December 8, 2023

Fair Game: S.E.C. Plan for Money Market Funds Takes Some Baby Steps

Given the onslaught of lobbying against Ms. Schapiro’s efforts, it is perhaps not surprising that Ms. White’s proposal is much more incremental than her predecessor’s.

Money market funds need tighter regulation because both individual and institutional investors rely on them as bank-account alternatives. These investors have come to believe that their holdings will never decline in value; $1 in will always be $1 available for redemption. But unlike banks, money funds do not have to set aside capital for either redemptions or losses. Therefore, money funds can be vulnerable to runs when shareholders stampede for the exits.

This is what happened after Lehman Brothers failed in 2008. The Reserve Fund, an enormous, institutionally held money fund that owned some of the brokerage firm’s debt, had to halt redemptions in an investor run. Recognizing that the potential for problems wasn’t limited to that fund, the federal government offered insurance to money funds during the crisis.

To prevent a future run on these funds, the new, nearly 700-page S.E.C. proposal offers two possible regulatory fixes. One would require some funds to abandon the fixed $1-a-share asset price and require the price to float, based on fluctuations in their holdings.

The idea here is to dispel the myth that each share of a money fund is worth precisely $1 at the end of every business day. That fiction has lulled investors into complacency about the funds’ safety and predictability.

But only prime institutional funds — which account for almost 40 percent of the overall market — would have to show floating net asset values under the rule. Money funds that invest mostly in government securities and those aimed at individual investors would be exempt. The S.E.C. said this was because government portfolios and retail funds hadn’t run into redemption problems.

The S.E.C.’s proposal “targets precisely the funds that ran the most in 2008,” said Norm Champ, director of the S.E.C. division of investment management, in an interview. “The S.E.C.’s staff economic study showed that institutional investors redeemed from money market funds at a much higher rate than retail investors during the 2008 financial crisis.”

It’s likely, though, that the panic would have spread to retail funds if the government hadn’t stepped in with its insurance program.

The proposal offers another attempt to prevent a run: a redemption charge. If any fund’s so-called weekly liquid investments fell below 15 percent of its total assets, the fund could impose a 2 percent fee on all redemptions. (Weekly liquid assets are typically cash, United States Treasury securities and instruments that convert into cash within seven days.) Once a fund crossed the 15 percent threshold, its overseers could also halt redemptions for as long as a month, allowing an orderly sale of assets as well as time for panicked investors to cool down.

The fund industry may not like some of this, but it is sure to be delighted about what is absent from the S.E.C.’s proposal. Unlike last year’s version, this one does not require money market funds to set aside capital to protect against mass redemptions.

Setting aside capital is the best way to protect shareholders from funds that take excessive risks, as well as from the perils of a panic, says David S. Scharfstein, a professor of finance and banking at Harvard Business School and an expert on money funds.

“The run doesn’t just come from a fixed net asset value,” he said in an interview last week. “It comes from the underlying assets that are illiquid.” He prefers a capital requirement of between 3 and 4 percent.

The industry, which sees required capital set-asides as anathema because they crimp profits, would have fought such a provision as fiercely as it did the last time. The S.E.C. may have found it preferable to propose a rule that was workable, not dead on arrival.

Another criticism of the rule, Mr. Scharfstein said, is that while it purports to provide investors with a true market value for a fund’s holdings, it offers significant leeway in determining those valuations. It would not require funds to assign prices based on market transactions on securities that come due in 60 days or less. The fund could value those at the cost it paid to buy them, so long as the fund’s directors thought that the prices represented fair value.

But those valuations may not reflect what a fund would really receive in a sale. “Most money market fund assets mature in less than 60 days,” Mr. Scharfstein said. “This could allow them not to mark to market a fairly large fraction of their portfolios.”

The greatest strength of the S.E.C.’s proposed rule is that it would require greater transparency, bringing money funds out of the Dark Ages where disclosures are concerned. It would require funds to divulge material matters, such as when the 15 percent threshold is crossed for liquid assets or a relatively large holding goes into default. And what if a fund gets into trouble and requires the financial support of its parent? Investors would be told.

Finally, under the rule, the funds would have to report their holdings within five days of each month’s end, rather than the two months they can wait now.

“The proposal would require funds to disclose information that investors have never had access to before,” Mr. Champ said. “It will be a major step to increasing investor knowledge and understanding of the product.”

Now that the rule has been proposed, the S.E.C. will field comments for 90 days.

Could the rule be stiffened? Probably not by the S.E.C. Dennis Kelleher, president of Better Markets Inc., a nonprofit advocating effective financial regulation, said regulatory proposals usually weren’t expanded beyond their initial outlines.

But, he said, there is a possibility that the Financial Stability Oversight Council, the regulatory group created under the Dodd-Frank law, may toughen the rule. In November, after the S.E.C. failed to come up with an acceptable proposal, the stability council suggested three money fund reforms. They went beyond the S.E.C.’s rule, proposing either a floating net asset value for all money funds, or capital buffers.

“The F.S.O.C. has the power and authority it needs to address systemic risks,” Mr. Kelleher said. “If the final rule is weak and deficient and leaves a significant systemic risk to the financial system unaddressed, they have the duty to act under the law.”

Whether they will is another issue. Clearly, the battle for safer money funds is far from over.

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Major Retailers Planning for After-Hurricane Sales

Few retailers have in place plans as firm as these retailers do for when a storm hits.

Like its competitors — Wal-Mart and Lowe’s — Home Depot’s corporate eye was squarely on Hurricane Sandy a week ago, when the company’s supply-chain managers and merchants began preparing for the advancing storm by moving high-demand goods like generators from stores outside the storm’s path — California and Texas — to stores and distribution centers in its path.

The search also began for more vendors that could supply goods that would be heavily in demand, like plywood and bleach, by storm-struck customers from the Carolinas to Maine.

“We’re attempting to find goods anywhere and everywhere and move them toward New York and New Jersey. We’re making phone calls, and finding anything we can get our hands on to get them to people in the area,” said Doug Spiron, the company’s emergency response captain.

While meeting the needs of customers is a strong motivator, there is no denying that there is money to be made in a catastrophic storm’s advance and aftermath. Late fall is generally quiet for home supply retailers, but bad weather can increase sales.

Last year, for instance, Home Depot’s revenue jumped as a result of preparation and response to Hurricane Irene.

Several analysts said that both Lowe’s and Home Depot received a financial boost from Hurricane Irene.

Some 441 Home Depot locations from North Carolina to Bangor, Me., are expected to be in areas that will sustain storm-force winds, Mr. Spiron said. And those stores need to be ready for the onslaught of customers whose numbers are bound to rise.

As of 5 p.m. Monday, 55 of Home Depot’s 2,200 stores — those directly in the storm’s path — were closed. The company expected to reopen them as soon as possible. “As we close, those days are going to be tough — that’s a big hole when you’re not ringing cash registers,” Mr. Spiron said. Once the storm passes, though, “there’s a lot of business being done. It’s a big deal in terms of the amount of goods we’re going to move through.”

Wal-Mart Stores, the nation’s largest retailer, has been operating disaster distribution centers since 2001 that are always stocked with basics like water, propane and ready-to-eat meals, the company said. As a specific disaster approaches, Wal-Mart moves in other supplies, like mosquito repellent for a Gulf Coast incident, said Dianna Gee, a spokeswoman.

Starting last Tuesday, Wal-Mart moved Hurricane Sandy-related supplies like blankets, shovels and generators to its 10 disaster distribution centers, Ms. Gee said.

A spokeswoman for Lowe’s, Stacey C. Lentz, said the company sent more than 400 truckloads of generators and water to stores in the last four days, and more than 200 truckloads of emergency supplies to regional distribution centers. Four distribution centers near the storm’s path were still taking deliveries on Monday.

Ms. Lentz said that products needed for storm preparation, like water, extension cords and utility pumps, were selling well in the Northeast, as were snow-related products like ice melt and snow shovels.

As soon as the worst of the hurricane passes, Lowe’s and Home Depot are poised to send employees from stores outside the storm zone to help out in those inside it.

“Local staff may not be able to get back in,” Mr. Spiron said, but the company “will bus in associates from different areas of the country and put them up in a hotel.”

On Friday, about 350 people from Home Depot moved into a command center at its Atlanta headquarters, four fourth-floor conference rooms outfitted with TVs tuned to the Weather Channel and local newscasts and provided with Internet and phone lines. Representatives from truck companies joined supply chain executives to find “every truck they can get their hands on. Some stuff like plywood goes on a flatbed, stuff like ice you end up with a refrigerated truck,” Mr. Spiron said.

Before the storm, Home Depot tried to get items like water, batteries, flashlights and plywood needed for boarding up windows into stores, Mr. Spiron said — “all the things you know the customer’s going to want in quantities before the storm hits.”

At the same time, he said, the company has to plan for the aftermath. “After the storm’s moved through, you’ve got flooding, water damage, trees are down, ” he said. Then, customers want things like kerosene heaters, cleanup supplies and bleach, and the company has been moving those goods east, to stores when possible and to distribution centers. Once Home Depot assesses the damage in each location — from power failures to flooding to roof damage — it can further narrow down what supplies to send where.

Home Depot had a similar response in place for Hurricane Irene, Mr. Spiron said, but “this one has the potential to go way beyond that.”

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Bits: Partial Agreement Seen in Yahoo-Alibaba Dispute

Yahoo and Alibaba Group have informally agreed to end a three-week old dispute over the ownership of the Chinese payment service, Alipay.

But the deal is far from final because Softbank Corporation, the other party in the talks, has yet to agree, according to a person who was briefed on the matter and demanded anonymity because of the sensitivity of the negotiations.

The agreement between Yahoo and Alibaba, a Chinese Internet company in which Yahoo owns a 43 percent stake, is still a major sign of progress. The two companies have publicly feuded about Alibaba’s transfer of its Alipay online payment service to a separate company.

Investors feared that the surprise shift in ownership had eroded the value of Yahoo’s stake in Alibaba. Wall Street values Yahoo in large part because of its investment in Alibaba, which controls several e-commerce sites including the China’s equivalent of eBay.

News of the ownership uncertainty triggered a 12 percent decline in Yahoo’s shares. They recovered 3.3 percent on Tuesday to close at $16.55 based on a potential resolution to the dispute.
Any such deal would depend on Softbank, the Japanese technology company that also owns a large stake in Alibaba. Softbank, which is taking part in the negotiations, has so far been unwilling to agree.

The talks center on how much Alipay’s new owners must compensate Alibaba. What is unusual about the negotiations – and worrisome to Wall Street — is that they are taking place after the transfer occurred, not before, as is customary for business deals.

Yahoo has said it only learned of the transfer in March, months after the fact. Alibaba has argued that Yahoo had known for a while that a transfer was necessary to comply with Chinese laws that require local ownership.

Last week, Carol A. Bartz, Yahoo’s chief executive, dodged an onslaught of questions about Alibaba and the negotiations at her company’s investor day. She portrayed the discussions as making progress, but she did not divulge many new details.

On Tuesday, Yahoo would only say that it continued to be pleased with the progress of the talks. Alibaba declined to comment.

Reuters news service first reported Yahoo’s agreement with Alibaba, along with Softbank’s reticence, on Tuesday.

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Bucks: What Would You Take With You in a Disaster?

I listened on Monday as survivors of the devastating tornado in Joplin, Mo., were interviewed on the radio while they sifted through the wreckage of their homes. One woman choked up as she described calling area nursing homes, seeking a parent with Alzheimer’s. Another wearily explained that she was looking for clothes, any clothes — a T-shirt would do.

A T-shirt seems such a mundane item, but it struck me that it is the basics — rather than jewelry or other valuables — that we want and need after a disaster. But others have different ideas about what they’d take if they had to flee, which is made clear on the Burning House, a Web-based project that posts a series of photos that people have taken in response to the question, “If your house were burning, what would you take with you?” The site notes: “It’s a conflict between what’s practical, valuable and sentimental. What you would take reflects your interests, background and priorities.”

The images are fascinating. Some are artsy, photographic still-lifes of practical items (wallets, car keys). One couple’s assemblage includes their 10-month-old baby (well, duh!). But others are far less obvious: a World War II bayonet bequeathed by an uncle, a copy of Michael Jackson’s “Thriller” album.

Whether it’s a burning house, a tornado bearing down on your town or a tsunami, you often don’t have time do anything but duck for cover or run for your life. But it’s a provocative question, especially given the onslaught of natural disasters this year. (Joplin is less than two hours from where I live, and we’ve had numerous tornado and flood warnings this spring in our area, too.)

The McMillans of Minneapolis documented their prized possessions for the Web site The Burning House.the-burning-house.comThe McMillans of Minneapolis documented their prized possessions for the Web site the Burning House.

So it got me thinking. What would I take? My children have been wondering the same thing; my husband and I have told them that they are the most precious things to us, and that as long as we get out with them, everything else is just stuff that can be replaced (assuming you have decent insurance, which we do). Each of them has a toy animal (one a frog, the other an owl) that they’ve had since babyhood, so I’d grab them, too. Other than that, there’s a few treasured photo albums, a wedding portrait of my mother and a special book (signed by Tom Wolfe, during a memorably fun reporting assignment) that I’d take if I had a few extra minutes. That’s about it.

What would you take? Take a look at some of the photos on the Burning House and create your own list — and let us know.

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