The Reserve Primary Fund was the original

money market fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a ...

, created in 1970 by

Bruce R. Bent Bruce Roger Bent (born May 25, 1937) is an American businessman credited with inventing the world's first money market fund, the Reserve Fund, with Henry B. R. Brown in 1970. Bent and Brown created an organizational structure by which investors c ...

and Henry B. R. Brown and managed by Reserve Management Company. At its peak it held more than $60 billion in assets. During the

financial crisis of 2007-2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...

it lost dollar value, or " broke the buck," and was liquidated as a result.

Origin

Until 1980, Federal Reserve

Regulation Q Regulation Q ( 12 CFRbr>217 is a Federal Reserve regulation which sets out capital requirements for banks in the United States. Updated as required. The version of Regulation Q current was enacted in 2013. From 1933 until 2011, an earlier version ...

limited the rate of interest that banks could pay on savings accounts to 5 percent. This rule was a legacy of the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

, when unsustainable interest rates had contributed to widespread bank failures. When

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

reached 5 percent in 1969, depositors could no longer receive a beneficial real rate of interest. Alternatives to savings accounts at the time included

Treasury bill United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. gov ...

s and jumbo

certificates of deposit A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions in the United States. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, t ...

, each of which paid market interest rates but were less liquid than savings accounts and had minimum purchase amounts of $10,000 or more. Seeing an opportunity for

arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...

, Bent and Brown established the Reserve Fund to pool funds and invest them solely in those instruments. In response to this and other arbitrage methods, Congress lifted most of the interest rate limits by 1986.

Failure

In 2006 Reserve Primary made the decision to purchase

commercial paper Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...

, an asset class that Bent had dismissed as recently as 2001. By early 2008 asset-backed and financial-sector commercial paper made up 56% of its portfolio. The September 15, 2008

bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal ...

raised concern about Reserve Primary's holdings of Lehman-issued paper, which then made up 1.2% of its portfolio, as well as its other financial-sector paper. Among money market funds, Reserve Primary was especially vulnerable due to its lack of a parent company that might be able to guarantee its share price. Demands to withdraw money from the fund reached 25% of its assets by the afternoon and more than half on the following day, as clients sought to exit the fund before its Lehman assets impacted the share price. Unable to find a buyer for the assets, the fund declared them worthless and announced a share price of $0.97. After the Reserve Primary announcement other money market funds also began to experience runs, leading the

United States Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...

to halt orders and temporarily guarantee fund share prices. At the end of the month, the fund's managers announced that they would liquidate the fund. The

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC) sued Reserve Management and its executives for making false assurances to investors about their ability to maintain the fund's value. A federal court awarded the SEC $750,000 from all parties, a small fraction of the requested damages. The court concluded that the misconduct had been an isolated incident in extraordinary circumstances and was not likely to be repeated. A separate investor

class action A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class actio ...

lawsuit was settled for $54 million. The fund dissolved in December 2015, having paid investors $0.991 per share.

References

{{Reflist, 1 Great Recession Mutual funds of the United States Financial services companies established in 1970 American companies established in 1970 Financial services companies disestablished in 2015 American companies disestablished in 2015