I just had an interesting conversation with Tom Newton, the co-founder of Institutional Cash Distributors, a company that runs a trading platform for folks like state treasurers and corporate cash managers to buy and sell money markets.
I was curious to know where institutional investors moved their money to after withdrawing it from that Putnam fund that shut down because of mass redemptions. I mean, if you don’t think a money market is safe, where do you go? A lot of these cash managers work under tight restrictions. It’s not like they start buying up gold.
Partly, they’ve been moving to other money markets. The thinking isn’t to abandon money funds entirely, but to make sure cash is spread between a lot of different companies—diversification!— in case there is an issue at any one firm. Funds run by big banks, which ostensibly have the wherewithal to back up their money markets should it come to that, have been particularly popular.
There has also been a real flight to super-high-quality money markets, like the ones that only buy Treasuries or Treasuries and the bonds of government agencies. In fact, there was so much of a flight to quality in the wake of Reserve Primary breaking the buck that a number of funds stopped taking additional investments—there was simply nothing more to buy with the extra cash.
The other option, if you’re the one running some company or pension fund’s cash portfolio, is to go and buy issues directly. Considering the massive amount of money that’s left institutional money funds, this has obviously been the case. And where do you go? To Treasuries, agency bonds—and top-rated commercial paper. Wait, commercial paper? Does that make sense? A diversified money fund with commercial paper isn’t safe, but owning that paper outright is?
Newton had another idea about what’s at play: people covering their asses. Okay, he didn’t use that word. And I kind of wonder if I’m allowed to use it on Time.com… Anyway, he put it much more diplomatically, but the idea is, if you’re an assistant state Treasurer, and there’s panic in money funds, you’ve got to do something. You’ve got to do something so that you can walk into your boss’s office and tell him what that something is. So you can say the money is safe—never mind that it was almost certainly safe before.
Of course, with the Treasury’s announcement that it will temporarily guarantee money funds, people have calmed down. At least for now. But no one yet has details on what the Treasury’s program involves. Newton’s probably not the only person out there who’s eager to find out.