Administration Considers Breaking Buck-a-Share Rule for Money Funds

[question everything]

JUNE 19, 2009

Administration Considers Breaking Buck-a-Share Rule for Money Funds

By KARA SCANNELL and ELEANOR LAISE
WSJ


WASHINGTON -- Money-market mutual funds grew into a nearly $4 trillion industry based on the idea that the market value of a fund's share would remain steady at $1. The Obama administration's proposed overhaul of rules governing financial markets could change all that. The administration called for new rules to prevent runs on money-market funds that can pose risks to the entire financial system, as occurred last fall. It urged study of potential solutions such as requiring funds to secure private investors as a backstop or -- more controversially -- dumping the $1 standard in favor of a floating number.


The Securities and Exchange Commission is expected to propose rules next week, and is likely to raise the possibility of a floating number, technically a net asset value. Already, the Investment Company Institute, the lobby for the mutual-fund industry, is pushing back. "If you float the value of a money fund, you've essentially destroyed the product," said Paul Schott Stevens, president and chief executive of ICI. "We're going to explain clearly to the working group why we believe a fluctuating

is a very bad idea." Representatives of big fund operators State Street Global Advisors and Vanguard Group also expressed concern. Money-market funds are attractive to many consumers because they are stable investments that allow investors to take money out at will. They are also a vital and continuous source of short-term funding for corporations, financial institutions and governments.

The administration is posing the issue because of the trauma caused last year when the Reserve Primary Fund, the flagship fund for Reserve Management Co., became the first fund in 14 years to "break the buck," meaning its net asset value fell below $1, largely because of losses associated with the collapse of Lehman Brothers. That caused a run on many money-market funds and dried up the availability of short-term funding for corporations. In September, the Treasury took the unprecedented step of providing insurance to money-market mutual funds to stem withdrawals. That insurance expires this fall.

(snip)

The floating net-asset value is one option the administration hopes to explore. Another, which the industry prefers, would require money funds to have access to stable, private sources of funding in the event of an emergency. In the near term, the SEC is expected to propose shortening the maturity, raising the creditworthiness and increasing liquidity of securities money funds can hold. As a result, a fund facing redemptions would have easy-to-trade assets that it could turn over quickly. Another idea the SEC is expected to propose is public disclosure of net asset values to the third decimal. The ICI opposes that, saying fluctuations in the rate could drive investors away from funds.

http://online.wsj.com/article/SB124528377609025609.html (subscription)

Printed in The Wall Street Journal, page M4

[Kdillard]

1. k and r Sounds good to me.

[Zenlitened]

17. I'd be interested to know... What makes it sound good?

:shrug:

[Common Sense Party]

2. Breaking the buck "rule" would be a bad idea.

I much prefer the SEC's idea of mandating higher quality holdings and having enough reserves of highly liquid notes and paper for emergencies. It will lower yields, but most momey market "investors" are looking for safety, not high yield.

[question everything]

5. It is, and I intend to tell the SEC and my (one) Senator

about it.

For those of us approaching retirement, money fund and treasury bonds kept our IRAs and 401Ks from completely collapsing.

[Kdillard]

6. Correct me if I am wrong but wasn't the rule already broken and as the article states it caused a

problem.

[Common Sense Party]

24. No, it was never a "rule," it was an accepted, standard practice in

the mutual fund industry. Money market funds are sold/presented as being "safe." They're not FDIC insured, but the fund company was going to buy high quality, short-term paper in order to keep the share price at about $1.

Now Obama/Geithner is suggesting to do away with the industry standard of having the share price be $1--now the share price can "float." Well, sorry, that's NOT a money market fund. That's a short-term floating rate bond fund. There is risk there, and money market investors (savers, cash-parkers) don't want risk. They want safety and stability.

[Indenturedebtor]

31. I don't understand it so I'm going to go with my knee

Whatever the financial industry jackoffs support - I'm against.

[Zenlitened]

3. Oh, yeah. Eliminate 401k savers' last hope of preserving capital.

Great idea! :dunce:

[Kdillard]

4. I am confused didn't a company already break this rule and they

are trying to and proposing ideas to fix it so that those types of runs and problems don't happen again. Also it is one of many proposals being brought forth.

[Zenlitened]

7. One did. In response, the gov't created a guarantee program, similar to FDIC insurance.

It's temporary, and people on fixed income, unsure of what's "safe" anymore, are nervously watching to see what happens next.

Prior to the gov't program, the "guarantee" was implicit, and only as good as the reputation of the fund co. where you'd parked your retirement savings.

If the fund co.'s are going to be relieved of even that slim promise... :hide:

People saving for retirement in 401k plans need a place to put their money where it is guaranteed safe, without a lot of fees and rules designed to penalize you for getting at your $$$.

That should be a requirement of any "reform" that undermines the already-shaky safety of money market funds.

[high density]

8. I don't like this proposal

The ENTIRE idea of a money market fund is that stable $1 value. It is up to the fund managers to purchase appropriate short-term underlying investments that can earn enough income to cover fund expenses and then pay the any surplus out as interest. People will buy short-term bond funds if they don't mind the NAV fluctuating.

The bottom line is this seems like a way to try to get more money to flow into bank savings accounts.

[Zenlitened]

9. Worse yet, it seems like a way to relieve 401k savers of even more of their dough. -n/t

[Kdillard]

10. Yeah you are correct about the idea of a money market fund but

as was proven when the $1 rule was broken and the run ensued the stable $1 value is illusionary. The problem seems to be how do you move forward now that the illusion is broken. They seem to be exploring ideas on how to fix it and we'll see what is the ultimate result. I am just perplexed by the uproar over considering breaking a rule that was already broken.

[high density]

11. One fund broke it. One failure does not make an "illusion." So far it is an outlier.

I really don't see why one fund breaking the buck that means other more responsible MMF providers (e.g. Vanguard) should be forced to follow different rules. Should the closure of a reckless bank by the FDIC mean that no other banks should be allowed to make loans?

[Kdillard]

13. Obviously more than one fund has broken the article doesn't say

first fund ever but the first fund in 14 years unless I am misunderstanding something. So obviously given my admittedly limited knowledge on the matter that would indicate that this has happened before and will happen again unless something is done.

[Zenlitened]

14. Really... it's OK if people are critical of Obama admin. proposals.

Put down the pom-poms and take a rest, would you?

[Kdillard]

15. After you stop being rude. I have questions which you can answer or ignore try it.

What is wrong with you?

[Zenlitened]

16. Will these questions come before or after...

... further admonishments to quiet the "uproar" and wait and see what The Powers That be decide for us little people?

[Kdillard]

18. How old are you because you seem to have the maturity level of a 2 year old?

Again I ask the question what is wrong with you and why do you feel the need to further insult someone you don't know regarding proposals that haven't even been decided on, fleshed out or debated?

[Zenlitened]

19. And you have an opinion with no knowledge to support it.

Please, tell me more about maturity.

Failing that, explain why this "reform" being floated by the SEC such a good idea?

Can you?

[Kdillard]

20. I expect an apology for being attacked for no reason. Short of that

I have nothing more to say to you ever.

[Zenlitened]

21. No apology is forthcoming, but perhaps you'd care to acknowledge...

... your own flippant indifference to this issue that is so important to millions and millions of Americans who are already suffering enormously in this economic crisis?

[Kdillard]

22. You are insane good bye.

[Zenlitened]

23. Well, at least you've refrained from immature name-calling. That's gotta feel good!

:hi:

[Common Sense Party]

26. Not to mention the fact that there's currently about $4 TRILLION

sitting in money market funds, parked there by nervous investors who still expect to have their funds maintain a $1 share price.

There wouldn't be any panic if the powers that be capriciously decided that those funds could no longer do that, would there?

[Zenlitened]

28. LOL! Nope, no panic. No freezes on redemptions.

Everything'd be juuuuust peachy. :crazy:

Isn't this whole thing weird? How this idea fits in with the goal of restoring confidence, stabilizing markets, etc. etc. is just beyond me.

Edited to add: Maybe its just the usual game, of trying to herd Joe and Jane Investor in one direction or another. Then the question becomes, IMO, what's the direction? And is there any advantage in trying to get there ahead of the herd?

Heck if I know. That's why I'm on the sidelines too, trying to preserve the few shekels I've collected over the years.

[Common Sense Party]

29. I'm not usually much of a herd guy.

You follow the herd, you step in poop.

You run ahead of the heard, you could get trampled.

But it is possible (not likely, but possible) one could profit from this IF one had any idea where the herd was going.

I just keep plugging away, dollar cost averaging and diversified, and I don't look at my statements. 24 years is a long way away for me.

[Zenlitened]

30. Agreed. I know just enough to know... that I don't know enough. :)

Unfortunately, illness and job loss have put me closer to The New Retirement than I'd ever planned. On the doorstep, about a decade sooner than expected.

Add in (rather, subtract) plunging home values and a frozen market that makes downsizing difficult... and now I'm trying to preserve capital, grow that same capital, and possibly very soon start living on that capital.

If I can figure a way to conjure that trick... look for my book in stores! LOL

[high density]

32. Sorry, you're right. Exactly two money market funds have broken the buck in the last 37 years

http://en.wikipedia.org/wiki/Money_fund#Breaking_the_buck

:)

[Zenlitened]

12. "...we'll see what is the ultimate result"

Passivity? No thanks.

Oh, and this "uproar" that has you so puzzled? Hasn't happened, not yet at any rate. Sounds to me like people are expressing concerns over something fairly important. Like, their ability to house, feed and clothe themselves.

[Common Sense Party]

27. Again, it's not a "rule." It is, as you say, "illusory." It's built on trust.

When the whole system melts down, as it started to last fall, trust can only get you so far.

But it was not a rule broken. It was an industry-wide, accepted and expected standard.

Only one fund broke the buck, and luckily the Treasury stepped in to shore up the rest.

[Common Sense Party]

25. Into bank accounts or into government issued notes and bills.

Which is what I think Geithner might be after in the long run.

But no prudent person looking for safety is going to put their money in a "money market fund" that fluctuates.

Honestly, I wonder what they're smoking up there in Washington. They don't seem to understand how real people think and behave.