Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Debt-Driven Consumer Economy Breaking Down - 23rd Oct 17
Next Wall Street Stock Market Crash Looms? Lessons On Anniversary Of 1987 Crash - 23rd Oct 17
This Super Metal Is Set To Soar By 300% - 23rd Oct 17
More New Record Highs As S&P 500 Gets Closer To 2,600 Mark - 23rd Oct 17
Another Minor Stock Market Top? - 23rd Oct 17
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

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

© 2005-2017 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