Skip to content

FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

In September 2008, the Reserve Primary Fund, a large US money market mutual fund, 'broke the buck' after it wrote down its holdings of debt issued by a failed investment bank. Which feature of this event best explains why it triggered wider stress in short-term funding markets?

The Reserve Primary Fund's drop below $1 per share shattered the belief that money market funds were safe and stable. Investors rushed to redeem from other funds, which then cut purchases of commercial paper and other short-term debt, sharply tightening short-term funding markets for banks and corporations.

  1. AInvestors had assumed a stable $1 net asset value, so the loss prompted rapid redemptions across money market funds and a pull-back from commercial paperCorrect
  2. BThe fund's collapse eliminated the Federal Reserve's ability to act as lender of last resort to commercial banks
  3. CThe fund was the main counterparty in the credit default swap market, so its failure froze all CDS settlement
  4. DRegulators required all money market funds to hold only equity securities, forcing immediate asset sales

Explanation

Money market funds were seen as safe, with a stable $1 NAV. When Reserve Primary fell below $1, investors redeemed heavily from prime funds, and these funds stopped buying commercial paper, tightening short-term funding for banks and corporations. The other options describe things that did not happen.

Did you get it right without looking?

One question tells you little. A timed set on Anatomy of the Great Financial Crisis of 2007-2009 shows your real accuracy, how long you take and where you lose marks.

Practise Anatomy of the Great Financial Crisis of 2007-2009Free diagnostic mock

More Anatomy of the Great Financial Crisis of 2007-2009 questions