3 see emergency economic stabilization act of 2008

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3SeeEmergency Economic Stabilization Act of 2008, Public Law 110-343, 122 Stat. 3765 § 131 (“The Secretary is prohibited from using the Exchange Stabilization Fund for the establishment of any future guaranty programs for the United States money market mutual fund industry.”).
8The 2010 ReformsShortly after I joined the Commission in 2009, I asked the Commission’s staff to prepare rulemaking designed to address concerns about money market funds revealed by the 2007-2008 crisis. The staff, with assistance from a report prepared by the money market fund industry, quickly identified some immediate reforms that would make money market funds more resilient. I am proud of this initial reform effort, but it is important to recognize what it did and did not do. The initial reforms, adopted and implemented in 2010, were designed to reduce the risks of money market funds’ portfolios by reducing maturities; improving credit standards; and, for the first time, mandating liquidity requirements so that money market funds could better meet redemption demands. The new reforms also required money market funds to report comprehensive portfolio and “shadow NAV” information to the Commission and the public. The 2010 rules made money market funds more resilient in the face of redemptions by requiring them to increase the liquidity of their portfolios. But the amendments did not (1) change the incentives of shareholders to redeem if they fear that the fund will experience losses; (2) fundamentally change the dynamics of a run, which, once started, will quickly burn through the additional fund liquidity; (3) prevent early redeeming, often institutional investors from shifting losses to remaining, often retail investors or (4) enable money market funds to withstand a “credit event” or the loss in value of a security held by a money market fund, precisely what triggered the run on the Reserve Primary Fund. That money market funds were able to meet redemptions last summer when the markets were under stress suggests the 2010 reforms have helped address the risks they were designed to
9address. However, the reforms were not designed to address the structural features of money market funds that make them susceptible to runs, and the heavy redemptions of 2011 were (1) substantially less than in 2008, (2) made over a longer period of time, and (3) not accompanied by losses in fund portfolios. During the three-weekperiod beginning June 14, 2011, investors withdrew approximately $100 billion from prime money market funds. In contrast, during the 2008 financial crisis, investors withdrew over $300 billion from prime money market funds in a few days. These are significant differences. If there had been real credit losses last summer, the level of redemptions in some funds could very well have forced a money market fund or funds to break the buck, leading to the type of destabilizing run experienced in 2008.

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