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Document Type

Case Studies

Abstract

In mid-September 2008, following the bankruptcy of Lehman Brothers, money market mutual funds (MMMFs) began to experience run-like redemption requests after a large fund “broke the buck,” owing to a large position in Lehman commercial paper (CP). Funds, which as a group were the largest investors in CP, retreated from CP, including asset-backed commercial paper (ABCP). Funds also sought to raise cash to meet redemptions by selling assets but were reluctant to sell ABCP into a depressed market. As the CP and ABCP markets seized up, it became difficult for issuers to place new paper, and concern grew about possible contagion of the broader financial markets and economy. As a result, on September 19, 2008, the Federal Reserve (the Fed) announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), pursuant to which the Fed made discount window loans to depository institutions and broker dealers to purchase high-quality ABCP from eligible MMMFs, providing cash for redemptions. Utilization of the AMLF peaked in October 2008, when outstanding loans totaled $152 billion, or the equivalent of 21% of all outstanding ABCP. As markets improved, utilization of the AMLF waned, and the program expired on February 1, 2010, without the government experiencing any losses. The AMLF is credited with having helped to stabilize MMMF redemptions, to restore liquidity to the ABCP market, and to have fostered liquidity in the money markets in general, but its impact must be considered in light of other coexistent programs.

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