Expose the risks of money-market funds
As the financial crisis intensified in September 2008, the value of a money market fund fell below the $1 value that such funds strive to maintain. The federal government was forced to step in with a temporary guarantee, which averted a destabilizing run that would have worsened the panic gripping financial markets.
It was only the second time in the four-decade history of such funds — typically offered in brokerage accounts — that a money-market fund’s value had “broken the buck,” or dropped below $1. It was a lesson for many investors that such accounts aren’t risk free.
Now, Securities and Exchange Commission Chairman Mary Shapiro has proposed a plan to make that lesson more clear while reducing the risk that taxpayers would have to finance another money-fund bailout.
Her proposal would give money-market funds a choice. They could set aside a small capital reserve and impose restrictions on withdrawals, or they could allow a fund’s value to fluctuate. The industry is strongly opposed to this plan because it might prompt many investors to withdraw money. To go into effect, the plan must be endorsed as a formal proposal by three of the five SEC commissioners, then adopted later in a second vote.
Some brokerages offer money accounts that are effectively bank deposits backed by the Federal Deposit Insurance Corp., but others do not. Many investors are unaware their cash accounts aren’t guaranteed.
One of the main lessons of the panic of ’08 was the ruinous cost to the taxpayers of concealing risk. Shapiro’s plan would make risk more apparent so investors could make decisions accordingly — rather than in ignorance, and rather than blithely assuming any risk has been transferred to the taxpayer.
Kent Mueller
10 months, 3 weeks agoThis is a good example of building needless cost into the system.
First of all, has anyone seen the existing disclosures that are required? If so, then you will understand that no one should be surprised by the small amount of risk inherent in money market mutual funds. If haven’t seen those disclosures, then presenting you a way to avoid a small amount of risk won’t get you to notice either.
Obviously, if a reserve is built into a fund, then the fund’s costs will go up and the yield to the shareholder will go down. The simple strategy would be for the investor to be in a “non-reserved” higher yielding fund until economic conditions push interest rates so low that “breaking the buck” is possible. The investor then simply shifts his cash to a “reserved” fund for the safety of not breaking the buck.
This is a classic example of a solution that sounds great, but doesn’t do anything but add costs.