Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2022 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