First, Norway’s regulators turned down the bank’s request that they waive a new rule requiring it to have a more diverse portfolio. Then they announced that the bank would no longer handle the export loan program it had run for decades. By late November, the bank’s credit rating had been slashed from “high quality” to “junk.”

About 20 American money market mutual funds — those trusted staples of institutional and individual cash management — were caught holding notes issued by the bank, Eksportfinans of Norway. The downgrade put the notes well below the quality threshold set by fund regulators.

What happened next? The answer depends on whether you’re talking to mutual fund executives or to their regulators — and the gap between the answers explains the regulatory fight that the $2.6 trillion money fund industry faces in 2012.

Ask a mutual fund industry executive and you’ll hear that the affected funds were quietly bailed out by their sponsors. In fact, fund industry executives say the Eksportfinans episode simply proved that the money fund industry is much safer and resilient because of the reforms put in place after 2008, when the Lehman Brothers bankruptcy set off a panic.

But ask a federal regulator about the Eksportfinans event and you’ll hear that the financial system dodged a bullet that could have started another ruinous stampede. As regulators see it, the episode is a worrisome reminder that, despite the new rules already in place, money funds still pose too big a risk to the nation’s financial stability.

The previous reforms — and the memory of 2008 — have had a healthy effect. Money funds are keeping more cash on hand for withdrawals and are buying less-risky securities.

For example, on a single day during the federal debt-ceiling crisis last summer, money funds experienced “the largest withdrawals since ‘Lehman week,’ ” noted Henry Shilling, a senior vice president at Moody’s Investors Service. “It was a fairly significant event, but the funds fared well.”

That stability was noted by Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, in a speech in November. But the goal, Ms. Schapiro said, is not just to make the market safe for money funds but also to keep the market safe from them.

Although “many voices have said ‘you’ve done enough,’ I believe additional steps should be taken” to address “a lingering concern about how money market funds will stand up in a significant financial crisis,” she continued.

The commission is expected to propose steps early in the year that would change the kind of money funds available to individual and institutional investors, and comments are already being filed from all sides.

But industry executives and analysts contend that there doesn’t seem to be a strong empirical link between the risks the regulators are trying to address and some of the changes they want to make.

The fundamental goal is to prevent a replay of the week of Sept. 15, 2008, when Lehman filed for bankruptcy. The Reserve fund family, the sponsor of the oldest money fund and the owner of almost $800 million in Lehman notes, was hit by a flood of redemption demands. On Sept. 16, 2008, it reported that the net asset value of its Reserve Primary fund had “broken the buck,” falling below $1 a share.

Within days, panicky investors yanked at least $310 billion from the nation’s money funds. The funds, dumping assets to raise cash, could no longer buy new notes offered by American businesses and government units. The short-term credit market went into free fall, adding to a banking crisis that was threatening to spin out of control.

An emergency government money-fund insurance program helped to stem the panic — and Reserve Primary fund investors eventually were paid 99 cents a share — but it was an experience that regulators are determined to ensure will never happen again. But would the outcome have been different if the proposed rule changes had been in place in September 2008? That’s harder to say.

ONE proposal is to institute a floating share price. Regulators say that investors wouldn’t worry that their money fund might “break the buck” if it did so all the time. But this proposal is especially irrelevant to what went wrong back then, according to a recent study by Jonathan Curry, Chris Cheetham and Travis Barker, senior investment officers at HSBC Global Asset Management.

The reality, they said, is that money fund prices simply don’t fluctuate very much — until there’s a full-blown crisis.

Article source: http://feeds.nytimes.com/click.phdo?i=0c64cd5e14c32a56de75d524b516a465