David Wessel of the Brookings Institution has described what happened with the Reserve Primary Fund, a money
Question:
David Wessel of the Brookings Institution has described what happened with the Reserve Primary Fund, a money market mutual fund, on September 16, 2008:
At 4:15 p.m., the fund issued a press release. The Lehman paper in its portfolio was worthless and the fund’s shares were worth not $1, but only 97 cents: breaking the buck. The news triggered a run that spread through the $3.4 trillion [money market mutual fund] industry.
a. What is “Lehman paper”? Why was the Lehman paper in the fund’s portfolio worthless?
b. What does “breaking the buck” mean? Why was it significant to the financial system?
c. What is a “run”? Why would one money market mutual fund having broken the buck cause a run on other money market mutual funds?
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien