Lehman Brothers filed for bankruptcy, creating sudden uncertainty about the value of many short-term debt instruments. Money market mutual funds, which aim to keep a stable $1 share price by investing in short-term, high-quality debt, faced rising questions about credit quality and liquidity. This set the stage for investor withdrawals (redemptions) from funds exposed to Lehman-related paper.
The Reserve Primary Fund announced that its net asset value fell to $0.97 per share, meaning it could not maintain the $1.00 target share price—commonly called “breaking the buck.” This rare event damaged confidence in prime money market funds (funds that hold private short-term debt, not just government securities). It became a key shock that intensified withdrawals across the sector.
In the days immediately after Lehman’s failure, the Primary Fund faced extreme redemption pressure, with requests rapidly reaching tens of billions of dollars. Because many money market assets could not be sold quickly at close to face value (“par”), the fund struggled to raise cash without locking in losses. This pressure helped turn a single fund’s losses into a broader liquidity crisis.
The Federal Reserve announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). AMLF provided nonrecourse loans to banks so they could buy high-quality asset-backed commercial paper (ABCP) from money market funds, helping funds meet redemptions without “fire sale” asset dumping. The goal was to stop a downward spiral where forced sales cause losses, which then cause even more redemptions.
The U.S. Treasury announced a Temporary Guarantee Program for Money Market Funds to support confidence in funds that maintained a stable $1 share price. The program was designed to protect investors’ shares held as of September 19, 2008, if a participating fund later fell below $0.995. This policy aimed to reduce panic withdrawals by making investors less afraid of sudden losses.
The SEC issued an order allowing the Reserve Primary Fund to temporarily suspend redemptions, effective as of September 17, to support an orderly process. Suspending redemptions is unusual for mutual funds, but regulators viewed it as a way to prevent unfair outcomes among investors when assets could not be valued or sold normally. This step highlighted how far money-market stress had moved beyond routine liquidity management.
Treasury opened the guarantee program for eligible, publicly offered money market funds that applied and paid a fee. Coverage applied to shares held as of the close of business on September 19, 2008, and would be triggered if a participating fund’s net asset value fell below $0.995. Opening the program operationalized the policy response to the run dynamics seen after the Primary Fund’s loss.
Reserve’s management began liquidating the Primary Fund, moving from a stable-value money fund to a wind-down of assets for repayment. Liquidation was meant to return cash to shareholders as securities matured or were sold, but it also raised complex issues about pricing and fairness across investors. The drawn-out liquidation became a widely cited example of how a “$1 stable NAV” product can still transmit losses under stress.
The Federal Reserve provided details on the Commercial Paper Funding Facility (CPFF), a program to buy highly rated three-month commercial paper from issuers, financed through a special-purpose vehicle. Because many money market funds invest heavily in commercial paper, stabilizing this market helped reduce pressure on funds and their issuers. This broadened the response from “help funds sell assets” to “help issuers keep borrowing short-term.”
The Federal Reserve announced the Money Market Investor Funding Facility (MMIFF) to support an industry initiative to finance purchases of eligible short-term assets from money market investors, including money market funds. The facility was intended to improve secondary-market liquidity for instruments like certificates of deposit and commercial paper. Together with AMLF and CPFF, it reflected a layered strategy to stop runs by improving liquidity in multiple short-term markets.
The SEC adopted an interim final temporary rule to support orderly liquidation for money market funds participating in the Treasury guarantee program. The rule provided limited relief so a liquidating fund could suspend redemptions and postpone payment under specified conditions, rather than forcing disorderly asset sales. This was part of the crisis-era toolkit aimed at reducing “first-mover advantage,” where early redeemers may get paid while later investors absorb losses.
Treasury extended the Temporary Guarantee Program beyond its initial term, continuing coverage into 2009 as market conditions remained fragile. Extending the program signaled that policymakers still saw a risk of renewed money fund instability. The extension helped maintain confidence while other liquidity facilities and market conditions gradually improved.
Treasury announced the guarantee program’s expiration on September 18, 2009, reporting no losses and about $1.2 billion in participation fees. Ending the program reflected improved confidence and reduced emergency risk compared with late 2008. It also closed the most direct federal backstop for stable-$1 money market funds created in response to the Reserve Primary Fund shock.
A federal court ordered a pro rata distribution of Reserve Primary Fund assets following SEC action, and the fund distributed $3.4 billion in January 2010. The SEC reported that, with this distribution and earlier ones, investors had recovered more than 98 cents on the dollar. This marked a turning point from crisis containment to the longer process of unwinding and returning value to affected investors.
The SEC adopted amendments to Rule 2a-7 and related reporting requirements, tightening portfolio quality, maturity limits, and minimum liquidity requirements. The reforms also created a framework allowing certain funds that had broken the buck (or were close) to suspend redemptions to support orderly liquidation. This was a key post-crisis regulatory response meant to make money market funds more resilient to future run risk.
Money market fund runs and the Reserve Primary Fund breaking the buck (September 2008–2009)