Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
The 5 Biggest Bubbles In Markets Today - 20th Sep 17
Infographic: The Everything Bubble Is Ready to Pop - 20th Sep 17
Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years - 20th Sep 17
Stock Market Waiting Game... - 20th Sep 17
Precious Metals Sector is on Major Buy Signal - 20th Sep 17
US Equities Destined For Negative Returns In The Next 7 Years - 3 Assets To Invest In Instead - 20th Sep 17
Looking For the Next Big Stock? Look at Design - 20th Sep 17
Self Employed? Understanding Business Insurance - 19th Sep 17
Stock Market Bubble Fortunes - 19th Sep 17
USD/CHF – Verification of Breakout or Further Declines? - 19th Sep 17
Blockchain Tech: Don't Say You Didn't Know - 19th Sep 17
The Fed’s 2% Inflation Target Is Pointless - 19th Sep 17
How To Resolve the Korean Conundrum  - 19th Sep 17
A World Doomed to a Never Ending War - 19th Sep 17
What is Backtesting? And Why You Need Backtesting System? - 19th Sep 17
These Two Articles Debunk The Biggest Financial Nonsense I See In The Media - 18th Sep 17
Bitcoin Price Crash 40% In 3 Days Underlining Gold’s Safe Haven Credentials - 18th Sep 17
The Sum of Risks – Global, Strategic, Political, and Financial - 18th Sep 17
The Netflix Of Canada’s Cannabis Boom - 18th Sep 17
Stock Market Sentiment Speaks: Either You Learn From The Events Of The Past Week, Or You Are Hopeless - 18th Sep 17
SPX 2500 … At Last! - 18th Sep 17
Inflation Lies, Lies and OMG More Lies - 18th Sep 17
How to Choose right Forex Trader? - 18th Sep 17
Who Has Shaped the World the Most? The Dozen Greatest Achievers - 17th Sep 17
Riding the ‘Slide’: Is This What the Next Stocks Bear Market Looks Like? - 17th Sep 17
Gold Up, Markets Fatigued As War Talk Boils Over - 17th Sep 17
Predicting the Future of the U.S. and the World - 16th Sep 17
Deceit in the Financial Food Chain - 16th Sep 17
Gold GLD ETF Investment Resuming - 16th Sep 17
Extreme Weather & Energy Markets: What's Next? - Video - 15th Sep 17
Trump’s Path to IP Wars - 15th Sep 17
GBP USD Approaches Fibonacci Target - 15th Sep 17
Higher US Interest Rates May Force Higher Inflation Rates - 15th Sep 17
Stock Market Investors: Taking the Road "Less Traveled" Has Its Perks - 15th Sep 17
The 3 Best P2P Lending Platforms For Investors In 2017—Detailed Analysis - 15th Sep 17
The US Debt Bubble Will Soon Warrant Serious Measures - 15th Sep 17
Why it is Often Difficult to Sell a House Fast - 15th Sep 17
S&P 500 At New Record High, Will It Break Above 2,500? - 14th Sep 17
Capital Market Trends - 14th Sep 17
Mike Maloney: The Top 10 Reasons I Own Gold and Silver - 14th Sep 17
The Only Real Europe is Greece - 14th Sep 17
7 Security Tips for Online Traders - 14th Sep 17

Market Oracle FREE Newsletter

5 Markets Ready to Move Before Year-End. Eexpert Analysis and New Trading Opportunities

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