November 27, 2020

Money Market Funds May Soon Face More Changes

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.

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A Stronger Aer Lingus Says It Is Ready to Fly Solo

The six-seat, twin-engine propeller plane was restored for the occasion by a volunteer team of Aer Lingus pilots and engineers — a “labor of love,” as Mr. Mueller put it, as well as a source of comfort at a moment of wrenching austerity and economic uncertainty across Ireland.

“I believe it has served a little bit as a campfire,” Mr. Mueller said during an interview in his office overlooking Terminal 2 at Dublin Airport. “I mean, 1936 were difficult times, too.”

Yet for Mr. Mueller, a German who took the helm of Aer Lingus, the struggling Irish flag carrier, less than two years ago, the anniversary represents more than just a sentimental milestone.

“Out of 800 airlines in the world today, only about 13 are 75 years or older,” he said. “This proves that the airline business has always been very, very tough. Only a few make it.”

It also represents a turning point. After three-quarters of a century of state ownership — Aer Lingus was privatized in 2006, but the government still owns a 25 percent stake — he said it was time for Dublin to let go.

“Maybe we are a bit of a late developer,” Mr. Mueller said, choosing his words carefully. “But after 75 years, I believe we are ready to finally leave the parents behind.”

Many industry executives and analysts have long argued that full Irish divestment from Aer Lingus is inevitable and that the company’s share price would also benefit if the stock were more widely held.

But there is less agreement about what an end to the state’s role may portend for the future ownership of Aer Lingus. The airline is seeking to reinvent its business model in the face of bare-knuckled competition from its low-cost rival, Ryanair, and pushing ahead with an aggressive turnaround program that seeks to trim its work force by 20 percent and cut at least 100 million euros, or $141 million, in costs by the end of the year.

For one thing, the government is not the only big shareholder in Aer Lingus. Ryanair, whose headquarters are just across a parking lot from Mr. Mueller’s office at the airport, holds a nearly 30 percent stake in Aer Lingus, the legacy of two hostile takeover attempts — in 2006 and 2008 — that were flatly rejected by the Irish government and European regulators as anticompetitive. Aer Lingus and Ryanair together control 70 percent of the Irish air travel market.

“If the Irish state were to try and place its shares into the market, there is the risk that Ryanair would try and snap them up unless there were some arrangement worked out with Ryanair beforehand,” said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin.

The alternative, he and other analysts said, would be to sell to another investor, most likely one of Europe’s three major airlines: Air France-KLM, Lufthansa or the recently merged British Airways-Iberia, now known as the International Airline Group.

And therein lies the rub. “Any industrial buyer of Aer Lingus would probably be reluctant to have Ryanair as a large minority shareholder,” said Gerard Moore, an analyst at Merrion Capital in Dublin.

Representatives for all three groups said it was their policy not to comment on speculation about possible acquisitions.

Ryanair’s chief executive, Michael O’Leary, said he had received the message from regulators and Aer Lingus employees, who own 14 percent of the airline, that a third offer for the carrier would be unwelcome. “We are still too emotive a subject here in Ireland,” Mr. O’Leary said.

After the 85-billion-euro bailout that Ireland received from the European Union and the International Monetary Fund last year, however, Mr. O’Leary said the government was under pressure to put its financial house in order.

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