Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Money Market Funds Are in the Fight of Their Lives

Stock-Markets / Credit Crisis 2012 Feb 09, 2012 - 06:50 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: Money market funds aren't exactly the safe-haven investments they're cracked up to be.

In September 2008, when Lehman Brothers failed, money market investors fled funds in droves, exposing investors and capital markets across the globe to huge systemic risks.

Now, to better safeguard investors and prevent the commercial paper market from shutting down in future crises, SEC chairwoman Mary Schapiro is proposing to re-make the money market mutual fund industry in the image of banks.


Mary Schapiro is proposing to re-make the money market mutual fund industry in the image of banks.

The SEC staff is recommending money market funds set aside capital reserves, as banks are required to do, and fund sponsors issue stock or debt to bolster their positions as a "source of strength," as bank holding companies are expected to do.

Also, the staff recommended restricting redemptions under certain circumstances and potentially requiring funds to collect upfront fees to further cushion themselves in times of trouble.

Industry leaders immediately attacked the plan as an assault on their business. They're threatening to sue the SEC.

The battle ahead isn't just about changing an industry.

It is about reshaping modern finance, the future power of regulators, and the real world implications of moral hazard.

Money Market Funds Explained
Money market funds are mutual funds. Investors who buy shares are pro-rata owners of the underlying investments that funds hold.

Money market mutual funds are restricted by SEC rules under the Investment Company Act of 1940 to purchasing only the highest-rated debt of issuing companies. They also invest in government securities and repurchase agreements.

The duration of the debt instruments they hold cannot exceed 13 months and the average weighted maturity of their portfolios has to be 60 days or less. Additionally, funds can't hold more than 5% of one issuer, except for governments or repurchase agreements.

The first U.S. money market mutual fund, The Reserve Fund, was established in 1971 to directly compete with banks for investor deposits. At that time "Regulation Q" prohibited commercial banks from paying interest on checking accounts.

Money market funds quickly drew in investors looking to earn interest on cash positions.

By September 2008, the size of the oldest money fund in the U.S., the Reserve Primary Fund, was $64.8 billion. Total industry assets were $3.8 trillion.

Anatomy of a Money Market Fund Panic
On Sept. 15, 2008 Lehman Brothers filed for bankruptcy and everything changed.

The Reserve Primary Fund, which held $785 million of Lehman's debt obligations, had to immediately write down the value of its Lehman holdings. The following day, Sept. 16, 2008, the fund "broke the buck" by declaring the par value of its shares had fallen to 97 cents.

"Breaking the buck" is a cardinal sin for money market funds. Whatever the mix of debts and maturities any fund holds, and no matter how little interest they pay, at an absolute minimum investors park their cash in these funds for safety. The measure of safety is every fund's ability to maintain at least a dollar per share par value.

When the buck was broken at one fund, money market investors at all "prime" funds panicked. Only one day later investor redemptions exceeded $169 billion.

While investors were panicking about the par value of their fund holdings, the Federal Reserve, the U.S. Treasury and world financial markets feared the collapse of U.S. money funds would take the global financial system over a cliff.

Since short-term government securities don't pay a lot of interest, portfolio managers juice up fund yields by buying commercial paper (short-term funding instruments issued by corporations and financial firms) with more attractive yields.

The crux of the crisis, which nobody saw coming, was that not only did banks and investment banks issue hundreds of billions of dollars in commercial paper, but their off-balance sheet "conduits" also known as SIVs (structured investment vehicles) were also issuing commercial paper to finance the purchase of hundreds of billions of dollars of mortgages and other asset-backed securities.

As investors pulled out of prime money market funds, commercial banks, investment banks, asset-backed holding vehicles and every top-rated corporation in the U.S. that relied almost daily on functioning commercial paper markets were all unable to finance themselves.

The panic in the money markets was driving America's corporate elite and the rest of American businesses to an abyss.

To stem the "run" on money market funds, the Federal Reserve announced the creation of the Commercial Paper Funding Facility (CPFF) on October 7, 2008. The CPFF effectively extended access to the Fed's discount window to issuers of commercial paper, including those not chartered as commercial banks, to act as their lender-of-last-resort.

In addition to directly lending to commercial paper issuers, the Fed introduced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility and the Money Market Investor Funding Facility.

According to the Fed, "All three facilities supported short-term funding markets and thereby increased the availability of credit through various mechanisms."

In other words the Fed saved investors and credit markets from an almost certain death.

But, not much changed in the commercial paper market. The same contagion and systemic issues that led to the money market crisis are still inherent in the system.

Making Money Market Funds in the Image of Banks
Behind the scenes, banks are now working to level the playing field.

Banks have restrictive capital reserve requirements; they have to pay FDIC insurance fees, and are subject to far greater scrutiny than funds.

They complain that money market funds don't have those restrictions and the full backing of the Fed affords funds an insurance backstop that they don't have to pay for, but benefit from because lower costs allows them to offer higher yields.

From the moral hazard perspective, critics point to the Fed's backstopping money market funds as a license for them to take more risks as they divert deposits from the more regulated banking system.

The SEC staff's proposals level the playing field between funds and banks by essentially requiring money market funds to re-make themselves more in the image of better regulated banks.

Although the recommendations are meant to lessen the likelihood of another taxpayer-funded bailout in the future, money market fund sponsors are up in arms that they are being disadvantaged by regulatory overreach.

Fund sponsors claim the future of the commercial paper market is at stake.
They say increased regulatory costs will raise financing charges for commercial paper issuers to the detriment of the entire economy and that their own businesses will be destroyed.

The battle ahead is bound to get ugly.

"Free market capitalists" (as "socialists" might call them) will make their usual case that if left alone, bruised fund sponsors and commercial paper issuers will adjust to the complex realities that nearly caused their collapse. And investors should be free to chase yield and face free market consequences for decisions they make based on their own due diligence. They will argue that moral hazard will disappear if individuals, businesses, and banks are allowed to fail.

Of course, the "socialists" (as "free market capitalists" might call them) who want the American financial system to be safe for everybody will point to how free market capitalists are the first ones to cry for bailouts when their greedy schemes overwhelm the economy's capacity to absorb their losses. And that bailouts, which are increasingly necessary because deregulation unleashed the wrong kind of animal spirits, are the root cause of moral hazard.

The battle for the soul of America's financial and economic future hangs in the balance.

Source http://moneymorning.com/2012/02/09/money-market-funds-are-in-the-fight-of-their-lives/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules