For years money market funds toiled in the shadows offering safety and reliability; now they’re in the spotlight.
Are money market funds, with their long history of stability and safety, going away? Ordinarily, most people, and more significantly, regulators, paid them little heed. But since the fall of 2008, this benign and boring area of investing has been a focal point the government, regulators, institutional investors, technology providers, and every other constituency with some relationship to the investment class. Regulators want to radically revamp the asset class but some think they face an uphill battle.
The furor of course is over how to prevent a repeat of the MMF panic in 2008 that was triggered by the collapse of Lehman Brothers and that resulted most famously in the Reserve Primary Fund “breaking the buck.” Since that event the government has intervened on multiple fronts starting with crisis management in the form of temporary guarantees for MMF balances. This was followed by a tightening of the MMF rules in 2010 that called for higher quality holdings, shorter durations and higher levels of liquidity. But those moves, which many seem sufficient, are not at all in the eyes of the SEC, which is working on new proposals to potentially change the industry in a more radical way (see related story here).
Calling for the potential elimination of the stable net asset value (NAV) and a holdback of 5 percent of redemptions are key components of the latest proposals. While these proposals, if passed, would surely add significant stability to MMF’s, they would also seriously impair, if not annihilate, the industry. A Wall Street Journal editorial this week endorsed these ideas on the grounds that their strengthening of the industry would go a long way to prevent future tax-payer funded bailouts or support.
But some industry experts are not at all convinced the proposals would ever fly. Peter Crane of Crane Data, a firm that closely follows, analyzes and reports on money market funds and the industry in general, in one of them. In response to the notion suggested by some that the FDIC, Fed, and treasury would like to see the MMF industry greatly diminished in favor of banks, Mr. Crane didn’t think this was the case. “The SEC like MMF’s and isn’t interested in killing them,” he said. “I don’t think there is anyone out there with malice toward MMF’s. They are the biggest buyers of bank debt and CD’s.” He added that they are aware of the impact. “You can’t harm one industry without harming the other.”
In any case, Mr. Crane said he is not that concerned about the proposals and calls them “a trial balloon” and predicted they will be “dead on arrival.” Mr. Crane also pointed out that “the SEC is aware that the FDIC, Fed and Treasury are watching them and recognize the Financial Stability Oversight Council would overturn anything too radical.”
Mr. Crane said that the biggest threat to the industry is actually performance and competition. It is lost on no one that MMFs have been in a slump for a while, offering low returns. Many investors might be looking for alternatives, despite the threats from regulators.