An examination of prime vs. government money market funds, the mechanics of breaking the buck, the March 2020 run that required Fed intervention, and why structural fragility persists despite regulatory reform.
Educational content only — not personalized financial, legal, or tax advice.
Money market funds (MMFs) manage over $6 trillion in the United States alone — and they are structurally fragile. They promise a stable $1.00 net asset value (NAV) while holding no capital buffers and offering no deposit insurance. When investor confidence breaks, they run.
Government MMFs: Invest exclusively in Treasury securities, agency debt, and government repo. Considered virtually risk-free. Stable NAV preserved even in crises. AUM: ~$4.8T.
Prime MMFs: Invest in commercial paper, certificates of deposit, and corporate short-term debt. Higher yields, but higher risk. AUM: ~$1T. These are the systemic risk.
On September 16, 2008 — the day after Lehman Brothers filed for bankruptcy — the Reserve Primary Fund reported its NAV had fallen to $0.97, triggering a global panic. The fund had $785M in Lehman commercial paper. Investors fled prime MMFs: $310B was withdrawn in 3 days. The Fed and Treasury intervened with guarantees and emergency facilities to stop the run.
As COVID-19 panic spread, institutional prime MMFs experienced $100B+ in outflows over 2 weeks in March 2020. Corporate paper markets froze as funds refused to buy commercial paper. The Fed launched the Money Market Mutual Fund Liquidity Facility (MMLF) — essentially buying assets from funds to restore liquidity. Same playbook as 2008.
Post-2008: Institutional prime MMFs required to use floating NAV (not stable $1.00). Liquidity fees and redemption gates permitted.
Post-2020: SEC proposed mandatory swing pricing and removal of the redemption gate option (arguing it accelerated the 2020 run by triggering preemptive withdrawals).
What hasn't changed: The fundamental mismatch — daily liquidity promises backed by instruments that take days to settle. Prime MMFs remain run-prone because they offer a false promise of bank-like stability without bank-like protections. Until this structural mismatch is resolved, every major crisis will include a prime MMF run requiring government backstop. See shadow banking for the broader context.