Not a mattress
U.S. money market funds have played a supporting role in the euro zone crisis – they’re short-term lenders to European banks. Before that, they lent to the likes of Lehman Brothers. The regulators of the $2.5 trillion market, meanwhile, want to end the fiction that they are just rebadged savings accounts.
The Securities and Exchange Commission is considering forcing money market funds to float their net asset values, like other mutual funds do, rather than having flexibility to hold them at the traditional $1 a share. That veneer of stability – broken only very rarely, for instance right after Lehman’s collapse in 2008 – is one feature that can make investors complacent. The SEC’s proposed change is a big one, but worth making since it would force investors to recognize the risks and remove cover for the funds’ managers.
Mary Schapiro, the SEC chairman, also this week floated the idea of forcing money market funds to hold capital reserves. The logic goes that banks are required to have a cushion to absorb volatility in their assets, so why not money market funds – especially if they are going to own potentially risky things like Lehman debt or French bank CDs. That way the funds won’t require Uncle Sam’s deep pockets to stabilize them, as they did in 2008 after one prominent fund “broke the buck” and a run on others ensued.
Such a requirement would also surely reduce the yield the funds could pay investors. That could shrink their appeal: it hasn’t been noticeable in recent years with interest rates ultra-low, but money market funds used to attract investors by paying out a good bit more than deposit accounts for what was perceived as equivalent risk.
But perhaps money market funds need to shrink for the greater good. Euro zone banks were still borrowing $218 billion from them in October, according to JPMorgan. With lending mostly very short term, that’s dangerously hot money if the funds get the jitters. The industry has already shrunk more than a third from its peak, but it’s still bigger than the total assets under management in hedge funds globally. Further SEC reforms might ensure money market funds aren’t players in the next crisis.