Reference no: EM133007060

A money market fund is a kind of mutual fund that invests only in highly liquid near-term instruments such as cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity-less than 13 months, such as U.S. Treasuries. On March 18, 2020, the Fed announced a new program that will make loans to financial institutions that buy shares in "prime" money market mutual funds (MMMFs). In the days prior to the initiation of the program, some MMMFs experienced significant demands for redemptions by investors due to the uncertainty related to the coronavirus outbreak. The bail-out program is intended to maintain the liquidity of MMMFs.

Problem a) MMMFs also experienced a broad run (unexpectedly high volume of redemptions) during the 2008 financial crisis. Compare the different features of MMMFs and interest-bearing deposits at commercial banks and explain why MMMFs are subject to runs while bank deposits are not.

Problem b) The MMMF industry was also bailed out during the 2008 financial crisis, and the most recent bailout in March 2020 is considered a disconcerting repeat of the bailout during the financial crisis. Why are the MMMFs considered so special that it can often obtain assistance from the governments?