That group is the money market funds, which function as banks but historically have had the best of all regulatory worlds: no capital requirements, no reserves, no fees for deposit insurance and a belief by their customers that they were at least as safe as banks.
This week the comment period closed on proposed money market rules set forth by the Securities and Exchange Commission. The rules are pitifully weak and inadequate. They could even make the system more vulnerable in a crisis, as the presidents of all 12 Federal Reserve banks pointed out in a letter to the S.E.C.
But that has not stopped the mutual fund industry from trying to weaken them even more.
By coincidence, the deadline for comments was on Thursday, just five days after the fifth anniversary of the collapse of Lehman Brothers. It was that collapse that revealed to all just how shaky the money market industry was.
The answer is — or ought to be — remarkably simple:
“They either have to be banks or mutual funds,” Paul A. Volcker, the former Federal Reserve chairman, told me in an interview. “If they are banks, promising to pay at par on demand, they should be regulated like banks. If they are mutual funds, they should be regulated like mutual funds.”
But such a sensible proposal would outrage the money market fund industry, which has lobbied politicians intensely.
It was perhaps the biggest embarrassment of Mary Schapiro’s tenure as chairwoman of the S.E.C. that she was unable to persuade a majority of commissioners to propose any reform of the industry. So her successor, Mary Jo White, was praised when she managed to get the commission to unanimously put out the two rules for comment. Surely, something was better than nothing.
Well, in this case, perhaps not.
One proposed rule calls for allowing the net asset value of money market funds to fluctuate. Currently, funds price their shares at $1, rounded to the nearest penny, and promise they will remain there. In practice, that means that as long as the value remains at or above 99.5 cents, the fund will not break the buck.
The S.E.C. proposal would stretch that rounding out to the nearest hundredth of a penny.
But the S.E.C. proposal would not actually do very much. Funds that invest primarily in government securities would not face a floating net asset value. Nor would so-called retail money market funds, which allow investors to withdraw no more than $1 million at a time. Even those few funds that would be subject to the rule would be able to use an existing S.E.C. rule that usually lets them assume market prices are equal to par value for any security that will mature within 60 days.
The fact that the proposal would do little has not stopped the industry from complaining. Fund companies want to change the definition of “retail” fund. Some suggest raising the limit to $5 million. Others say that as long as the investor has a Social Security number, the fund should be deemed retail.
The other S.E.C. proposal sets up an elaborate procedure that would allow — but not require — money market funds that have experienced a lot of redemptions to either impose a fee on redemptions or to simply suspend such payments for 30 days. This is called the “gating” proposal because it erects gates to protect funds.
And what is the virtue of that? Well, it would prevent, or at least delay, a run on any fund that got in trouble. If protecting the fund, and not its investors, is the top priority, maybe that makes sense.
But in reality, it probably would do more harm than good. As Eric S. Rosengren, the president of the Federal Reserve Bank of Boston wrote in a letter signed by all the other regional Fed presidents, a fund could run low on liquidity — and thus initiate the gating proposal — if a couple of large investors in the fund withdrew their money for any reason. That could scare investors in other funds that seemed similar in some way, producing more runs and more gates. “As this represents a new run mechanism that does not exist under the status quo, the fees-and-gates alternative may actually increase run risk relative to not enacting further reform,” Mr. Rosengren wrote.
To much of the industry, there is no problem at all. What happened in a 2008 was a “once-in-a-generation scenario” that is unlikely to recur, as a lawyer for one money-market fund group, Federated Investors, put it in a comment letter. Any further reform, he added, “should be designed to preserve the utility” of money market funds.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
Article source: http://www.nytimes.com/2013/09/20/business/money-market-funds-circle-the-wagons.html?partner=rss&emc=rss