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DealBook: A Third Option for Regulators in the Money Market Fund Fight

August 31, 2012 by Leave a Comment

Timothy F. Geithner, the Treasury secretary, with Mary L. Schapiro, the Securities and Exchange Commission chairwoman.Alex Wong/Getty ImagesTimothy F. Geithner, the Treasury secretary, with Mary L. Schapiro, the Securities and Exchange Commission chairwoman.

The biggest battles are sometimes decided by the most arcane tactics.

That could turn out to be the case in a fierce fight between the mutual fund industry and top financial regulators.

At issue is whether to impose more regulations on the nation’s $2.6 trillion of money market funds.

Regulators think the funds pose a risk to the financial system. In the 2008 financial crisis, investors fled the funds in droves, which worsened the credit freeze that gripped the banking system. Money funds then received a big bailout.

In a bid to lessen the chances of such events reoccurring, the Securities and Exchange Commission proposed measures, including requiring the money funds to hold a capital buffer against losses. But the commission dropped the reforms last week, after it became clear that a majority of its commissioners weren’t going to vote for the reforms. This was a big win for the mutual fund industry, which says some reforms made in 2010 are sufficient. The industry also argues the latest reforms would needlessly damage a popular investment product.

The regulators, however, may be able to effectively override the S.E.C. They can do that by involving the Financial Stability Oversight Council, a special committee of senior regulators set up after the crisis by the Dodd-Frank financial overhaul legislation.

The council’s job is to spot big risks in the financial system and take action to address them, even if it means acting itself or pressuring individual regulators.

After the money fund reforms were blocked at the S.E.C., much speculation began on how the council might act. At first, there appeared to be two separate paths laid out in Dodd-Frank. But both had drawbacks for the regulators.

Now, a third option may exist. And it appears to get around the headaches involved in the other two.

The council, which is chaired by the Treasury secretary, Timothy F. Geithner, and has publicly backed the S.E.C.’s money fund reforms, is scheduled to meet toward the end of September.

Initially, one of the council’s perceived options was to designate fund companies or individual money funds as systemically significant, and give them to the Federal Reserve to regulate. The problem: This approach would remove money fund regulation from the S.E.C., a potentially wrenching move that could undermine the standing of that agency. This option could also lead to a two-tier, unevenly regulated money fund sector, where larger funds might come under Fed oversight and smaller ones wouldn’t.

The second option was to declare the general activity of money market funds as risky to the system. But if this route were taken, Dodd-Frank lays out a series of steps that puts the issue back to the S.E.C., where the majority of commissioners may still oppose reform. If that happened, Dodd-Frank then appears to move the issue to Congress, but it doesn’t define how the stalemate would be broken.

Enter option three.

With this, the council would use a part of Dodd-Frank, called Title VIII, that addresses regulation of the plumbing of the financial system. It refers to “utility” activities like organizing financial payments and processing transactions.

Using Title VIII, the council could take a two-step approach. It could designate a single activity or feature of money funds as a systemically important utility function. Next, it could then require reforms to buttress that function.

For instance, money funds have a special feature called a fixed net asset value, which allows them to say each share in a fund is worth $1 when in reality it may be worth slightly less. Regulators fear the stable net asset value could mask the risks of money funds from investors, who tend to use the funds like bank accounts.

The council could designate the stable net asset value as systemic and require that the funds hold capital.

The big apparent advantage for the regulators is that it avoids the pitfalls of the other options. It would keep money fund regulation at the S.E.C. And, unlike option two, this part of Dodd-Frank doesn’t map out steps that could lead to stalemate. Instead, it allows the council to require the S.E.C. to introduce the sort of reforms that the council favors.

But there is a weakness with this approach. While this part of Dodd-Frank does give the council a lot of leeway in determining a systemically important activity, opponents of reform may argue that money funds simply aren’t part of the payment functions of the financial system, which is what title VIII was written for.

“On the face of it, this is not what Title VIII was designed to regulate,” said Jay G. Baris, a lawyer at Morrison Foerster. “To me, it’s a last resort.”

Article source: http://dealbook.nytimes.com/2012/08/30/a-third-option-for-regulators-in-the-money-market-fund-fight/?partner=rss&emc=rss

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Hopeful, but Wary at Money Markets

August 1, 2011 by Leave a Comment

In search of safer havens, investors have flocked to newer investments like federally guaranteed, zero-interest checking accounts. Fund managers, in turn, have increased cash levels and shifted their portfolios to hold even more investments that can be easily sold to meet investor withdrawals.

Congress was working around the clock over the weekend to raise the debt ceiling by Tuesday, reaching a framework agreement late Sunday. But even a short-term Congressional deal will leave some uncertainty for money market investors.

One credit rating agency has held out the possibility that it would downgrade in the nation’s credit rating even with a debt deal in place. Such a move would probably send even more investors toward the exits, fearful that fund managers will have to decide whether to sell off other holdings whose value could be affected by lower ratings.

But the greatest fear for a fund manager is that a fund “breaks the buck” — that its share value falls below the stable $1-a-share price that money funds maintain. That happened in 2008, when the asset value of the Reserve Primary fund fell to 97 cents a share because of its large holdings of the debt of Lehman Brothers, which went bankrupt.

To break the buck, its value must fall by one-half of 1 percent, to 99.5 cents a share. Since Treasury bond prices move inversely with interest rates, if the market attaches greater risk to owning Treasuries, their interest rates would rise and prices would fall to attract buyers. A steep swing in rates and prices could cause the value of a money market fund to sink below the $1 level.

Chris Plantier, a senior economist at the Investment Company Institute, a mutual fund trade group, and Sean Collins, a senior director of industry and financial analysis, said last week that their models showed that it would take a 3 percentage point rise in short-term interest rates, affecting every security in a money market fund’s portfolio, to drive a fund’s value down to 99.5 cents a share.

With short-term rates currently near zero, a jump of 3 percentage points would be such a catastrophic event that money funds might be the least of investors’ problems. It’s so inconceivable that rates for consumers and businesses could jump that far that fast that it evokes dire images of people in bread lines.

More likely, managers say, is that a downgrade of Treasury bond ratings would push short-term rates up by one-quarter to three-quarters of a point, leaving the net asset value of money funds safely at $1 a share.

Over all, though, fund managers and regulators were optimistic that money market funds would be relatively untouched by further market turmoil.

“We’ve had a contingency team focused on this since the end of May,” Robert Brown, president of money markets at Fidelity Investments, the nation’s largest manager of money market funds, said Friday. “We have to be prepared to respond to the unthinkable.”

Fidelity has $440 billion in money market fund assets.

Federal regulators, too, say they believe that investors have seen what is possible — unlike in 2008, when Lehman Brothers went bankrupt over a weekend.

“I don’t believe the Treasury markets are going to freeze up,” said one federal regulator, who spoke on the condition of anonymity because he feared the knowledge that regulators were watching might cause undue concern about a market segment. “The funds we have talked to are well positioned to substantially handle the kinds of outflows that they have seen recently.”

Money funds must hold only highly rated, short-term assets, but government securities are exempt from the requirement. So a ratings downgrade would not automatically force fund managers to sell Treasuries.

The greater danger is to money funds with extensive holdings of short-term corporate i.o.u.’s, or commercial paper. Any issuer that enjoys a high credit rating because of implicit or explicit support from the government could be subject to downgrades if the government’s rating fell.

Those include Fannie Mae, one of the big government mortgage companies, whose debts are guaranteed by Washington but which would likely be downgraded as well, and some of the largest banks, which might enjoy an implicit belief that the government would bail them out in a financial crisis, as it did in 2008.

Regulations after 2008 require taxable money market funds to hold 10 percent of their assets in a form that can be converted to cash in a single day, and all funds to hold 30 percent of assets in a form that can be converted to cash within five days.

According to one market analyst, iMoneyNet, many funds have gone beyond that. On June 30, the company said, the average government money market fund had 58 percent of its assets in securities that would mature within five days.

Even so, the next-to-nothing interest rates that most money market funds are currently earning have been judged by many investors not to be worth the risk. A little-noticed portion of the Dodd-Frank Act, passed in the wake of the financial crisis, provides federal insurance through the end of 2012 for unlimited amounts of deposits in noninterest-bearing checking accounts.

That has led to a sharp upswing in the assets in bank checking accounts, to $2.4 trillion at the end of last year from $2.1 trillion at the end of 2009.

So far, it doesn’t seem to have worried investors that the government that is promising to make interest payments on Treasuries is the same government insuring those checking accounts. Insurance on bank accounts is covered by the Federal Deposit Insurance Corporation.

Article source: http://feeds.nytimes.com/click.phdo?i=04771de64edc271ff34896ec6201297f

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Howard Stein, Who Helped Teach Public to Invest, Dies at 84

July 31, 2011 by Leave a Comment

The cause was complications of a stroke, his son-in-law Jamie Stokien said.

Mr. Stein was a powerful force in bringing stock and bond investment to the general public. He broadened the mutual fund market by flooding potential investors with direct mail, rather than using salesmen. He helped devise the famous Dreyfus television commercials in which a lion stalks out of a subway. He not only invented the first “no load” money market fund — meaning no upfront fee — but also created the first tax-free municipal bond fund. He was the first to sell an American mutual fund in Japan.

Mr. Stein was adept at picking investments, notably Polaroid in the company’s early days. His instinct to go for what he called “unloved” stocks and against market trends was legendary.

“People now realize that Howard is always a step ahead of the market,” Barton Biggs, chairman of Morgan Stanley Asset Management, told Crain’s New York Business in 1990.

When Mr. Stein joined Dreyfus as a young analyst in 1955, it had around $2 million in assets. At the time of its sale to the Mellon Bank Corporation in 1994, it had assets of $80 billion.

During the 1970s, Mr. Stein set up a fund to invest in companies that had shown unusual concern for the environment and for consumers. He recruited people from outside the conventional business world, like the journalist Bill Moyers, to join Dreyfus’s board. He invited provocative public figures like the feminist writer and editor Gloria Steinem to speak to directors and top executives and offer them new points of view: the Steinem session kept the mostly male group arguing until 1:30 a.m.

Mr. Stein himself was an early critic of the Vietnam War. In 1968 he took a six-month leave of absence to be chief fund-raiser for Senator Eugene J. McCarthy’s antiwar presidential campaign. He was on President Richard M. Nixon’s so-called enemies list. He worked with John Gardner in planning Common Cause, the citizens’ lobby group.

In 1988, Mr. Stein served on the Presidential Task Force on Market Mechanisms, known as the Brady Commission, which investigated the market crash of Oct. 19, 1987, or Black Monday.

Howard Mathew Stein was born in Brooklyn on Oct. 6, 1926, to immigrants from Poland. His family moved around New York, finally settling in an apartment over the Stage Delicatessen on Seventh Avenue in Manhattan. His parents, a brother and a sister worked in the garment industry. At 5, he began to play the violin. He was soon practicing for as many as 10 hours a day and planned to be a musician.

By his own account he pursued his formal education between encounters with truant officers. He attended the Straubenmuller Textile High School on Manhattan’s West Side and the Juilliard School, which gave him a scholarship. He gave up on a music career when he realized he was not destined to be a great violinist.

At 23, he got a job loading steel onto trucks for 75 cents an hour. “It was invigorating for three or four hours,” he said in an interview with The New York Times in 1982.

He looked for work on Wall Street and became a trainee at Bache Company, where he noticed that responses to sales brochures piled up unanswered while salesmen concentrated on person-to-person contacts. He contacted the writers of those responses and built up a rich commission business. He left Bache in 1955 because he didn’t believe he was rising fast enough, Time magazine said in a cover article about him in 1970.

He joined Dreyfus and soon became an assistant to Jack J. Dreyfus Jr., the firm’s founder, chief executive and chairman. He became president in 1965, and chairman and chief executive in 1970.

Mr. Stein’s record of sharp investing included buying New York City real estate at cheap prices during the city’s fiscal crisis in the 1970s. But he was roundly criticized in the ’80s and ’90s for holding back on buying stocks when the markets were surging. When Fortune magazine asked him about this in 1996, he replied, perhaps jocularly: “I was stupid! I wasn’t paying attention.”

In fact, his conviction that stocks were overvalued saved him from the devastation many of his competitors experienced in the 1987 crash.

In 1994, the Mellon Bank Corporation of Pittsburgh acquired Dreyfus in a stock swap valued at $1.85 billion. Mr. Stein continued as Dreyfus’s chairman and chief executive, joined Mellon’s board and was reported to have made around $90 million personally from the deal. He resigned in 1996.

Mr. Stein is survived by his wife, the former Janet Gelder; his daughters, Julia Stokien, Jocelyn Hayes, Jessica Levine, Joanna Stein and Jennifer Seay; and six grandchildren.

A former employee of Mr. Stein’s gave Fortune an example of how Mr. Stein’s thinking strayed from the beaten path. Years earlier, Dreyfus was heavily invested in enterprises owned by the reclusive tycoon J. Paul Getty, some of which were looking shaky. When Mr. Stein suggested that this employee speak with Mr. Getty, the employee replied that “nobody” talks to Mr. Getty.

“Well, have you tried?” Mr. Stein asked. A week later, the employee was in Rome, where Mr. Getty answered all of Mr. Stein’s questions.

Article source: http://feeds.nytimes.com/click.phdo?i=9dd61caad875772f3287e6a385325b3c

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