Immediately after Lehman Brothers failed, a money market mutual fund called Reserve Primary “broke the buck”–it did not have enough money in its coffers to pay the shareholders what they’d had. Since money market funds are essentially used as bank accounts, this was a big problem–and it triggered a bank run on the money markets, which ended only when the government stepped in and said it would backstop these funds.
Despite their major role in the financial crisis, these funds haven’t attracted nearly as much attention in the press, or the wonk-world, as more theatrical financial instruments like synthetic CDOs. Not many financial journalists own synthetic CDOs. Most of us probably have money market accounts.
At last, the government is proposing new rules, which are supposed to make MMFs less risky. The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers. They would also have to offer a floating net asset value instead of the current “guarantee” that if you deposit a dollar, you’ll always get at least that dollar back.
The last is all by itself disastrous for these funds, whose main attraction is that they act like bank accounts. As for the rest, in a normal interest rate environment, this would be onerous. But with interest rates as low as they are, there’s no way for MMFs to absorb the hit by offering a lower return; it looks to me as if the interest rate would probably have to be negative. Which is to say, your MMF would actually be charging you for the privilege of giving you their money.
If passed as proposed, the rules would seemingly put the MMFs out of business. And perhaps that’s the point–Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s.
Though the SEC has tightened up the rules on what sort of assets the funds can hold, my understanding is that there are large gaps in the way we regulate these funds–as I understand it, in 2010 congress effectively made it illegal to bail out the funds again, but was less explicit about how to keep these funds from starting another run. These rules are an attempt to close that gap–and for sure, if we don’t have any MMFs, we won’t have any darn runs on them.
But it doesn’t actually seem likely that these rules will go into effect as proposed. This is the opening bid in a long negotiation. With another crisis looming in Europe, let’s hope it isn’t too long.
Industry attacks SEC proposals to regulate money market funds
AP – Two proposals being worked on by the Security and Exchange Commission’s staff “are neither constructive nor likely to make financial markets more resilient,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement posted on the group’s Web site.
The mutual-fund industry rejected plans for new rules governing money market funds, escalating a three-year confrontation with regulators over how to make the investments safer.
Two proposals being worked on by the Security and Exchange Commission’s staff “are neither constructive nor likely to make financial markets more resilient,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement posted on the group’s Web site.
“My concern is that within the councils of government there are people whose agenda it is to kill money market funds,” Stevens said in a telephone interview. “We won’t go quietly.”
The statement marks a shift to a more confrontational approach in a debate that has lasted for more than three years. The trade group said previously it might accept one of the plans the SEC’s staff will probably propose before the end of March. With new details of the plans emerging last month, the ICI is now on record opposing both.
The SEC’s first proposal would call for money funds to abandon their traditional $1 share price, adopting a so-called floating net-asset value. Industry executives have fought the idea since it was floated in January 2009 by a think tank headed by former Federal Reserve chairman Paul Volcker.
The second plan would require funds to build a capital cushion designed to absorb potential losses and hold back at least 3 percent of client redemptions for 30 days.
The ICI, whose members include Fidelity Investments in Boston and New York-based BlackRock, had engaged in talks with the SEC over versions of a capital cushion plan.
“The combination of capital requirements and redemption restrictions may well be the one idea that’s worse than forcing funds to float,” Stevens wrote Tuesday.
Christopher Donahue, chief executive of Pittsburgh-based Federated Investors, the country’s third-largest money-fund manager, said Jan. 27 that his firm would take legal action to block the changes being contemplated by the SEC.
Regulators have debated how to make the funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run by clients that helped freeze global credit markets.
The SEC enacted new rules in 2010 in an attempt to prevent future runs and government bailouts. Those changes included liquidity requirements, shorter maturity limits and enhanced disclosure mandates.
The ICI had long said it would oppose any regulation that wouldn’t leave a “robust and competitive industry in place” or “fundamentally alter the characteristics” of funds for investors, Stevens said in the interview.
As a second step, SEC Chairman Mary Schapiro “is advocating structural reforms to money-market funds to address their susceptibility to runs and provide a buffer against losses,” John Nester, an agency spokesman, said today in an e-mail.
Sumber: http://www.theatlantic.com/business/archive/2012/02/will-the-government-put-money-market-funds-out-of-business/252722/ dan http://www.washingtonpost.com/business/economy/industry-attacks-sec-proposals-to-regulate-money-market-funds/2012/02/07/gIQAjF3bxQ_story.html?wprss=rss_business