The Dash for Cash: When Money Market Funds Nearly Broke
In the middle of March, institutions stopped trying to earn a return and simply tried to hold dollars. That rush exposed a weakness in money market funds that regulators thought had been fixed after 2008.
The Safest Thing That Was Not Safe
A money market fund is supposed to be the boring corner of finance. It holds very short term, very high quality debt, and investors treat it as a place to park cash that pays slightly more than a checking account. Corporate treasurers use these funds to hold payroll. The entire product is built on the promise that a dollar in is a dollar out.
In March 2020, that promise came under real pressure. Prime money market funds, the category that holds corporate short term debt rather than only government paper, experienced very large redemptions in a matter of days as institutions moved to government only funds or to plain bank deposits.
Why Investors Ran
The mechanics are worth understanding because they repeat. A prime fund holds commercial paper, which is short term corporate borrowing, typically maturing in 30 to 90 days. Those holdings are high quality but they are not instantly sellable in a panic, because the buyers who normally take the other side are themselves hoarding cash.
If a fund faces heavy redemptions, it must sell assets to pay departing investors. Selling into a market with no bids means accepting a lower price, which reduces the value left for everyone who stayed. That creates a first mover advantage: the rational move is to redeem before anyone else does. Understanding that structure is understanding why runs happen even when the underlying assets are fine.
A run does not require the assets to be bad. It only requires that leaving early is better than leaving late.
The Reform That Did Not Hold
After 2008, when one large fund fell below a dollar per share and triggered a broader panic, regulators rewrote the rules. Institutional prime funds were required to use a floating share price rather than a fixed dollar, and funds were allowed to impose redemption fees or temporarily suspend withdrawals if their liquid assets fell below certain thresholds.
The uncomfortable finding from March 2020 is that those gates may have made things worse. Investors could see a fund approaching the threshold at which withdrawals might be restricted, and redeeming ahead of that point became the obvious move. A rule designed to slow a run gave investors a visible countdown to run against.
What the Fed Built
The Federal Reserve responded with a facility designed to lend against the assets these funds held, so that a fund facing redemptions could raise cash without dumping commercial paper into an empty market. A parallel facility supported the commercial paper market directly, which mattered because that market is how large companies fund payroll and inventory between longer term financings.
The effect was quick. Once a buyer of last resort existed, the incentive to run in front of everyone else weakened, and flows stabilized. That is the recurring pattern in liquidity crises: the credible promise to buy often reduces how much actually has to be bought.
Why This Matters Beyond 2020
Liquidity risk is distinct from credit risk, and conflating them is one of the most common analytical mistakes. Credit risk asks whether you will be paid. Liquidity risk asks whether you can convert an asset to cash right now at a fair price. An asset can be entirely safe on the first question and dangerous on the second.
Every institution that funds long dated or hard to sell assets with money that can leave on short notice carries some version of this mismatch. Banks manage it with deposit insurance and central bank access. Funds manage it with liquidity buffers. The structure never fully disappears, which is why this episode is worth carrying forward rather than filing away.
The Bottom Line
The 2020 dash for cash showed that even reformed money market funds can face a run, and that rules meant to slow redemptions can accelerate them. Safe and liquid are two different words, and March 2020 was an expensive reminder of the difference.