Money Fund 'Reform' Will Drive Cash to Banks and Help No One

Your headline is patently false. The destabilizing run on money market funds post the Reserve Fund breaking the buck hurt everyone and required the US government to explicitly guarantee $3 trillion of assets. The run froze the short term lending markets and crippled the US economy. Any solution that prevents a run on money market funds will benefit every taxpayer.

This is a bit of revisionist history. Banks were very much involved in the creation of MMMFs. MMMFs have been both a source of business and a source of competition for banks. Both are welcome if conducted on fair terms. MMMFs should be clearly understood by investors as not having any federal backing, since the sponsors of MMMFs do not pay the $13 billion per year that the banking industry pays to the FDIC for deposit insurance. And as for how well securities investors faired vs. bank depositors during the recent recesssion, that is clearly mixing apples and oranges, but since it was raised by the author, no insured bank depositor lost a penny during the recession, because of the deposit insurance, which insurance, by the way, is heavily paid for by banks in terms of annunal premuims and a heavy supervisory program. Again, apples and oranges, but I did not make the claim that working through a securities broker is a better deal for investors.

It is important to understand that government guarantees are backed by human and corporate taxpayers. Allowing the MMF industry to buy insurance only when their funds are underwater clearly harms taxpayers and is a lousy business model for this line of business at the FDIC.

Requiring a capital cushion for MMMFs does not disadvantage them in any way, it corrects an unfair advantage the MMMF industry has enjoyed. What kind of market value risk will the taxpayer have to assume when interest rates do begin to rise? Even short term investments will be at risk to break the buck. This group is trying to justify their free lunch. Let them pay for the cost of insurance and retain reasonable liquidity, and let's see how that works. And liquidity expectations should be the same for any entity the government feels it has to protect. If they want the guarantee, fine. Pay for it, If they don't want it, disclose it in big, bold print to the customer and let the customer take the financial risk and MMMF industry take the reputatiion risk.