Feature

Issue of the week: A battle over money market funds

SEC Chairman Mary Schapiro lost her bid to reform the money market fund industry by one vote.

“Every once in a while the financial industry lives up to its critics’ worst expectations,” said Bloomberg.com in an editorial. We’ve just had such a moment. For several years, the Securities and Exchange Commission has been trying to pass “sensible new rules to make money market mutual funds safer.” But after an “intensive and often misleading campaign” by the $2.6 trillion money market industry, SEC Chairman Mary Schapiro last month was forced to abandon her bid, one vote shy of a majority among the regulator’s five commissioners. 

We can’t leave it at that, said the Chicago Tribune. This is an industry in dire need of reform. Most investors don’t know that money market funds aren’t federally insured. We think we can put $1 in and get $1 out at any time, “plus a tiny gain,” but that’s not true if a fund’s investments tank or if investors pull out all at once. That’s exactly what happened in 2008, when the Reserve Primary Fund, an industry giant, “broke the buck.” Investors panicked, withdrawing $200 billion from money market funds in just two days and forcing the Treasury to intervene to temporarily insure holdings. Preventing a repeat of that ugly scenario is exactly what the SEC sought to do, until industry lobbying derailed the effort.

“If it ain’t broke, the old saying goes, don’t fix it,” said Arthur B. Laffer in Investor’s Business Daily. These funds have been “exceptionally stable” for years, and reforms they adopted in 2010, like keeping more cash on hand, have made them even safer. Regulators should attend to more pressing risks, said James J. Angel in The Washington Times. “Now is not the time to experiment with destroying a vital part of the economy in the theoretical but incorrect hope of preventing a run when the next 100-year flood hits the markets.”

In fact, money market funds are “especially prone to a run,” said John Gapper in the Financial Times. That makes reform of this vital sector “an open-and-shut case,” and the proposed rules—like requiring funds to hold bigger capital buffers—are eminently reasonable. But since the SEC has shown itself “to be fatally susceptible to industry lobbying,” other regulators need to step in. One option is the Financial Stability Oversight Council, “established by Dodd-Frank as a kind of super-regulator of systemic risk,” said The Washington Post. It could override the SEC’s inaction if it decides these funds pose a danger to the financial system. “It would be that body’s first major test; it must not fail.”

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