purchase and sell a money market fund after the Cut-Off Date.
In the first scenario, the model assumes that purchases of a money market fund are as likely to come from investors who are covered (insured) by the TGP than those who are not covered (uninsured). Accordingly, in the numerical summary below, the split in Average Monthly Sales (82.6% insured vs 17.4% uninsured) closely matches the split in Average Monthly Balance (81.4% vs 18.6%). As highlighted by the green box, investor balances not covered by the TGP paid 9.6% of the total premiums in this model scenario.
In the subsequent graph, which shows the trend in the insured and uninsured balances over the modeled time period, the monetary cost to investors who are not covered by the TGP is proportional to the size of the red bars versus the green bars.
In the second scenario, the model assumes that purchases of a money market fund are twice as likely to come from investors who are covered by the TGP than those who are not covered. When comparing the split in Average Monthly Sales (45.4% insured vs 54.6% uninsured) against the split in Average Monthly Balance (65.7% insured vs 34.3% uninsured), we observe a greater tendency for sales/purchases to come from investors not covered by the TGP. As highlighted by the green box, investor balances not covered by the TGP paid 28.2% of the total premiums in this model scenario - equivalent to $188 million for the sampled population of $1.9 trillion in fund assets.
Accordingly, the graph corresponding to this second scenario shows a larger proportion of bars colored red than in the first scenario.
In the third and final scenario, the model assumes that purchases of a money market fund are four times as likely to come from investors who are covered by the TGP than those who are not covered. When comparing the split in Average Monthly Sales (25.7% insured vs 74.3% uninsured) against the split in Average Monthly Balance (49.9% insured vs 50.1% uninsured), we observe an even greater tendency for sales/purchases to come from investors not covered by the TGP. Investor balances not covered by the TGP paid a substantial 44.7% of the total premiums in this model scenario - equivalent to $298 million for the sampled population of $1.9 trillion in fund assets.
This scenario may be somewhat extreme but interesting nevertheless. In the corresponding graph, the proportion of red bars versus green bars shows the increasing amount of TGP premiums paid by investors who invested in a money market fund after Cut-Off Date.
While TGP premiums were paid to the Treasury only on specific dates, we assume that money market funds amortized that expense over time and spread the cost out beyond the date when premiums were paid. Regardless of when an investor made initial or subsequent investments, whether before/after Cut-Off Date and before/after premium payment dates, the fund assessed its fees consistently across all investors. Whether investors in a money market fund paid for some portion of TGP premiums after its termination on September 18, 2009 is a question beyond the scope of this analysis and beyond the scope of data available.
We cannot estimate an exact monetary cost to investors who, by definition of the TGP, would not have been eligible to receive payouts from the Treasury in the event a money market fund suffered losses from defaulted securities or otherwise could not fully repay investors. However, from these scenarios, we get a sense of the relative magnitude of this cost. The green box in each of the numerical summaries above indicates how insured and uninsured investors split the modeled cost of TGP insurance. Investors not covered under TGP might have paid $64 million under a reasonable scenario, to as much as almost $300 million in an extreme scenario. Without access to additional data from account-level records, one cannot perform a more accurate and conclusive analysis. (For a money market manager curious on how such an analysis would work, please contact the author at omer@ProteusFinancial.com)
This analysis should lead to further questions and potential ideas for how such a program could have been funded in a more equitable manner. Please feel free to post comments and feedback below. Check back for a future post showing how an actual money market fund (which invests in Treasury securities) participated in the TGP for the full term even though a vast majority of investors purchased the fund after the Cut-Off Date.