What Was the Money Market Investor Funding Facility?
The Money Market Investor Funding Facility (MMIFF) was a financial entity created by the Federal Reserve during the financial crisis of 2008 to raise the liquidity available for money market investments.
Understanding the MMIFF
The Money Market Investor Funding Facility (MMIFF) existed from November 24, 2008, through October 30, 2009. During that time, the Federal Reserve Bank of New York authorized five special purpose vehicles (SPVs) to purchase up to $600 billion in short-term debt instruments from private-sector financial institutions. Eligible assets included highly rated money market instruments with maturities between seven and 90 days held in U.S. money market mutual funds and valued at no less than $250,000.
The Federal Reserve Bank supported the SPVs by loaning 90% of the purchase price of each asset to the SPVs, which issued asset-backed commercial paper to cover the remainder of the cost. As the debt matured, the MMIFF used the proceeds to repay both the Federal Reserve Bank and the MMIFF's outstanding ABCP debts. Funding from the SPVs supported 50 designated financial institutions covering a broad geographic distribution and identified by industry leaders as high-quality issuers of short-term debt with which the money market funds already did business.
The Federal Reserve took these actions in response to liquidity fears among money market investors and mutual funds, which flooded the short-term debt markets. By establishing the MMIFF, the Federal Reserve sought to expand secondary-market sales of medium-term instruments such as certificates of deposits, bank notes, and highly rated commercial paper.
Liquidity in Money Markets
Money market funds typically represent a stable, low-risk investment. They seek to hold net asset value (NAV) of deposited funds at $1, but since the Federal Deposit Insurance Corporation (FDIC) does not insure money market funds, investors can theoretically lose money by investing in them. During the financial crisis of 2008, the collapse of Lehman Brothers drove one money market fund’s NAV down to $0.97 after writing off debt. The United States Treasury eventually stepped in to insure consumer protection for funds that fell beneath $1, staving off a potential cash run.
Institutions wary of runs on their money market funds increased their liquidity positions by investing more of their holdings in very short-term assets, especially overnight positions. The Federal Reserve Bank established the MMIFF to offer additional sources of liquidity to money market funds at longer durations. This helped the funds to maintain appropriate liquidity conditions while at the same time relieving the short-term debt markets from the strain put on them by the unusually high number of short-duration investments seen from money market investors.