Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

Don't Let the SEC Tread on Your Money Market Funds!

Stock-Markets / Market Regulation Mar 09, 2012 - 05:56 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: SEC chairman Mary Schapiro announced last week that she has set her sights on your money market funds.

I'm sorry, but that makes no sense at all. Losses on money market fund investments have been trivial in the almost 40 years they have existed.


What's more, they haven't added to the tottering instability of global finance. Not one wit.

Her attempt to come down on money market funds is nothing more than crony capitalism at its most unpleasant.

The regulators, who under the Obama administration simply like regulating, are just in cahoots with the big banks, seeking to eliminate their competition.

In this case, what the banks would like to do is simply turn back the clock.

After all, in the 1960s, banks had a very easy life, because interest rates were regulated.

The old adage was "3-6-3" banking - borrow at 3%, lend at 6% and be on the golf course by 3 p.m.!

It was a good deal for the bankers but not such a good deal for those forced to lend to the banks at 3%--especially as inflation rose in the late 1960s to 4%, 5% and higher.

In fact, it was no wonder that when I first opened a U.S. bank account in 1971 that I was rewarded with a full set of bone china! Attracting savings was THAT profitable!

But all of this changed with the establishment of money market funds.

Why We Need Money Market Funds

The Reserve Primary Fund was the first in 1971, but the funds really took off after Fidelity offered the first money market fund with checking privileges in 1974.

Money market funds were not unregulated; they were regulated by mutual fund statutes.

However, they were able to invest in commercial paper and bank certificates of deposit and offer investors true market interest rates.

Since interest rates in the late 1970s were soaring, to a peak of 20% at the end of 1980, money market funds attracted a huge volume of deposits from banks and savings and loans.

Ever since then, the banks have resented the competition from money market funds and have attempted to hobble them.

One valid bank gripe is that money market funds report their asset value as $1, ignoring the minor fluctuations in the value of the portfolio in which they have invested.

This allows investors with checking privileges to treat their money market fund account as the exact equivalent of a bank account, which it really isn't.

The excuse to get the funds regulated came in September 2008 when the Reserve Primary Fund, which had invested too much in Lehman Brothers paper, first "broke the buck" reporting a net asset value of 97 cents, and then closed for business.

The reality was not quite as dire as commentators pretended. While legal nonsense tied the Reserve Primary's assets up for nearly three years, investors were eventually repaid more than 99 cents on the dollar.
The banks also complain that money market funds sell themselves as being as safe as banks, when they do not benefit from deposit insurance.

That's actually very cheeky, since the deposit insurance system was set up to protect us from the bank disasters in 1931-33.
Of course, the technology did not exist in the 1920s to even begin to set up money market funds. Alas, w
ithout computers, you would have needed a Russian Army-sized team of clerks keeping Pentagon-sized collections of manual ledgers.

But if they had, money market funds would have been a better solution for bank problems than deposit insurance. Widows would not have had to worry about the safety of the local bank in which their savings were held, but could have benefited from the diversification of a well-run money market fund.

Without bank runs, there would have been no 1931-33 bank crash. Problem solved!

What makes the banks' argument against the safety of money market funds so spurious is because it depends on the solvency of the deposit insurance system, which is currently running out of money and will have to be bailed out by taxpayers.

Tell me, how safe would you feel with Greek deposit insurance? Russia had deposit insurance in 1998, and a fat lot of good it did for Russian depositors.

Because money market funds buy commercial paper and CDs from foreign banks, they are safer and more liquid than banks when the government itself is running big deficits.

After all, money market funds don't trade credit default swaps, they don't originate subprime mortgages, they don't invest in illiquid 7-10 year loans against commercial real estate and they don't lend 400% of equity to finance leveraged buyouts of casino operators.

Schapiro's "reforms" are thus unjustified.

Four Reasons Mary Schapiro is Wrong about Money Market Funds

To go through them one by one, Schapiro is wrong to target money market funds for the following reasons:

1) She wants money market funds to be forced to mark their assets to market, thus causing investors' deposits to fluctuate by tiny amounts day-by-day. This is her best idea, but would put money funds at an artificial marketing disadvantage (bank CDs are not "marked to market" daily with interest rate fluctuations as by the same logic they should be.)

However, it can be solved by each fund maintaining a small reserve account, which could top off the fund or withdraw excess cash, so that the fund's net asset value remained $1. It is fiddly, but doable if we have to be persnickety about the accounting.

2) She wants the funds to maintain capital. What for? They invest only in the short-term securities of top quality names, and need to keep a $1 net asset value, so they don't do anything for which capital would be useful. It would just sit around. Mutual funds don't need to hold capital.

3) She wants the funds to restrict withdrawals, in case commercial paper becomes unsalable, and the funds can't pay out their investors. But almost all of the funds' investments mature within 90 days, so full payouts can be made with only a modest delay (unless the lawyers are allowed to get involved, as in the Reserve Primary Fund). There's a theoretical risk here, but restrictions would make the risk to investors greater, not less.

4) She wants the funds to charge fees on redemptions. This doesn't solve the illiquidity problem. This one is very clearly an attempt by the banks to mess up the money fund industry. Nice try, guys!

So here's the bottom line...

If we let Schapiro have her way, the money market fund industry will be killed--especially if Ben Bernanke is able to keep interest rates at zero for several more years

Then we will all be at the mercy of the bank cartel again, earning 3% on our money when the inflation rate is 10% or more.

It's the kind of thing that made the colonists rebel in 1776!

Don't let Mary Schapiro tread on your money market funds.

Source http://moneymorning.com/2012/03/09/dont-let-mary-schapiro-tread-on-your-money-market-funds/

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

© 2005-2016 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

Catching a Falling Financial Knife