Depending on who you listen to, money market mutual funds are either the safe, similar-to-cash accounts that investors love and businesses depend on, or a dangerously uninsured flaw in the financial system that imperils us all. A run on money funds isn’t a phantom menace: it happened in 2008, and federal intervention was needed to stop it. Even so, the $2.6 trillion money fund industry seemed to win the argument in August, when the chairman of the Securities and Exchange Commission lost her bid to overhaul how the funds are structured.
Now two things have happened: a regulator with broader oversight power, the Financial Stability Oversight Council, has offered to pick up where the SEC left off, and an SEC commissioner who opposed the original reforms has said that he would support a modified measure.
That means the same battle will be fought again: regulators saying, essentially, “Your deceptively risky products nearly caused financial apocalypse in 2008, so let’s fix that”; and the industry responding, more or less, “Your reforms would put us out of business, and anyway everything’s fine now.”
The companies that offer money market funds, like Vanguard and Fidelity, argue that their funds play a crucial role in the economy, matching up the public’s desire for liquid, interest-bearing accounts with the needs of companies and governments for short-term loans. And the industry feels that it has already taken its regulatory medicine: in 2010, the SEC forced the funds to keep more assets in easily traded securities, the better to respond to any sudden panics.
Many experts contend that there’s more work yet to do. John Gapper, in the Financial Times, wrote in August that “reform of money market funds ought to be an open-and-shut case.” And former SEC chief Arthur Levitt called the agency’s abandonment of reform that month a “national disgrace.” (Levitt is a board member of Bloomberg LP, parent of Bloomberg Businessweek.)
There are three proposals for shoring up money funds. The first would raise capital requirements — that is, require them to keep more cash on hand as a backstop against losses. The second would place a speed limit on investors’ withdrawals, so that no one can take out his entire balance all at once. And the third involves a “floating” NAV, or net asset value — the cost of one share. One key feature of money funds is that you can always buy and sell your shares at the same price — $1 — so you always know what your account is worth and never have to worry about making or losing money on transactions. While the true value is sometimes off by a cent or two, money fund managers are allowed to ignore those fluctuations. A floating NAV would end this ruse and remind everyone that the funds are investments, not bank accounts, and the value of their holdings does, in fact, fluctuate.
The money market industry has a ready rebuttal to all three proposals. Each, they say, would kill the entire investment class. “Death by hanging, death by poison, and death by bullet,” says J. Christopher Donahue, the CEO of Federated Investors. “We know what will happen to our clients if they [the regulators] put any of that stuff in.” Capital requirements would make managing funds unprofitable, Donahue and others say. Withdrawal limits would repel investors. And a floating NAV would lead to more, not fewer, runs, because investors would pull money out at the first hint of a decline. Plus it would create endless tax headaches for investors.
Karrie McMillan, general counsel of the Investment Company Institute, argues that money market funds have proved their stability several times since 2008. Throughout the Euro drama, crisis in Greece, the U.S debt ceiling standoff, and more, the industry did not wobble. “Through all of that, money market funds did really, really well,” she says. From her perspective, the SEC’s proposed overhauls don’t guarantee more stability, but do guarantee higher operating costs.
Those proposals seemed to die in August, when SEC chairman Mary Schapiro acknowledged that she couldn’t persuade two of the other four SEC commissioners to support them. In defeat, she punted the issue to the FSOC — and Treasury secretary Timothy Geithner, who leads that group, accepted the challenge last week. “Further reforms to the MMF industry are essential for financial stability,” he wrote, and indicated that if the SEC didn’t resume its efforts, the Federal Reserve could step in.
Republican SEC commissioner Daniel Gallagher, who had initially opposed the money fund reform effort, told Bloomberg News in an interview last week that he had changed his mind, throwing his support behind the fluctuating NAV idea. That gives Schapiro another shot at pushing through change, with the fund industry doing everything it can to resist.
“I find it hard to believe that something isn’t going to happen,” says Bert Ely, a banking consultant based outside Washington. “But what isn’t clear yet is what.”
Summers covers Wall Street and finance for Bloomberg Businessweek.
