The President’s Working Group on Financial Markets, as well as the SEC, are considering forcing money market funds off their stable $1.00 value method of maintaining share prices. In other words, the government wants to eliminate your stable value money market. But the million dollar question is ... WHY?
Obviously this would create huge problems in the markets, as investors seek safe haven alternatives. It could potentially put the money market industry out of business altogether. So, are they hoping more people will buy Treasuries? Are they trying to get more money into the "bailed-out but still insolvent" bank coffers?
I don't know. But either way, this fishy regulation attempt stinks on ice!
The following is Paul Schott Stevens, President and CEO of the Investment Company Institute, discussing the governments "floating NAV" (net asset value) scheme.
The Seventh-Inning Stretch: The State of Play for Money Market Funds
The biggest potential game-changer, of course, is the report that the President’s Working Group on Financial Markets is expected to issue on money market funds ...
[M]oney market funds remain firmly opposed to proposals that would force them to abandon their stable per-share value. And we are not alone in that stance. America’s businesses, along with state and local governments, are rallying in opposition to any suggestion that regulators would force money market funds off their stable $1.00 net asset value.
The idea of floating these funds’ value is likely to be discussed in the President’s Working Group report, whenever it may be issued. And it’s still in the air at the SEC, which is contemplating a “round two” rulemaking to address any lingering issues in money market funds and Rule 2a-7.
Proponents of the floating NAV see this idea as a home run – a way to solve any problems of systemic risk that might somehow arise from money market funds with one swing of the bat.
We think it’s more of a foul ball.
Forcing money market funds to float their NAV will not eliminate the chances of investor runs. Nor will it reduce risks to the financial system in a severe liquidity crisis. What it will do is destroy money market funds as we know them – imposing severe dislocations on America’s households, businesses, and governments, and disrupting the American economy.
In the last several weeks, groups representing state and local governments have come out squarely in opposition to forcing money market funds to float. The National Association of State Treasurers; the Government Finance Officers Association; and the National Association of State Auditors, Comptrollers, and Treasurers – all have voiced their support for the ability of funds to operate with a stable NAV.
The SEC’s own Investor Advisory Committee has before it a resolution, strongly backed by one of its subcommittees, that calls upon the Commission to preserve the stable NAV as a core feature of money market funds.
[F]loating these funds will drive away investors, and the resulting drain of assets will [QUOTE] “severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy.”
These organizations and others have emphasized that it is vital to preserve the essential, defining characteristic of money market funds – because they all recognize the highly important role that these funds play in our markets and our economy.
What is that role?
Well, money market funds are about jobs. They hold almost 40 percent of the commercial paper that businesses issue to finance payrolls and inventories.
Money market funds are about communities. They hold nearly two-thirds of the short-term debt that finances state and local governments.
Money market funds are about ordinary Americans. Credit-card, home-equity and auto loans are substantially financed by asset-backed commercial paper held by money market funds.
Money market funds even play a vital role in financing the U.S. government. One dollar out of every six in short-term paper issued by the Treasury ends up in a money market fund.
Forcing money market funds to float their value would put all of that at risk — without any offsetting benefits.
Stevens is right about the dire implications of this strange regulatory move too. A move for which the government has not one legitimate reason. So be prepared for anything, because what they're up to is anyone's guess.
A retail investor expects that $1 put into a money market fund will count for $1 when writing a check or making a withdrawal. If money market funds cannot provide that, retail investors will have no alternative but to use bank accounts – by no means an ideal substitute.
Institutional investors already have many alternatives. But they stick with money market funds in large part because a floating-value fund would mean constant accounting and tax headaches ...
So if regulators forced money market funds to abandon their stable $1.00 value, institutional investors would leave. As one institutional investor has told us, “If a money market fund is not dollar-in, dollar-out, you won’t have my dollar.” Indeed, many institutions are required by law or by investment policy to keep cash in stable-value accounts.
Where would they go if money market funds did not provide that stable value? Banks might seem to be the obvious choice. But banks don’t want large institutional deposits. In fact, banks now “sweep” institutional deposits off of their books and into money market funds and other short-term instruments, so that the banks can avoid carrying large demand balances. Wiping out stable-value money market funds won’t make banks any more eager to assume those liabilities.
Instead, institutions that want or require stable value would probably wind up investing in private pools, here and overseas, that promise to maintain a fixed price. Indeed, as ICI’s chief economist, Brian Reid, will describe tomorrow, these pools are already drawing institutional dollars out of money market funds.
In short, forcing money market funds to float their values would kill these funds as we know them – without reducing systemic risk. In fact, it seems highly likely that the world would be a riskier place for investors, for issuers, and for the markets.
H/T - Are Regulators Attempting to Kill Off the Money Market Mutual Fund Industry?
What are they really up to? Your guess is as good a mine. But let's not kid ourselves about anything here ...
Our Washington Overlords already control a great deal of our finances. They confiscate our earnings to pay for their mandated Social Security and Medicare, earnings which are tracked, recorded and taxed yet again. They control our investments and retirement savings through arcane rules and taxation. Then inflate away the value of your earned dollars to boot!
And yet our Overlords are still broke. Flat broke. Which btw, is your fault peasant!
So they're tracking your gold coin purchases, holding hearings about confiscating personal retirement accounts (your 401(k)s and IRAs), and apparently they plan to take away your stable money market accounts ...
What's next? Today's reality already reads like a dystopian conspiracy novel. The road to serfdom? Heck, we're goin' straight towards iron-fisted tyranny!
Cloward-Piven strategy my friend.
[...] Why is the Government Trying to Kill Money Market Funds? [...]
Honesty is the reason to let the NAV float. If a fund's assets are really worth 0.96 per share, then investors should be told that. Certainly the pros will. So do you just want to put the sheeple at a disadvantage?