Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock

After Lehman’s collapse in 2008, investors ran from risky money market funds. In 27 funds, outflows overwhelmed cash inflows, thus forcing asset sales. These funds sold their safest and most liquid holdings. Funds were thus left with riskier and longer maturity assets. Over the subsequent quarter, however, the hard-hit funds reduced risk more than other funds. In contrast, money funds hit by idiosyncratic liquidity shocks before Lehman did not alter portfolio risk. The result suggests that moral hazard concerns with the Treasury Guarantee of investor claims did not increase risk taking. Funds that benefited most from the government bailout reduced risk.